William Maina - IR, ICR Ron Cogburn - CEO Jim Reynolds - CFO.

Mike Reid - Cantor Fitzgerald Bryan Bergin - Cowen Arun Seshadri - Credit Suisse John Borch - HSBC Doug Rothschild - Scoggin Capital Umesh Bhandary - Legal & General Usman Tahir - P. Schoenfeld Asset Management.

Good day and welcome to the Exela Technologies Third Quarter 2017 Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to William Maina, ICR. Please go ahead..

Thank you. Good afternoon and welcome to the Exela Technologies third quarter 2017 conference call where we will be discussing our pro forma financial results for Exela's third quarter ended September 30, 2017. With us, in this call we begin with comments from Ron Cogburn, our Chief Executive Officer followed by Jim Reynolds, Chief Financial Officer.

We will then turn the call over to questions. A replay of this call will be available until November 16. Information to access the replay is issued on today's press release which is available on our website under the Investor Relations section. As a reminder, today's conference call is also being broadcast live via webcast.

Before we begin, I'd like to remind everyone that during today's call, we will be making forward-looking statement regarding future events and financial performance. These forward-looking statements are subject to known and unknown risks and uncertainties. Exela caution that these statements are not guarantees of future performance.

All forward-looking statements made today reflect our current expectation only and we undertake no obligation to update any statements to reflect events that occur after this call. Please refer to the company's filings with the SEC for factors that could cause our actual results to differ materially from any forward-looking statements.

During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations of non-GAAP to GAAP measures and certain additional information are also included in our press release and presentation. The press release is posted on Exela's IR website.

Please note there is also a presentation that accompanies this conference call and an investor factsheet which are also accessible in the IR section of our website. With that, we will begin by turning the call over to CEO, our CEO, Ron Cogburn..

Thanks Will. Good afternoon and thanks everyone for joining us today on our third quarter 2017 conference call. This was a solid quarter for Exela Technologies.

We closed on the business combination of SourceHOV and Novitex just about four months ago and we are pleased with the significant progress that we've made in terms of the integration of these two companies and the attainment of merger-related cost savings.

Just as important, we are pleased with the momentum that the company is enjoying as the combined strength that's resonating well with existing clients and new prospects. We're executing well and making strong early progress against our strategic objectives.

As a result, we are affirming our prior full-year 2017 guidance and tightening the range which Jim Reynolds will discuss later in the call.

Turning to a brief overview of our results, I would like to remind everyone that the financial results we will discuss today reflect pro forma combined company results of the business combination of SourceHOV and Novitex which closed on July 12, 2017. So let's turn to Slide number 6.

Overall we are pleased with our performance which reflects solid revenue growth, pro forma EBITDA, and free cash flow generation. Total pro forma revenue for the third quarter was $358.2 million, up 12.2% year-over-year and 2.3% sequentially. We generated further adjusted EBITDA of $88 million, up $8 million or 10% year-over-year.

We generated further adjusted free cash flow of $80.3 million representing a conversion rate of 91.2%, and as we announced in our earnings press release today, our board has authorized a share buyback program of up to 5 million shares under the right market conditions over the next 24 months.

The decision to initiate this program reflects our financial flexibility driven by our high cash flow conversion and commitment to deliver value to our shareholders.

I'm also pleased to report that we are on track to deliver the merger-related cost savings identified earlier this year and we continue to identify additional opportunities for cost savings in the business. Now let's turn to Slide number 7.

Year-to-date 2017 we have generated total revenue of $1.1 billion and further adjusted EBITDA of $269.3 million representing a 25.2% margin with available liquidity of approximately $124 million as of September 30, 2017. Turning to Slide number 8.

As I mentioned in our last earnings call, we believe Exela is uniquely positioned in the global business process outsourcing market given our ability to offer end-to-end multi-industry and industry specific technology enabled solutions which were built in our proprietary technology platforms and those enable our skilled knowledge workforce.

We believe, we will continue to benefit from significant whitespace opportunity by leveraging our deeply embedded relationships with our clients to cross-sell our combined company solutions across our global footprint. Exela is one of the largest global players in the high growth financial services and healthcare sectors serving the top 10 U.S.

banks, nine of the top 10 U.S. insurance companies, and the top five healthcare payers. As I mentioned in our Q2 call, we have significant traction in our go-to-market strategy as new opportunities emerge from our global client base, as a result of the combination.

