Exela Technologies, Inc. (XELA) Q3 2021 Earnings Highlights
Ron Cogburn, CEO:
“….We are focused on executing our strategy to speed up capital deployment, debt reduction, cash flow improvement and investing in our business for stabilizing performance and growth. The fundamentals of our business are strong and we are pleased with the continued exceptional growth of our digital solutions for the SMB market, where we see opportunity for further geographic expansion. We expect further improvements within our underlying business that will lead to additional improvements in the margins and cash flow in 2022.
Now I’d like to take a moment and point out a couple of highlights for you to remember today. First, an enhanced cash flow position. We have the initiatives in place to achieve $50 million in cash flow improvements in 2022. This is a $25 million improvement from our previous cash flow estimates. That’s quite an accomplishment. These improvements are currently underway in Q4 based on previously announced plans to deploy over $400 million of capital. And second, we’re executing plans to reduce our debt by approximately 25% to $1 billion from $1.355 billion.
So with that, let’s begin on Slide #4 with an overview of Exela’s investment highlights. For those who are new to Exela Technologies, Exela is a global leader in business process management solutions. Our total addressable market is extremely large at $207 billion and growing. Moreover, there are incremental growth opportunities in digital asset groups of what we call DAG, as we refer to it, included in the SMB market, which we entered in late 2020. We are well positioned in the market with a strong competitive moat, supported by our extensive investments in technology and the numerous patents that we own. Our customer base, which is over 4,000, spans across 14 industry verticals, including 60% of the Fortune 100, we service a large and diverse group of customers from the SMB to some of the largest blue-chip companies in the world, where we have long-tenured relationships. And finally, with decades of industry experience, we believe we have the right management team in place to capitalize on the significant opportunities we see ahead.
Now let’s move to Slide #5. I would like to discuss some of the third quarter highlights. Total revenue for the third quarter was $279 million, down from the same period a year ago. The most significant variations in revenue occurred in our public sector, which were mainly driven by the delays in the funding approvals for the agencies that we serve as well as the continued COVID-19 impact. We generated EBITDA of $49.1 million in Q3, an increase of 30% or $11.4 million year-over-year. We generated adjusted EBITDA of $36 million in Q3, which is down 25% year-over-year. Also, we delivered continued margin improvement in the third quarter.
Our Q3 gross margin was 24.2%, an increase of approximately 90 basis points year-over-year. COVID-19 and the resulting safety measures have had a continuing impact on our on-site business as well as some of our operating centers. We’ve been impacted by lower usage in the on-site services as well as lower utilization in some of the operating centers than we originally forecasted which ultimately affects our margins. Since the beginning of 2021, we have raised total gross proceeds of $276 million through our equity offerings. These transactions combined with our strategy to reduce cost and increase efficiencies have enabled us to reach a total liquidity of $227 million as of November 2, 2021, exceeding our total liquidity target range of $125 million to $150 million, which we discussed in late November. In addition, our efforts provided us with the capital to repurchase a portion of our outstanding debt. Our net debt as of September 30 stood at $1.247 billion, a $190 million reduction year-to-date.
Now let’s turn to Slide #6 and talk about some of the key performance metrics. Our strategy has evolved to scale up our cloud usage. Many of our platforms, including intelligent data processing and our work from anywhere initiatives are driving fast adoption of the cloud. We expect materially, all customers and employees will be using the cloud by the end of 2022. This is up from 30% in Q4 of this year. Quarterly revenue challenges due to COVID-19 aside, we are seeing solid momentum throughout our business, highlighted by strong renewal rates, expansion activity and an increasing pipeline of new activity.
Now with regard to COVID-19, with those impacts, we’ve seen delays in the following areas: delays in the plans to return to the office by our onsite customers, which in turn impacting our onsite revenue, which is part of the ITPS segment; continuous government restriction across countries during Q3 have led to delays in project executions and thereby, revenue delays; and then lastly, the hiring market at large is challenging in the – not as many candidates for open positions as they were before. And this last one here is a market-wide phenomenon.
Overall, we have a high customer satisfaction level that can be seen in our renewal and expansion rates. Our renewal rates continued to improve and were up quarter-over-quarter and year-over-year. In terms of contract expansions, those were up 16.9% sequentially, 21% year-over-year. Our new offerings are resonating in the market with a pipeline that is up 4.6% sequentially and 10.5% year-over-year. Additionally, we’ve entered into a new strategic partnership with one of the largest technology companies in the world to pursue new business opportunities. This is part of our strategy to expand our reach and sale of our platforms and services. We look forward to sharing more on that partnership in due time….”