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spk06: Good day and welcome to XLA Technology Second Quarter 2022 Financial Results Conference Call. All participants will be in lesson-only mode. Should you need assistance, please signal a conference specialist by pressing the star key.
spk04: After today's conference, there will be an opportunity to ask questions. Please note that this event is being recorded.
spk06: Now I'd like to turn the conference over to Mr. Vincent Sangaviti, Vice President of Corporate Development. Please go ahead, sir.
spk01: Thank you, Nick. Welcome to our earnings call to discuss our second quarter results for the period ended June 30th, 2022. Our earnings release and presentation are posted to the IR section of our website. Speakers on today's call are Parchada, Executive Chairman, and Srikanth Sotor, our Chief Financial Officer. Today's agenda will be as follows. Par 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 also launched the SpeakUp platform for our shareholders to interact with the company. We plan to make this an integral part of our shareholder communications in the future. SpeakUp can be found at shareholderconnect.excelotech.com. You can also email us at ir.excelotech.com with any questions. Some of the matters we will discuss in the 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 presentation. And with that, I'll turn it over to Par, our Executive Chairman.
spk03: Thanks, Vin. Good afternoon, and thanks to all of you for joining our second quarter 2022 call. Our revenue for this quarter was $266.8 million, and our adjusted EBDA was $36.5 million. This was an eventful quarter, not ordinary by any means. I've selected 10 highlights which best illustrate our second quarter results and progress. Kindly, if you can, turn to slide number four. We kicked off our capital deployment strategy and deposited 70 million of 2026 bonds in XC-STS LLC set aside for our shareholders. We hope this is a first step, not the only one, in healing our capital structure dislocation. As many of you know, cash is king in current markets looking for direction. which are threatened by recession, rising rates, inflation, and many challenges our global citizens are facing. Yet, we raised a fair amount of money from markets, $58 million via equity in this quarter alone. We completed $150 million in securitization facility with PNC at attractive rates, and we are happy about This opens up new potential opportunities to raise debt at attractive prices for funding our business needs. We also were prudent and reduced our debt by $118 million, and we continue to look for additional opportunities to deploy capital, but where it benefits us. The quarter we did, this quarter we did very good in winning new business. Over $229.7 million in all. The highest amount of total contract value in a quarter, at least in over three years. This success will be hard to repeat. But we do like a good challenge. We saw continued wins on Bixell Asset Business, serving the small, medium business markets. We saw substantial uptick in this business led by DMR and DriveSign, our flagship products for this market. Our work from anywhere business model is also gaining traction. Over 8,549 employees, just over 50%, are taking advantage of our WFA business model. And we hope this will lead to substantial advantage in the future periods. As our efficiencies are not where they should be, and this is part of our current and future focus. We've also been working on savings. We have identified potential savings for 2023 of 11.8 million that we are executing in 2022. And this includes 20% reduction of real estate in 2022 as well. Another important development that you, the shareholders of Accela should know, that Accela has now become the largest holder of 2026 notes. We could not have accomplished this without a simplified management organization structure. We also completed the change, these changes to empower leaders and results in the form of, and these changes These changes and the results from these changes are evident in the form of new business wins. As you know, the macro environment is affecting all of us. Our Excel is no exception. Inflation, tight job markets, network outage, strong dollars have all, many of these have negatively impacted our results, and they have impacted us. We continue to also invest in bench to support our customers. And we look forward to the day when this cost becomes additional revenue and thereby contributes to profitability. We are happy about winning sizable business. Now the next part starts. To get benefit from this business, we need to ramp up this business. And we look forward to this becoming a part of our base business and providing incremental source of profits. My message to you is simple. We're going to be prudent, we'll be strategic, and we'll take advantage of the opportunities. Depending on market conditions, we plan to sell some of our assets, allocate these proceeds from corporate actions that can benefit our shareholders. And if it benefits us, we'll also have ambitions to purchase more debt. Kindly turn to slide number six. I'll cover on this slide our sales successes. And as you know, our objective is to grow profitable revenue. In this quarter, we won $229.7 million