Good day, and welcome to the Exela Technologies Third Quarter 2022 Financial Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. Vince Kondaveeti. Please go ahead, sir..

Paul will provide an overview of our results and update you on our strategic initiatives. Shrikant will then walk you through our financial performance for the quarter, and then we will take your questions. We've been communication with many investors via Speak Up, and we hope that you're finding it useful.

I also want to mention that we are accepting questions ahead of our fireside chat with Par on November 30. You can propose questions up until the day before Thanksgiving on fireside.exelitech.com.

Some of the matters we will discuss in today's call are forward looking and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties are set forth in our press release.

I'll turn the call over to Par, our Executive Chairman.

Par?.

Good evening, and thanks for joining our Q3 business update. I shared my strategy and objectives for the company when I stepped into this role a little over a year ago. The macro environment was different then.

We have completed some of our objectives, added a few new ones and adjusted it for you to stay nimble and focused on our mission changing from market exuberance to our reality. We have evolved and so has our mantra. Today, it is converting actions into results. I'd like to turn to Slide #3.

I want to share 7 highlights for this quarter and set the stage for Q4 and 2023. Number one, our European business will go public following the business combination at a valued of $220 million with Exela remaining as the majority stockholder. We look forward to sharing more on this over the coming months.

Number two, our serve shareholder initiative aligns all of our stakeholders. We are pleased that we have set aside $70 million of 2026 senior notes to begin with. It's never enough, but let's call it a good start. These are some of the examples of how the funds we raised in equity markets have been deployed.

This is an important topic, and I will provide some more color on the next slide. Number three, our revenue was lower this quarter due to several factors, including network outage, currency translation, transition revenue and tight job markets.

These events, combined with the changing macro environment require us to recheck our business models and assumptions, and we have been doing just that, and I'll share the steps we have taken to address these. In short, while we are on the right track, we do not need to get ahead of the events that impacted us or could impact us in the future.

Number four, I want to emphasize the importance of our strategic decision to pivot to work from anywhere, or WSA, which we adopted some time ago. We didn't know at the time that inflation, low unemployment, rising costs and yes, strong dollar will impact us the way it did. I'm so glad we adopted WSA when we did.

Our actions to offset these impacts are tracking to reach approximately $40.5 million of operational improvements estimated in 2023. I'll cover that in more detail over the coming slides. Number five, we are having a decent conversion of our pipeline into contracts. In Q3, TCV came in at $87 million.

I'm not happy that only a small amount of our contract wins have converted into revenue in this quarter. So no surprise, our focus has gotten even sharper on converting this into revenue as soon as practical. Number six, our SMB SaaS business continues to show stellar growth. Nice to see this is ramping into our enterprise business as well.

We see demand rising there, too. I primarily I'm referring to DMR and DrySign. And as we launch our next SaaS platform, we have a few more platforms, as you know, and will benefit from lessons we have learned and our experienced team. Number seven, we continue to fix and strengthen our balance sheet with help from our shareholders, of course.

As you know, in this regard, we still have some more work to do. Primarily, our focus for now has shifted to performance, converting action into results. Let's turn to Slide #4.

We have raised a substantial amount of equity capital, and let me walk you through how we've used it, prudently between investing in the business and balancing between our stakeholders. Look at the sum of the parts analysis. We own 100% of Exela DPA. In addition, we estimate the value of other assets to be over $600 million.

Yes, $617.5 million plus whatever equity value you want to allocate to Exela BPA. Our shareholders own these assets. The bottom line is that it accelerates trading far below its intrinsic value. We plan to address this by focusing on performance as fixing this gap is of utmost importance. Let's turn to Slide #5.

Let me walk through 6 items that have impacted our revenue. Historically, our Q3 is a seasonally soft quarter. That aside, the total negative impact in Q3 was $26.6 million, which was offset by revenue growth in Q3 of $7.2 million and $4.6 million of cleared backlog from Q2.

We were also impacted by currency translation to the tune of approximately $7 million. Net-net, revenue was down $15.2 million. Let us turn to Slide 6. Some more color on revenue. As I mentioned, we're seeing stable TCV conversion from pipeline into new contract wins.

We need to get our renewals up, but we are very satisfied with the recurring revenue at 98%. We are seeing healthy growth in health care and legal segments. We do have business in SPP that ITPS segment that as they convert into revenue will start to show as revenue growth as well.

Despite the macro headwinds, conversations with our customers remain robust, and demand continues to improve across various segments. The network outage that we talked about in the Q2 call is largely behind us. However, we are having some lingering impacts in our discussions with customers.