For example, we have recently had a couple of notable large financial and insurance customers approach us for proposal on additional services based on the combined company offerings. Likewise we've been able to propose to a large healthcare payer additional services leveraging our combined company strengths.

We are very pleased with the traction that we are seeing in terms with increased opportunities and believe the combination has improved our ability to expand our existing relationships and increased our probability of wins.

Another important aspect of our strategy across all of the industries that we serve is our focus on digital transformation from the front office to the back office. Digital transformation is no longer discretionary for the enterprises that want to stay competitive and be leaders in their respective industries.

This priority fits well with Exela's capabilities which help our clients drive digital transformation across their mission critical processes.

We believe that our deep understanding of our clients businesses and their industries in their ability to leverage Big Data automation and Analytics Solutions such as our Rule 14 platform enables us to be that partner of choice for digital transformations in the industries we serve. For example, Exela was recently asked on one of the largest U.S.

healthcare payers to propose on expanded services related to business automation. This enterprise saw their solutions and our expertise as a result of their recognition as a combined company strength in digital transformation.

Overall, we are seeing strong demand from our customers for digital solutions and we're encouraged by the growing number of digital related deals in our pipeline including front office automation, digital mailroom, and RPA. Let’s move to Slide number 9. And I would like to reiterate the large global footprint of Exela Technologies.

We have a presence in over 50 countries with operations in 15 different countries for the clients that we serve. And while we are global, approximately 91% of our business mix is in the Americas.

Moving forward, expanding with our clients into their global operations is a key priority of ours to capitalize on the significant whitespace opportunity for Exela Technologies. Now turning to Slide number 10. I would like to conclude by reiterating how we plan to drive continued profitable growth into the future.

We work with some of the largest companies in the world and we plan to expand our strong market position through a number of growth initiatives which leverage our technology enabled solutions, our deep domain expertise, our strong global employee base, and financial flexibility.

First, we continue to leverage our deeply embedded relationships as a trusted partner with our clients, to cross-sell our solutions throughout our global footprint, we see this as a significant growth opportunity.

Second, while we remain focused on driving the benefits of the combined company, we will also continue to seek tuck-in opportunities that are accretive and drive value creation in addition to organic revenue growth.

Third, we will continue to focus on delivering against our unified merger cost saving synergies and seek additional opportunity for cost efficiencies. As I mentioned earlier we're seeing good success executing against this initiative. Four, we will enhance the client experience and increase operational leverage through our scale.

And finally, we plan to further emphasize our bundled service offerings and our single vendor solutions to offer the best ROI for our clients. We believe our ability to provide a single source solution is resonating with our clients. In conclusion, we delivered a solid third quarter results driven by our strategy and execution.

Our end-to-end solutions and our deep domain expertise position us well to continue expanding with our current customers and grow our client base. We've made strong progress with the integration of SourceHOV and Novitex and we are on track to deliver the identified cost savings.

Our strong cash flow provides us with significant financial flexibility to continue to invest in our growth initiatives. Combined, we believe that these factors position us well for growth through the remainder of 2017 and beyond. And now, I would like to turn the call over to Jim Reynolds, who will discuss our financial results in greater detail.

Jim?.

Thanks Ron. I will now provide a review of our pro forma third quarter 2017 results. I'll then discuss our full-year 2017 guidance before opening the call up for questions. Turning to Slide 14. As Ron mentioned, we delivered solid results for the third quarter.

Total revenue for the third quarter was $358.2 million, an increase of 12.2% from $319.1 million in the third quarter of 2016 and up 2.3% from $350 million in the second quarter of 2017. As a reminder, we report our revenue results across three segments.

The first and our largest segment is Information and Transaction Processing Solutions or what we call ITPS. The second segment is Healthcare Solutions and includes a broad range of solutions for both payers and providers. Our third segment is Legal and Loss Prevention Services or LLPS which comprises of processing and administration of legal claims.

With respect to our segment revenue mix for the third quarter ITPS revenue was $279.8 million, an increase of 21.5% year-over-year and 3.5% on a sequential basis. The year-over-year increase in ITPS revenue was driven primarily by our acquisition of TransCentra which contributed $26.5 million of revenue growth in the quarter.