in total contract value of new business. While majority of the business is over three years, there is some that spans over five years. It is a substantial growth also over Q1 2022. We're very happy about that. We also did good on renewals and we also did good on recurring revenue which came in at 98%. That's estimated at 98%. Our digital asset business, I mentioned this before, especially DMR and DriveSign, DMR customers year over year grew by 343%. And DriveSign reported 1,786% growth in users year over year We do offer shareholders benefit for signing up for DriveSign and DMR. I would highly recommend you should check it out. It's available at shareholdersconnect.excelatech.com. I want to share my experience having been through several negative macro market cycles. What we have seen is that our customers When they're faced with changing negative macro conditions, environments like we face today, historically, they tend to adapt and change their business model where the negative cycles, they outsource more of their business to partners like us. So I look forward to that event, this negative event, resulting in something positive for the Accela group. Let's take a look at slide number seven. There are five messages I want to cover on this slide. Network outage, where we have proactively brought our entire infrastructure down for several days, and shortage of staffing resources to deliver a backlog. These two items alone cost or delayed our revenue by $14 million. Investment in bench to support our customer is running at an annualized rate slightly greater than previous quarter at $19 million. We continue to support our customers to maintain our commitments in this very tight job market. Our business model to become better work from anywhere company is stable in Q2, but we anticipate The blend will be favorable, will have favorable impact on our cost in future periods. Let's take a look at slide number eight. We adopted the work from anywhere model in response to pandemic. However, now it's become an integral part of our global strategy. 50.2% of our people are working from anywhere, wherever they want, and they are not in our offices. Our technology platform to Uberize work and workforce on the cloud continues to grow. We now have over 15,000 people on this platform and our plan to grow this platform to over 25,000 people. This is our way to take action to control inflation and stabilize the job market negative trends and we will see a migration of bench investment, that I talked on the previous slide, to revenue in the future periods, which will bode well for our overall revenue and profits. Moving to slide number nine, another advantage or benefit, positive benefit, that we are beginning to see is reduction in real estate needs, since our employees of working from anywhere, we have lesser need for real estate. We have earmarked 445,000 square feet of real estate for exit in 2022. This amounts to approximately $6.3 million of annualized rent, lease cost reduction. We will not see these benefits in 2022 in entirety. We've only done about 15% of it so far this year. So the full year benefits will be in 2023. We took steps last year and continued this year to simplify our organization, to overcome our impediments and improve our focus to win. We empowered our leaders to run our businesses, sell some of the assets, buy some of the debt, only if it makes business sense. both strategically and financially. Our focus, our strategy, remains to deliver fundamental value creation by leveraging all tools in our toolbox. We look forward to engaging with our vibrant global shareholders on our speak-up platform that Vin mentioned earlier. We're rolling this out to listen to our shareholders in channels that are more prominent for them and leverage our digital strengths. I thank you for being our shareholders and for your support. With that, I'll turn it over to Srikanth, our CFO, and thereafter we'll open it up for questions. Thank you.
spk02: Thank you, Par. And thanks to everyone for joining us this morning, this evening rather. I will cover our consolidated results and segment revenue for our second quarter 2022 performance and provide an update on our growth and balance sheet initiatives. As we have done in the past, we're reporting both GAAP and non-GAAP numbers. Reconciliations are in our filings and in the appendix of the presentation. Let me touch upon some highlights of our second quarter 2022 financial performance. On a reported basis, revenue was $266.8 million, down 9% year-over-year and $273 million on a constant currency basis, down 6.8% year over year. Gross margins were impacted due to the late June network outage, inflation, and staffing shortages. Adjusted EBITDA was $36.5 million, or 13.7%. Turning to slide 11, let me highlight the key drivers impacting revenue for the quarter. The impact of the network outage adversely affected revenue by $9 million, of which $5 million is delayed revenue that we expect to recover. Currency exchange impacted us adversely by $6.2 million year-over-year, and transition impact by $20.3 million. Overall, this led to a revenue decrease of $35.5 million and was offset by $9.3 million revenue gain for a net 26.2 million of revenue decrease as compared to Q2 of 2021. Additionally, we