We are a mission-critical vendor to our customers, and it's important to showcase our leadership and solutions and resiliency of our solutions to as concerns of our customers. We're having many successful conservation with our customers as well. Our objective remains to put us in a position to grow pipeline and ultimately win more business.

Let us turn to Slide #7. I touched on this earlier. And over the next few slides, I will highlight the actions we have taken for operational improvements to grow our margins and use tools in our control to manage our business but a better outcome. We have examined and continue to examine our performance across all functions.

And we have taken steps to align the size, reduce where appropriate and acted based on performance to fix. Ultimately, we are prepared for a better outcome with a reduction in overall costs. Backed by WFA, we have the potential to accomplish this goal.

For example, on Slide #8, we began to implement our WFA solutions during the pandemic, but quickly saw that solutions could help mitigate the inflationary environment, tight job market and rising costs to address the impact we were seeing. We took this initiative to expand our team across current and additional geographies.

Now 49% of our employees work from anywhere they want and whenever they want. Our platform now is targeting to reach 30,000 workers by the end of 2022. You asked what will this allow us to do? Well, I say, prepared for a feast at a lower cost by complementing our existing team members. Many additional good things happen, too.

This enables much larger usage of cloud as many -- I'm sorry, as when majority of our team is using cloud tools. This has many additional positive add-on effect. Another benefit as we turn to Slide #9. This permits to shed real estate cost in all geographies and allow us to consolidate some modern locations into bigger locations as well.

At beginning of Q3, we had 2.8 million square feet. Our goal is to -- in 2023, come down to 2.17 million square feet. Not an easy task but made possible by WFA. I want to share what many of you already know, the salary of our employees is by far the largest expense.

We have been also addressing this expense by blending work from anywhere and reduce real estate expense and physical expense. This all leads to the key question of how much infrastructure in our data centers is affected by this. We spend over $30 million of software and hardware maintenance, including over $30 million in real estate costs.

That's just the lease cost, not including all the other cost expenses that come with leasing ability. No surprise, this expense is under the lens as well. Upon successful completion of migration to cloud, this $60 million of costs start to become less important, maybe even secondary and start coming down as a real estate starts to come down.

We may have to pay onetime costs to exit some buildings, but savings materially favor the decision. One decision to pivot to WFA that we made during pandemic has enabled us to become more nimble and a better organization. Better organization, not just us but also for our customers. Let me add up the current benefit of these actions.

On Slide 10, these 5 initiatives total over $40 million in operational improvements. I assure you we are not done. In my experience, we'll continue to find more previously unknown operational improvements across all functions. I'm glad we adopted WFA to initially protect our employees and embarked on a mission to uberize our workforce.

It is just beginning to flow through and will benefit in 2023. Our goal is to reach and cross the inflection point as soon as possible. Our months are these days is converting access into reality -- into results reflecting our current reality. Many thanks to our shareholders, lenders, employees and many others.

And with that, Shrikant, our CFO, please take it away..

Thanks, Par, and thanks to everyone for joining us this evening. We filed our Q3 2022 10-Q, along with the restated audited consolidated financial statements in Form 10-K/A for the year ended December 31, 2021, to amend the originally filed 10-K on March 16, 2022.

I will cover our third quarter results and provide an update on our growth and balance sheet initiatives first and then follow it up with a discussion on the restatement. As we have done in the past, reporting both GAAP and non-GAAP numbers. Reconciliations are in our filings and in the appendix of the presentation.

Let me walk you through the third quarter 2020 financial performance on Slide 12. On a reported basis, revenue was $264 million, down 5.4% year-over-year and $271 million on a constant currency basis, down 2.9% year-over-year.

On a consolidated basis, revenue for the quarter was adversely impacted by $7 million from the currency translation change, $15.1 million from transition revenue and contract losses and $4.5 million impact from network outage on contracted revenue and was positively offset by revenue growth of $7.2 million and $4.1 million of cleared backlog these were the details of these are on Slide 5.

Additionally, we were not able to capture approximately $4.6 million of revenue during the quarter due to continued staffing shortage. Let's quickly look at our segment revenue performance for the quarter. Revenue for our ITPS segment was $185.3 million, a decrease of 11% from $208.3 million in the third quarter of 2021.

The decrease was primarily due to the factors described earlier. Our Healthcare Solutions segment revenue totaled $61 million, a 13% increase on a year-over-year basis from $54 million in the year ago period. The strength in revenue is led by our customers' continued acceptance of our solutions and services.