The remaining approximate $23 million of net growth was driven by new client contracts and expansions with our existing clients as well as $1.5 million of positive foreign currency changes. Healthcare Solutions revenue was $56.4 million compared with $60.7 million in the third quarter of 2016, and $58.1 million in the second quarter of 2017.

On a year-over-year basis our healthcare segment was primarily impacted by higher revenue related to the increase in billings related to ICD 9, 10 Coding work in 2016. As we discussed on our last call, we expect the impact to the comps related to this ICD-10 rollout to get better in the next few quarters.

On a sequential basis our healthcare revenue was impacted modestly by only $600,000 related to the coding work, and the remaining $1 million decline was related to quarterly seasonality. Finally, our LLPS segment revenue was $22 million flat with the second quarter of 2017 and down approximately $6 million year-over-year.

This decrease compared to the third quarter of 2016 was primarily due to the recognition of higher legal claims administration work related to a few large class action cases of approximately $4.7 million in Q3 of 2016 and $1.1 million related to the sale of Meridian, a small construction claim consulting practice which was divested up in the first quarter of 2017.

As a reminder, our LLPS sentiment revenue can be lumpy and it is dependent upon when the class action cases go to settlement and when we perform the associated settlement work for those cases. We expect our LLPS revenue in the fourth quarter of 2017 to be similar to the third quarter of 2017.

Gross profit in the third quarter was $87.1 million compared with $89.5 million in the third quarter of 2016 and $92.9 million in the second quarter of 2017. Gross margin for the third quarter of 2017 was 24.3% versus 28% in the third quarter of 2016 and 26.6% in the second quarter of 2017.

Our third quarter gross margins were impacted primarily by ramp up costs associated with new ITPS client contracts I mentioned, which were partially offset by revenue growth and merger-related cost initiatives. As a reminder, new contracts tend to begin at lower margins. As new contracts or volumes ramp to full transaction volumes, margins expand.

And the gross profit will also increase as we continue our cost transformation initiatives as part of this integration. Further adjusted EBITDA for the third quarter of 2017 was $88 million, up 10% year-over-year and 6% on a sequential basis.

Third quarter further adjusted EBITDA margin was 24.6% compared with 25.1% in the third quarter of 2016 and 23.7% in the second quarter of 2017.

Our third quarter further adjusted EBITDA and margin performance primarily reflect the benefit of our revenue growth and merger-related cost savings initiatives, partially offset by the new client ramp up cost previously referenced.

Focusing for a moment on our merger-related cost synergies, we are on track to deliver our annual cost savings over the next 12 to 18 months. We continue to find more opportunities for our merger-related cost synergies.

Pro forma net loss for the third quarter of 2017 was $130.5 million compared with a net loss of $16.7 million in the third quarter of 2016 and $27.9 million loss in the second quarter of 2017.

Please note that our third quarter 2017 net loss includes certain one-time non-recurring charges which include a $53 million loss on extinguishment of debt related to our refinancing, $20.9 million of optimization and restructuring charges, and $79.3 million of transaction costs related to the merger.

Now turning to Slide 16, we generated $80.3 million of further adjusted free cash flow in the third quarter of 2017. Year-to-date, we have generated approximately $243 million of further adjusted free cash flow representing 91.2% conversion of further adjusted EBITDA.

We calculated adjusted free cash flow as further adjusted EBITDA less capital expenditures. Our strong free cash flow profile is due to our low intensity CapEx model. In the first nine months of 2017, our CapEx totalled $26.3 million or 2.5% of our year-to-date revenues benefiting from our historical investments.

Turning to the balance sheet, at September 30, our total liquidity was approximately $124 million and total debt was approximately $1.41 billion.

We had cash of $46.6 million of which $19.2 million is segregated for customer use and $100 million revolving credit facility which was undrawn, but net of $22.8 million in standby letters of credit, giving the company $77.2 million at September 30 available for borrowings.

Before I move to guidance, I'd like to briefly review our strategic priorities with respect to capital allocation on Slide 17.

Given our high cash conversion and low capital intensity model, we have significant financial flexibility to invest in both organic and inorganic growth initiatives, de-lever our balance sheet, and return capital to shareholders.