were not able to capture approximately 5 million of revenue during the quarter due to staffing shortage. Let's quickly look at our segment revenue and financial performance for the quarter on slide 12. Revenue for our ITPS segment was 190 million, a decrease of 12.6% from 217.3 million in the second quarter of 2021. primarily due to transition revenue and currency translation. Our healthcare solution segment revenue totaled $56.4 million, an increase of 0.4% from $56.2 million in the year-ago period. The increase would have been more material but for the network outage. The strength of the segment was due to higher volumes in form of our healthcare payer customers. Our legal and loss prevention segment revenue was $20.4 million, a 4.3% increase year-over-year, driven by an increase in legal claims. Our gross profit came in at $49.5 million, down $34.4 million, or 41% year-over-year. The changes to gross profit for the comparative period is driven by the margin impact from lower revenue, idle production costs as a result of the network outage, and investment in bench costs. Q2 of 2021 included a one-time non-cash gain of $3.5 million from derecognition of an operating lease liability. Sequentially, cost of revenue increased by 4% as the cost of headcount or bench costs were higher based on our customer forecast. Our gross profit margin for the second quarter was 18.6%, down 11% from Q2 of the prior year, and down 145 basis points sequentially due to a number of macro factors previously highlighted. SG&A for the second quarter totaled $50.2 million, up $13.8 million, or 37.9% year-over-year, and up 16.6% sequentially, and representing 18.8% of sales. SG&A was elevated primarily due to higher employee costs as well as professional fees, including certain non-recurring transaction-related costs. As a note, The SG&A cost in Q2 of 2021 was benefited favorably by $2.7 million due to asset disposal and other one-time gains. Adjusted EBITDA was $36.5 million, down 28.4% from $50.9 million in the prior year period, and 90 basis points sequentially. Our adjusted EBITDA margin for the second quarter was 13.7%, up 74 basis points from the prior year quarter, and down 371 basis points from 17.4% in the second quarter of 2021. Q2 of 2022 included 15.5 million of non-operating charges that impacted EBITDA. We recorded 8.1 million of loss and extinguishment of debt related to the AR securitization facility and also recorded a 7.4 million liability for a fair value true-up of the revolver exchange notes. Both of these are add-backs under non-cash and other charges category. As a reminder, some of the other components of the add-back under other charges will include severance, retention bonuses, facility consolidation, contract costs, system integration, and other transition costs. Let us turn to slide 13 to discuss our actions to improve our margins. Rising costs due to inflation and tight job market are impacting our businesses. We have several actions underway to improve our operating profits. From a pricing perspective, existing COLA provisions are insufficient under the current market conditions to effectively offset the cost pressures. Apart from focusing on favorable pricing when contracts are up for renewal, we are proactively seeking price increases on our existing contracts. Second, we're targeting approximately $11.8 million of annual savings to benefit us in FY 2023. As discussed earlier, our work-from-anywhere model is having a positive impact on our lease and owned real estate. We have earmarked 445,000 square feet per exit in 2022, resulting in annualized impact of $6.3 million with an additional $5.5 million of annual savings executed in Q2 2022 in other areas. Our investment in bench is running at an annualized rate of $19 million. We continue to support our customers to maintain our commitment in these very tight job markets. Our investment in bench will convert to revenue as customer demand peaks. Let us turn to slide 14 and discuss our investments and continued deleveraging initiatives. As we continue on the path to deliver the business, we want to mention some of the highlights this quarter. As of June 30, 2022, our total liquidity was $72 million. We closed a $150 million facility from PNC Bank initially at BSBY plus 400 BIPs. with an additional 65 million available, which we will use to fund incremental AR from our sales growth. We also have plans to add our term loan of approximately 30 to 35 million to further expand liquidity. Overall, the initiatives we have completed will result in 10 million of annual interest expense reduction. Our blended coupon rate is currently at 11.15%. In line with our deleveraging goals, we continue this quarter to reduce the total debt Our debt outstanding, including interest-bearing current liabilities, has declined by $118 million as compared to end of Q1, including the payoff of the old AR facility. Lastly, Excel has now become the largest holder of 2026 notes. In closing, we would like to emphasize that our strategy is focused on delivering fundamental value creation by leveraging global operating presence and continue to grow our assets. We look forward to updating you on our progress following the third quarter. And with that, operator, please open the line for Q&A.
