Exela Technologies, Inc. (NASDAQ:XELA) Q2 2021 Earnings Highlights
Ron Cogburn, CEO
“…Today, I would like to focus on three key takeaways. First, Exela’s strong position in a large market where we have significant opportunity for growth. This opportunity is enhanced by our recently launched digital solutions for small and medium business segment, where we are seeing strong growth and plan to accelerate our strategy in the coming quarters.
Second, Exela’s improving fundamentals. Our revenue base is stable, and our pipeline reflects multiple avenues of growth. In addition, our profitability metrics are improving as we continue to focus on our efficiency plans. This is evident in our strong gross margin and EBITDA margin expansion in Q2.
And third, Exela’s improved liquidity position and strong financial flexibility. We have delivered on our November 2019 plan, achieving our liquidity target ahead of schedule and reducing our net debt by over $140 million.
So, with that, let’s begin on slide number 3 with an overview of Exela’s investment highlights.
We have discussed various iterations of this slide on prior calls because it underscores our strong position. Exela is a leader in business process management solutions globally. We serve a large and growing total addressable market estimated at $207 billion, and we see significant incremental opportunity for an even larger SMB market where we have experienced strong growth since our entrance into the space in late 2020. Our extensive investments in our technology and numerous patents serve as a competitive moat and position us well to win with solutions that drive digital transformation and automation. We serve over 4,000 customers across 14 industry verticals, including 60% of the Fortune 100. So, our customer base is not only large and diverse, but we work with some of the large 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 significant opportunities that we see ahead.
Now, let’s turn to slide number 4.
Slide number 4 underscores our strong market position by highlighting the scale, reach and the criticality of the services we provide. As you can see from this slide, our solutions help power critical business operations that touch the everyday lives of the majority of the population in the countries that we serve. The facts presented here demonstrate our ability to handle critical business processes at a tremendous scale, which is important, and this is something that sets us apart from the market. Furthermore, our digital transformation and automation as well as our BPA solutions are not only an integral part of our customers’ core day-to-day operations, but they also facilitate increased efficiency. This is a powerful value proposition, which helps us drive our long-tenured blue-chip customer relations.
Let’s turn to slide number 5. I would now like to discuss some of the second quarter highlights.
Total revenue for the second quarter was in line with our expectations at $293 million, down modestly from Q1. Variations in our revenue mainly reflect continued COVID-19 impact, offset by the increased stabilization achieved after pruning nonstrategic contracts. I’m pleased to say that we see — we’re seeing good momentum in our business.
Our ACV renewal rates improved to 95% in Q2. We have added new statements of work across many of our key customers as well. The public sector is showing potential for solid growth and the SMB vertical is exceeding all of our expectations.
Now, here’s an important fact worth noting. We generated adjusted EBITDA of $51 million in Q2, up approximately 10% sequentially and 18% year-over-year and in line with our pre-pandemic adjusted EBITDA in Q4 of 2019. We find this noteworthy considering the current COVID-19 headwinds and believe it further underscores our continued efforts to increase our profitability.
Also, we delivered strong margin improvement in the second quarter. Our Q2 gross margin was 28.6%, an increase of approximately 616 basis points sequentially and 722 basis points year-over-year. Our adjusted EBITDA margin was 17.4%, an increase of 189 basis points from last quarter and 336 basis points from Q2 of 2020.
As we have mentioned in the past, with facility consolidations, we continue to utilize our work-from-anywhere model as well as implementing additional automation technologies in our business. As a result, our operating profits increased by $21 million in Q1.
Since the beginning of 2021, we have raised total gross proceeds of $224 million through our equity offerings. These transactions, combined with our strategy to reduce cost, increased efficiencies, have enabled us to reach total liquidity of $158 million as of August 6, achieving our liquidity target range of $125 million to $150 million, as promised in late 2019.
In addition, our efforts provided us with the capital to repurchase a portion of our outstanding debt. Our net debt as of August 6 stood at $1.297 billion, $140 million reduction year-to-date. We ended Q2 with approximately 18,000 employees, and we expect our headcount to increase in the second half to meet the rising demand.
Now, let’s turn to slide number 6. I’d like to update you on our progress with the small and medium businesses or the SMBs.
The stats that you see on this slide give us confidence in the success of our current SMB offerings. Since our entrance into this segment in late 2020, we have seen consistent strong growth in the number of new SMB customers in our digital mailroom and new users of our DrySign solutions.
In the second quarter, our digital mailroom SMB customers grew 99% sequentially, and our DrySign users were up 144% from Q1 of 2021. With the launch of DMR in the United Kingdom in Q2 and launches in France and Germany this month as well as the recent launch of DrySign in India, we expect our strong momentum will continue. With the success we have achieved in the SMB space so far with our DMR and DrySign solutions, we plan to add additional solutions to the SMB market across the Americas, Europe and Asia, which we will discuss in the near future.
Now, let’s turn to slide number 7. I’d like to focus on our Q2 segment results.
We delivered strong sequential revenue growth in our Healthcare Solutions segment of 10%, reflecting improved volumes due to new statements of work, new customer adds, and a larger backlog. Our Legal segment also had a nice quarter with 14% growth from Q1 of 2021 and 26% growth over last year. Our ITP segment had lower volumes due to COVID-19, but are slowly coming back as people return to work. And we continue to believe we are well positioned to see volumes and revenue improvement in this segment once the COVID-19 subsides.
Overall, our current revenue base is stable and diversified from a customer, industry and geographic standpoint. Our backlog is substantial and our pipeline growth remains strong. This gives us increased confidence in our 2021 outlook, which we reaffirmed today.