We will continue to make the necessary investments in our growth initiatives; this will include investments to drive organic growth as well as actively evaluating M&A opportunities only if they are leverage accretive. In addition, our focus is to continue to de-lever our balance sheet.

Our long-term leverage target around three times, we think is appropriate for our business. Additionally, our board has an approved share buyback program of up to 5 million shares; the authorization is for 24 months and allows us to make purchases at our discretion based on market and other factors.

Finally, we will consider dividends to shareholders, once our leverage targets are achieved. Moving now to our full-year 2017 financial outlook. As I mentioned earlier, we're on track to deliver our identified business combination savings. We are affirming and tightening our prior financial outlook for pro forma revenue and further adjusted EBITDA.

We currently expect 2017 pro forma revenue to be $1.45 billion to $1.47 billion and further adjusted EBITDA to be $350 million to $370 million. Further adjusted EBITDA includes approximately $100 million of company combined merger adjustments.

Finally, we expect further adjusted free cash flow to be approximately $310 million to $320 million for the full-year of 2017. In closing, I want to commend the entire global team at Exela for the great work they have done in integrating, driving revenue opportunities, and cost efficiencies across the business.

Exela is well positioned within a large and growing industry serving a diversified client base and end markets with attractive growth opportunities. We have a strong financial model which generates solid cash flows giving us the ability to invest in our growth initiatives, de-lever over the long-term, and return capital to our shareholders.

With that, this concludes our remarks and operator, I would like to open up the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Joseph Foresi from Cantor Fitzgerald. Please go ahead..

Hi guys, this is Mike Reid on for Joe. I was just wondering if you could walk us through maybe some detail on where you're seeing getting some of these cost synergies and a little detail on that, please..

Sure. I think we've discussed historically the three buckets we look at headcount, facilities, and vendor. Obviously we went through a number of transactions in integration; these are typically the best areas where we find synergies.

We as of September had executed a good portion of the headcount synergies and look to further improve the vendor and our facilities over the next 12 to 18 months..

Okay.

And then on the revenue side for potential revenue synergies, where are you kind of seeing some of these cross-selling opportunities?.

Yes, this is Ron. When we looked at the combination of the two companies, Novitex had a set of customers that were very complementary to what SourceHOV has. So at Exela we have customers that really have not had the benefit of the technology enabled services and solutions that we've offered previously at Source.

So once we came together even before hand, we had inbound interest from many of those large multinationals to the extent that they said look if you're combined company would you propose on the transaction processing solutions that we do internally as well as maybe to Novitex core business let's say had whether it was mailroom, mailroom logistics, or print and production.

So we've had many of those types of opportunities and that's what I talked about in my remarks our pipeline is rich with that type of opportunity at this moment..

Thank you. Your next question comes from Bryan Bergin from Cowen. Please go ahead..

Hi guys, thank you.

Just wanted to dig in a little bit on industry demand trends, can you comment what you are seeing trends and behaviour within your financial services and your healthcare clients, any change over the course of this year?.

Well as we commented before the move for digital transformation is really driving lots of the conversations we have with our customers whether they're in the healthcare payer, healthcare provider, financial services, or the banking industry, and really this has been sort of the cadence for the last year especially with the SourceHOV clients, many of the opportunities that we've talked with them about circle around this need for digital transformation and so that's really where we're seeing lots of our opportunity comes from..

And is this driving a larger overall engagements for you and as you think about you're just going to have conversations around 2018 budgets, can you just give a sense on priorities around end conversations, currently you are having end conversations as far as scale of deals?.

Well let's talk about scale because it's really important when you think about what we pursue now is the enterprise opportunities at a different scale than we could before. Many of these I'll call it Fortune 100 companies have a risk model that says that we as a vendor cannot have more than 10% of our revenue as their business.

So for us, when we were below a $1 billion, sometimes we saw that ceiling come into effect when we missed out on those enterprise deals.

Now trending towards, upwards of $1.05 billion, $1.04 billion, we get the opportunity now to look at much larger enterprise opportunities and frankly that's really what we've seen since we brought the businesses together in July and that's a lot of the inbound traffic is the larger enterprise deals..