spk06: Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. And please remember to limit yourself to one question and one follow-up. First question will be from Josh Sigler, Cancer Fitzgerald. Please go ahead.
spk08: Yes, hi. Thanks for taking my question. I want to dive a little deeper into your $230 million of TPV that you won in the quarter, a significant increase from 1Q. What were some of the drivers behind that growth? And are conversations becoming increasingly easier with new and existing clients as your balance sheet improves?
spk03: May I take that? Sure, please. Josh, XBT is the technology-led bills and payment business that originated in our license at technology to MasterCard a couple of years ago in UK, and then it morphed and expanded into becoming a global platform that we've been migrating to. So we are very excited about this segment and the customers that used to be enterprise customers also now beginning to include smaller enterprises, lending institutions as opposed to just banks and bill aggregators. So we are beginning to see diversity in our customers and thereby we're beginning to win new business from new customers, new logos. And it's a technology-led business, which means it's more digital, less number of people, more payments, and that by nature of its business implies better margins and faster ramps. We are looking forward to getting some more business in the space and differentiating ourselves from other bills and payment providers. I hope I answered all your questions, but if I didn't, please go ahead and ask your question.
spk08: That was helpful. Thank you very much for the color there. I'd love to follow up on the debt reduction strategy. Given the recent large equity raises that you've announced through your press releases, do you believe there's additional room to continue to repurchase and reduce your debt burden over the next couple of quarters? Thank you.
spk03: Josh, we'll continue to deploy capital as long as it's prudent and gives us financially benefits, advantage to lower our overall cost, lower our interest rate, and deploy with equity and the operating profits, if necessary, to deleverage the balance sheet and continue to earn more of the debt in our subsidiary excella intermediate attitude for the benefit of all stakeholders. So that strategy hasn't changed and we'll continue to add to it from asset sales. We announced in the second quarter that we look forward to selling some of the strategic assets, not our big assets, but some of the strategic assets so we could add to the balance sheet cash and capabilities to heal, whether it's our equity, whether it's our debt, and also fund our growing business segment, like, for example, the XBP business, the healthcare business, and our SMB business.
spk04: Great. Thank you very much. Thank you.
spk06: Thank you. Our next question will be from Zach Cummings, B Rally FBR. Please go ahead.
spk07: Yep. Thanks. Hi, good afternoon. I appreciate you taking my questions. Um, in terms of the global infrastructure shutdown, I mean, can you talk about the actions that were taken to remediate, uh, I guess, relationships with customers and have you seen any sort of additional impact from that unexpected shutdown? Um,
spk03: I don't know if I heard the entire question. The impact from the global network outage. Oh, feedback. Yeah. Look, I think the best feedback is that we are fully operational. It took us a few days to make sure we were good, and the majority of our business continued. And as you can see from Srikanth's presentation, the backlog, which speaks highly of our mission-critical nature, that our backlog during the days we were off continued, rolled into July and some into August. And our relationship with our customers remained solid, globally solid. And the fact that we were able to actively bring it down and then bring it back up talks about, speaks highly of our ability to operate when we need to make sure our customer's data is highly protected and remains protected. I think we learned a few lessons and those lessons are really positive and our customers have responded with positive, and we also want some more business from them. So all in all, good.
spk05: I understand. That's helpful.
spk07: And in terms of gross margins, I know those were impacted by the network outage here in Q2, but can you speak to some of the actions you're taking to try to at least sustain or potentially improve margins in the back half of the year, just given some of the staffing shortages and the wage inflation pressures?
spk03: the best way to, the best way to grow our gross profit margins and gross profit dollars, absolute dollars is to ramp up the business, the highly profitable businesses that we have won. We can suddenly, we're suddenly doing our, our part in managing cost. And, but some of these costs, for example, bench is really dependent upon the job market. and we are fully committed to support our customers, even though it costs us margins. But the fact that we have new business that's ramping up is going to be highly accreted to the overall organization. So we're looking forward to the ramp becoming base business in the coming quarters.