Our Legal and Loss Prevention Service segment revenue was $17.8 million, a 5.2% increase on a year-over-year basis from $16.9 million, driven by steady project-based business. Gross profit for the third quarter was $46.2 million, down $21.3 million or 31.6% year-over-year.

Gross profit and margins were impacted due to inflation, tight job market, investment in bench cost and network outage. Gross profit margin for the third quarter was 17.5%, down 668 bps from Q3 of the prior year and down 106 basis points sequentially due to a number of factors previously highlighted.

SG&A for the third quarter totaled $44.4 million, up $1.1 million year-over-year and lower by $5.8 million sequentially and representing 16.8% of sales. SG&A was impacted by network outage-related costs and continues to carry professional fees, including certain nonrecurring transaction-related costs.

Adjusted EBITDA was $31.8 million, down 12.5% from the $36.4 million in the prior year period and down by 12.7% sequentially. Our adjusted EBITDA margin for the third quarter was 12.1%, down 98 basis points from 13% in the third quarter of 2021 and down 161 basis points sequentially.

On a GAAP basis, I would like to highlight 2 noncash items that had a material impact on the comparative 3 months net income year-over-year, both of which are neutral to adjusted EBITDA.

One, as a result of the interim impairment analysis at September 30, 2022, the company recorded an impairment charge of $29.6 million to goodwill relating to our ITPS segment.

Number two, 3 months ended September 30, 2021, which is last year, it benefited from a gain on early extinguishment of debt of $28.1 million in connection with the repurchase with the repurchase of notes and senior secured term loan.

Before moving to the next slide, I would like to highlight some of the key items from prior slides discussed by Par on the initiatives to address the performance of the company. Stable TCV conversion from sales pipeline despite macro headwinds is encouraging from a revenue perspective.

And initiatives for gross margin and operating income improvement in 2023, including COLA and price increases, rent reduction, executed annual savings and additional savings underway our actions to address rising costs and improving margins. Let's turn to Slide 13 and discuss the balance sheet.

To encapsulate the slide, our goal is to focus on near-term results to expand liquidity. We paid off all of our liabilities due in 2022 by extinguishing the revolver and appraisal action for a total of $163 million. Our blended coupon rate was 11.14%, and we are considering adding a term loan of additional $30 million to $35 million of liquidity.

Before opening up for the Q&A, I will provide an update on the restatement of our prior period financial results. Earlier this evening, the company restated its audited consolidated financial statements in the 2021 Form 10-K for the year ended December 31, 2021, which was originally filed with SEC on March 16, 2022.

I would like to highlight 3 important facts. First, there was no impact of the restatement on our reported revenue, net income and adjusted EBITDA. Second, there was no impact or changes to our cash balances or cash flow statement.

Third, the only change to our financial statement was a reclassification of the securitization facility from long term to current and the restated balance sheet as of December 31, 2021.

Additionally, the restatement does not have an effect on retained earnings or other components of equity, net assets or poor share amounts disclosed in the original report.

The restatement arises from the inclusion of disclosure related to the existence of substantial doubt about the entity's ability to continue as a going concern under the standards of ASC subtopic 20540 ongoing concern.

The amendment includes reissued audit reports from KPMG LLP, the company's independent registered public accounting firm, due to the restatement.

As a result of the issuance of an amended audit report, including going concern explanatory paragraph, indebtedness under one of the company's borrowing facilities would have become current and we reclassified it from long term to current and the restated balance sheet as of December 31, 2021.

Please refer to the explanatory note on the filed 10-KA for additional details, including changes to the financial statement notes for the fiscal year ended December 31, 2021. Note that each of the quarterly filings in 2022 includes the going concern footnote as well. Once again, thank you for joining the call.

I will turn this over to Chuck to open it up for the Q&A..

[Operator Instructions]. The first question will come from Zach Cummins with B. Riley FBR..

My question is really centered around the balance sheet. I guess, I'll just make it a 2-part question here.

But how are you thinking about available liquidity and options that you have to continue to address the balance sheet between now and year-end? And then also just dovetailing off of that, can you talk about the rationale behind trying to list the XVP Europe business in the public markets? And really, how is that helping you address some of the current challenges on your balance sheet?.

Maybe I kick that off. As we have -- I covered in my talk, our values, there's the intrinsic dislocation in the revenue. One of the primary reason is that we are preparing for taking some of our assets and making them revalue the public markets on their own basis and this is an example of that.

It's not really meant to address your question, but it's meant to address the long-term value this company represents. Your question about the balance sheet or our need for liquidity. Shrikant covered in s -- I think it's Slide #13 that we plan to add additional term loan capacity of $30 million to $35 million.