Thank you. Your next question comes from Arun Seshadri from Credit Suisse. Please go ahead..

Yes, hi, thanks for taking my questions. First I just wanted to ask in terms of adjusted EBITDA could you talk about what the pro forma compare was including TransCentra for last year that would be approximately $51 million last year..

For which quarter I'm sorry..

Just comparing the $55.3 million that you reported for Q3 of 2017 since that includes TransCentra I just wanted to compare it with the appropriate number for last year because I think the number that you disclosed the $56.3 million I don't think that includes TransCentra, so I just wanted to see; I think TransCentra was approximately $5 million..

It was approximately $57 million to $58 million..

Last year..

Included and it's also in our fact sheet..

Okay, understood.

And then is there any way you could give us the I noticed you dropped the adjusted EBITDA guidance for this year, could you give us sort of where you expect this year's 2017 adjusted EBITDA to end up?.

So I think we gave a range of our further adjusted EBITDA of $350 million to $370 million which is consistent with what we went out with at the lower end of the range. Our original guidance was I believe $350 million to $390 million..

But that was --.

So we adjusted EBITDA during the quarter as we get closer to year-end..

But that was the further adjusted EBITDA. I think you had originally given us adjusted EBITDA guidance as well are you dropping that guidance..

I think it will be consistent approximately within the range we gave earlier about $245 million to $260 million..

Okay, understood.

Last question from me is stock buyback; just wanted to understand I mean I don't think you've for this quarter just wanted to understand sort of the rationale stock buybacks given that you have a leverage target and it's only the first quarter out in terms of cash flow generation, I just wanted to understand why the stock buyback this early. Thanks..

Sure. Well as you know the board has approved the buyback and it give us the ability over the next 24 months to buy up to 5 five million shares depending on market conditions. And we view that as another lever for us to use as part as we move forward with the company. Obviously we have employees that we could consider using that buyback for.

So there is multiple things that the stock buyback will allow us to do. At this point it's not a -- it's a small amount compared to what it could be..

Okay, understood. I'll get back in line. Thanks..

Thank you. Your next question comes from John Borch from HSBC. Please go ahead..

Hi, thanks for taking my question. So the first one just ITPS was stronger quarter here organically. And I guess from your comments that seems to be a trend you think will continue but I just want to get your thoughts on the improvement there and how that's doing..

So I mean if you think about our ITPS is our largest segment, we ran our financial services. And the banking, insurance it's a large industry right and that's where Novitex is into.

So I think with our go-to-market strategy now we have the ability to improve the ITPS segment and achieve the growth similar to the industry as we look out, we see the opportunity because Novitex and Source coming together has created a great opportunity and a lot of opportunity in revenue synergies..

Okay, thank you.

And then the other one just a housekeeping question the debt was about $1.4 billion so other than that the term loan and the notes what debt was there?.

Yes, we have capital leases that are included in the calculation..

Okay, great. Okay, thanks. So that's it for me..

Thank you. The next question comes from Jeremy Sipzner [ph] from South Pole [ph]. Please go ahead..

Hi guys. Thanks for taking my question. First one from me I'm looking at your cash flow statement here and I was under the impression that there was going to be $275 million of cash contributed to effect the deal. And I see proceeds from common stock and preferred of only $204 million and then cash from Quinpario of $27 million.

Can you explain the shortfall to me?.

So part of the transaction, we raised the equivalent of the $275 million to get the transaction done with a combination of cash and stock..

Right. I guess I'm wondering where that is on the cash flow statement I thought would have seen something that's sounds to $275 million of cash coming in..

You know, as if you look on the equity statement there are also fees paid for stock which is the equivalent that gets us to the $275 million..

Got it. Okay. When do you guys think that further adjusted EBITDA will become on adjusted cash EBITDA how long will it take for that to happen..

So obviously we'd like to have less adjustments, but as we look out as part of putting these businesses together and we believe we will start to convert and it's going to take us 12 to 18 months to get the further adjusted EBITDA moved into GAAP EBITDA..

Okay. And last one it looks like cash from operating activities was negative $28 million or so for the quarter. Can you kind of just give some color as to historically been pretty positive why was negative..

Well, I think there were significant fees paid related to the transaction. So we expect that to turnaround in the coming quarters..

Okay, that’s it for me. Thanks..