spk02: And, Zach, just to add to that, I covered some more additional details on slide 13 specific to the margins. A couple of other pointers are either the COLA increases or, more importantly, price increases on contracts that we can do so. That's a lever that we need to push. Of course, the rent reduction and cost savings that we are continuing to execute to improve our margins.
spk06: That's also one of the focus areas.
spk05: Understood. Well, thanks for taking my questions, and best of luck here in Q3.
spk04: Thanks, Zach.
spk06: Again, if you have a question, please press star then 1. Next question will be from Randall Klein, Avenue Capital Group. Please go ahead.
spk00: Hey, guys. Thanks for taking the questions. I'll try to keep it short because I've probably got more than my one-in-one follow-up, but I'll do what I can here. First one, just on the balance sheet, you noted the cash and effectively what was raised in the second quarter. Not that long ago, you announced, obviously, the 24-1 rare split and the number of pro forma shares outstanding. You can clearly back into the fact that there was material incremental cash that was raised so far in the third quarter. Any reason why that wasn't disclosed, or you just kind of figured you'll put that in the 10-Q or in the next quarter? In the next announcement, just trying to understand why you focused on June 30th. I know there was a time where you gave more kind of recent liquidity type updates.
spk02: Randall, thanks for the question. I think you covered a couple of items within your question there. One, liquidity we have already talked about as of 6.30, and then from an ATM perspective, we will have disclosure in the 10Q when we file that.
spk00: Okay, that's fine. Kind of a follow-up to a couple of other comments you made and a recent question from, I think, the person right before me. So clearly the second quarter was a little bit of an impacted, messy quarter because of the network outage and other things. You know, slide 11 kind of goes through that pretty well. That being said, you know, at a high level, when do you kind of hope to see the benefits of, you know, the cost savings as well as the revenue so that you'll actually see kind of quarter-over-quarter growth either on the revenue side, the margin side, or the EBITDA side? I know you're not providing specific guidance, but just at a high level, how are you thinking about that right now to the extent you can forecast in not an easy environment?
spk02: Right. There's a certain level of unpredictability due to which we didn't provide guidance. As we are going through this transformation process, in some ways we anticipated some of these headwinds, but Q2 is an example where the network outage was something that we had not anticipated. That said, Randall, if you look at – I can only point to history for now, which is three-quarters of 20% or sub-20% margins. We have laid out specifically where the challenges are or where the compression is from. What we are very focused is on how to overcome that, and it goes back to the gross margin discussion or even with the SG&A. I covered it extensively, mainly to point out, even though in this quarter SG&A was higher, there were one-timers, including transactions, costs, and more than that. So it's really being focused on executing on the savings and overcoming the compression, more importantly, like PAR covered, getting projects to ramp up, converting all of our new businesses into billing. So that's going to be the focus.
spk03: I will add, Randall, to what Srikanth said. As we look to our future periods, we won about $78 million in Q1. We won $229 million in Q2. We have a recurring business that's estimated at 98%. which means if things remain they are, as Srikanth said, as we get business ramped up and we keep our costs under control and our SDNA, that instead of being 36 million to 39 million due to transactional and other one-time charges, it's 50 million. If they remain sort of balanced, we are bound to see a rebound in our both top line and bottom line. And we benefit from the fact that we have built up a giant backlog. This is a great position to be in, but a bad position due to job, number of people that we need to hire. But we have in our toolbox, we have what it takes to manage this type of multiple levers, some positive, some negative. And we're excited about the fact that we are looking into ending the second quarter with a big backlog.
spk00: Thank you. I appreciate that. That's actually an interesting way to think about it, given the renewal rate, increasing backlog, and then just do what you can on the margin, especially on SG&A. That certainly, I think, points me in the right direction, and hopefully that comes through. So that's a That's a very helpful way to put it. So good luck on that. Appreciate it, guys. Thank you.
spk04: Thank you. Thanks, Donald. Thank you. That concludes our question and answer session.
spk06: I'll now go back to Mr. Vincent Condovini for closing remarks.
spk01: Great. Thanks for everyone's time and interest in Accela, and we look forward to you joining us on our next call. Have a good evening or evening. or wherever you may be. Thank you.
spk06: The conference is now concluded. Thank you for attending today's presentation.
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