And when you combine that with our equity that we raised in October and we may raise, we will have runway for addressing any near-term needs. Shrikant, if I missed any, please feel free to add..

No, you covered it, Par. I guess, yes, the additional point probably is at a little bit more color into that would be that, as you probably saw, the team on the slide is it reflects the height option to convert actions into results. Our focus is on making operational improvements and converting that into liquidity.

I guess that's the key thing that I'll call out..

Understood. And I guess I'll just try to squeeze in one more. Just around your margins going here, I appreciate all the cost efforts that you've taken to reduce your overall footprint and drive better margins.

Just given the current revenue headwinds that we've seen in the past couple of quarters, I mean when do you anticipate we should see some of these cost reductions start to translate into more stabilized gross margin performance going forward?.

The expectations obviously has to be covered again on the presentation, Zach. The expectation is it will start coming to fruition in Q4, but the pickup is going to be more pronounced in 2023 and onwards. Before I talk extensively about that. There's a couple of other data points that I probably will point out that's not apparent.

Let's take the example of our Healthcare Solutions segment. While the focus probably has been on the revenue decline on ITP and some of the margin compressions there, Healthcare Solutions is a good example where we're doing really well. And in particular, let's look at Q3.

Whether it was sequential quarter, year-over-year or year-to-date year-over-year, all 3, we had revenue gains in health care solutions. And when we started off this year from a margin perspective, specific to the health care business, or that segment. In Q4 and Q1, we saw margin compression there.

And Zach, while it may not be apparent on the quarterly financials we present from an earnings perspective. If you look at our 10-Qs for each of the 3 quarters, what are you want to find is in 2022, Healthcare Solutions went from -- in Q1, 17.34% margins to 18.9% in Q2; and Q3 20.7%.

The reason I called this out is when we look at a consolidated basis and look at the margin compressions, there is a positive story there, whether it's health care solutions or LLPS, while we are still not at the 2021 margin levels, those both segments are seeing a margin improvement every quarter this year..

Understood. Well, I appreciate the additional color provided there and nice to see the rebound in performance for Healthcare Solutions. But best of of luck with the rest of the quarter and looking forward to reconnecting soon..

Thanks for your question, Zach..

Our next question will come from Randal Klein with Avenue Capital Group..

I think Zach kind of addressed 1 or 1/2 of my questions. The first one on the balance sheet. It looks like the answer to my question, which is it's great to clean out '22. I assume you want to reload liquidity.

It sounds like you're already starting to take actions post quarter end, you've already started to reach some more capital and you'll continue to do so you can continue to deal with '23 issues as well. I mean I don't think there's anything else to add there that you didn't cover with Zach, but that was going to be my first question..

Yes. Go ahead, Par..

Shrikant, I couldn't hear it, the last part, but if you did, please go ahead..

Yes. Yes, first of all, Randal, again, thanks for the question. More so, it was an observation of the question and the answer that we had for Zach. I guess from I think from a number perspective, we covered it. You can probably provide more of a business color in terms of what's in store. I guess Randal's question is more around that..

I'll just jump on what's going to be my second question, which is more on the business outlook. So you've talked about Q3 is a bit of a seasonal typically. You went through all these issues around the network outage, the new business ramp-up on the wins, et cetera. I guess, directionally on the revenue side.

And again, you may have already asked or answered this with Zach, but it sounds like the inflection point for revenue as well as margin is happening kind of as we speak, right? I mean, kind of Q4-ish, and then, by definition, more into 2023.

Is that, again, kind of a quick summary of what you're trying to articulate?.

That is correct, Randal. That will be our expectation. Obviously, to execute and convert is the key, as we covered, and Par also mentioned in his presentation, we would like to see the pace of pipeline converting into revenue pickup.

This quarter, for example, we did see some delays in customer decisioning even as we were working on getting back up from the network outage impact. So yes, in summary, yes, that's our expectation, Randal..

I would add with the 98% recurring revenue, as we look into Q4, in $7 million that we converted as new business that's approximately 2%.

So with the pipeline that we have already won converted into business, we just need to make sure that we don't have any obstacles like shortage of people type of stuff that we faced for us to exceed our Q3 revenue numbers. Obviously, the goal is to do better than that, but it looks like we are in a good position as we are in Q4..

Got it. Okay. That's good for me guys. I hope no new surprises get in the way so you guys can execute on that..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Vince Kondaveeti for any closing remarks. Please go ahead..

Thanks, Chuck, and thanks for everyone for dialing into the call. We look forward to you joining our fireside chat with Par and please enter your questions, and we'll talk to you then. Thank you very much..

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