Thank you..

Thank you. Your next question comes from Kristin [indiscernible] from Cowen Capital. Please go ahead..

Hey guys. Thanks for taking my question here.

Can you hear me?.

Yes, thank you..

Yes, thanks for taking my question. Just happy to see some revenue growth here and was just hoping you could give a little bit more clarity around how much of that is actually coming from the cross-sell opportunities to win and expand the whitespace within current clients and sort of how that process is going..

So I mean obviously we closed the merger on the 12 and that's when we brought the teams together July 12. So at this point there's been very little cross-sell that is actually generated revenue at this point in time. But as Ron discussed we see multiple opportunities in our meetings with our large clients..

Okay, great. And then I want to touch on the topic of the stock buyback. It's you're six times levered, the cost saves, aren't really rolling through yet and shouldn't you use cash to buyback bonds that are trading in the mid-to-low 90s and delever instead of buying back shares which adds leverage..

I think this is another lever that the company has for the cash flow that we generate it's not the main lever obviously; we're focused on investing in the growth in the business. We see a lot of opportunity; we're in the right industries and combining the two companies we think it gives us greater opportunity and larger deal sizes.

So I would say we're focusing on that. The stock buyback is an important aspect as we look forward and consider approving an employee stock plan. So those types of things we have as different levers before. Obviously three times makes a lot of sense to us given we're public at this point in time.

So I think we mentioned all four ways, we're looking at but obviously some make more sense earlier than others..

Right. So you're saying that so when would you expect to start buying back stock, I mean what sort of leverage ratio would you then believe that using cash to buy back stock is a good use of cash..

So at this point we haven't set that specific lever stock is as to what makes sense but it is like I said another lever for us to pull and a potential use of the company to reward employees at some point in the future..

Okay. So until I mean until you actually see much more robust, non-adjusted, non-pro forma cash generation is this basically to offset the stock comp plan..

Yes, I mean that is the plan, yes..

Okay, thanks for taking my questions..

Thanks..

Thank you. Your next question comes from Doug Rothschild from Scoggin Capital. Please go ahead..

Hey guys. Congratulations on another quarter of sequential revenue and EBITDA growth. Most of my questions have been asked but I want to talk on timing of the customer pipeline that seems to be building, how long do you think that will take to result in actual revenues..

Typically these are long sales cycles. Especially at the enterprise level is not surprising that sometimes these take 12 to 14 months to get to the right conversation for a decision from one of these multinational especially the largest banks, the largest healthcare, the largest insurance companies.

So we're excited about the growth in the pipeline the new opportunities that are at that enterprise level and we're hopeful we'll begin to see some of those come to fruition in 2018..

Okay. And on the synergies you guys mentioned that you're uncovering new opportunities. You had originally given a range of synergies are you now possibly going to deal to hit closer to the high-end..

So I think we're highly confident in the $37.5 million. We feel that's significant there's more I think we talked about $70 million. So we feel good of the $37.5 million we continue as we integrate into our technology through our platforms to find additional synergies..

Okay. And lastly on the buyback I know a lot of people have been asking about it. I assume you saying it's just another lever that you guys will be opportunistic here.

I don't think you're levered six times but I think it's probably closer to 3.5, 4 times but this is a plan to be opportunistic given the attractive levels that the stock is trading just so you have it as another lever; is that that how we should understand this..

That's correct, Doug. It's another lever that the company has..

Okay, all right. Thank you guys..

Thank you..

Thank you..

Thank you. Your next question comes from Elie Betito [ph] from [indiscernible] Capital. Please go ahead. Elie [ph] your line is now live. Your phone may be muted..

Can you hear me now?.

Yes, please go ahead..

Okay, sorry that's on mute.

Can you just talk about the Novitex revenue and gross margin if you have it looking out for the quarter?.

So revenue for the quarter was $154 million. And the gross margin I don't have that readily available but it's in our MD&A which should be posted shortly..

And if I'm looking at the gross margin decline sequentially and year-over-year, can you just share some of the drivers, I know you alluded in your customers but sequentially that shouldn't necessarily be leadership..

So if you think about when we ramp up these large customer contracts there is a lot of costs that are duplicate associated with training people getting individuals up the speed, doing test runs, a lot of that we have to expect.

So when you have large ramp-ups typically you get lower volumes in the beginning or no volume and then over the life of the contract, as you get to full volume you start to see the incremental margins and the expansion.

And if you remember a number of these Novitex contracts while there margins were good, they were smaller than legacy SourceHOV because they have to use technology from third-parties. So as we continue to put our proprietary software in systems into these contracts, we'll pull out that incremental cost and will get margin expansion..

Okay, got it. And on cash noticed unrestricted cash is in the 20s.

And I think in the original proxy it was $100 million of unrestricted cash and some other figures that's $77 million, can you just describe why the cash is materially lower?.

So obviously with the transaction, we incurred a significant amount of professional fees related to getting the deal flows. So that primarily drove the cash balances during the quarter.

I mean we feel good, the amount of cash, the combined company generates was approximately 90.1%, 90.2% conversion to further adjusted EBITDA and as the EBITDA converts from adjusted to GAAP, obviously that will help out on cash flows..

Further Jim, there is transaction fees in the proxy already and is still netting out to about $100 million of cash.

So what was higher and I guess what was higher in the fee loads from July 12 to now?.

So I think there were a number of factors, we can probably take it offline but what happened was is the interest rates moved from what we thought originally was causing increasing pause to get the deal done..

Thank you. Your next question comes from Umesh Bhandary from Legal & General. Please go ahead. Pardon me, Umesh Bhandary, your phone maybe muted, your line is now live into the call..

Hi thanks for taking my question.

Guys you talked about some of this margin compression in the quarter is related to contract ramp-ups, can you quantify what the margin impact of the contract ramp-up is and when do you expect sort of about this negative impact of this contract ramp-up to subside?.

So I think I addressed that, if you look at how the contracts ramp, there was a significant uptick in revenue in the third quarter. Obviously we have a lot of costs associated with generating net revenue.

That typically takes six to nine months to start to improve as we take out the do for credit note people and migrate systems so I think you'll start to see the margins change in 2018.

We have identified obviously a significant amount of synergies that we're working, the team is working hard on to drive the margins above what they were when we acquired Novitex..

Can you quantify what you mean by there is a lot of cost? How much is lot of cost?.

So if you think about it, there is costs associated with headcount, systems, facilities, as we consolidate the facilities and train employees and get them up to full production, those costs i.e. payroll, facility as we migrate and technology costs will start to decline.

Now you have to think about it, you're going to improve the utilization as you start to get more volumes through these contracts..

Thank you. Your next question comes from Usman Tahir from P. Schoenfeld Asset Management. Please go ahead..

Hi thank you for taking the question.

It seems like your fiscal 2017 guidance is implying $28 million to $48 million of revenue growth in Q4 on a year-over-year basis but just looking like what's driving that and obviously you've indicated that some new contracts are rolling in, so as this revenue comes in, in Q4, is there any substantial impact on margins?.

So I agree with Q4 we do have an incremental uptick in our revenue. I think we talked about earlier in the year the large local contract that we signed that started to go and ramp well.

In addition, typically fourth quarter has seasonality that helps us drive additional top-line as industries and businesses try to use up their budgets so lot of things happen and get build in the fourth quarter. So we feel really good about the incremental revenue that's going to flow through the next few months..

So but when I think about seasonality that's usually sequential but you guys are guiding to 28 to 48 approximately on a year-over-year basis.

So is this all like new revenues or debt like some of the spending that got pushed into Q4 and we have like some one-time pickup in Q4 that will probably roll off going into next year?.

No it's kind of a combination within healthcare, obviously summer months are usually a little slower, you start to get into open enrolments which help drive incremental volumes, people are trying to use up their HSRs. And in addition most people hit their deductibles by that time so they try and get into for their tests. So there are positive trends.

In addition, we have a small hardware business that typically has strong results in the fourth quarter incremental, there is software renewals in our solutions business, I think it rebuilds and are favorable, so there are lot of positive things that occur in the fourth quarter.

In addition we have ramped up and continue to ramp up some large contracts which will continue to drive the revenue in Q4..

Ron could you maybe quantify like what these -- what the revenues are on an annual basis for these large contracts which are ramping up?.

We typically don't quantify those amounts..

Thanks..

Thank you..

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