Business Overview and History
Exela Technologies, Inc. (XELA) is a global business process automation (BPA) leader that has been navigating a transformative journey amidst a challenging macroeconomic environment. With a rich history spanning over two decades, the company has emerged as a prominent player in the technology-enabled solutions space, offering a wide range of services to businesses across various industries.
Exela Technologies, Inc. has a complex and transformative history that began as a special purpose acquisition company (SPAC) named Quinpario Acquisition Corp. 2, which completed its initial public offering on January 22, 2015. The company's current form took shape in July 2017 when it completed the acquisition of SourceHOV Holdings, Inc. and Novitex Holdings, Inc. through a business combination agreement dated February 21, 2017, known as the Novitex Business Combination. This strategic merger was accounted for as a reverse merger, with SourceHOV determined to be the accounting acquirer. As a result of this combination, Quinpario was renamed Exela Technologies, Inc., forming one of the largest global providers of information processing solutions based on revenues.
Exela's business is organized into three reportable segments: Information Transaction Processing Solutions (ITPS), Healthcare Solutions (HS), and Legal and Loss Prevention Services (LLPS). These segments align with the company's strategic business units, reflecting its approach to key markets and customer interactions across various industries. The ITPS segment, which accounts for the majority of the company's revenue, provides a wide range of solutions and services designed to aid businesses in information capture, processing, decisioning, and distribution, primarily serving the financial services, commercial, public sector, and legal industries. The HS segment focuses on healthcare-specific outsourcing services, catering to both healthcare providers and payers, while the LLPS segment offers a broad array of support services in connection with class action settlement administration, claims adjudication, labor, employment, and other legal matters.
In a significant development, Exela completed the merger of its European business with CF Acquisition Corp. VIII in November 2023. This merger resulted in the formation of XBP Europe Holdings, Inc. ("XBP Europe"), which now operates as a majority-owned consolidated subsidiary of Exela. Following this transaction, XBP Europe's shares and warrants began trading on the Nasdaq Stock Market under the ticker symbols XBP and XBPEW, respectively, on November 30, 2023.
More recently, on June 8, 2023, Exela completed the sale of its high-speed scanner business, which was part of its ITPS segment. This strategic divestiture resulted in a total pre-tax gain of $7.2 million for the company. The terms of the sales agreement include provisions for potential additional cash consideration, contingent upon the future occurrence of certain earn-out events.
Financial Performance and Ratios
Exela's financial performance has been marked by both challenges and opportunities in recent years. In 2023, the company reported revenue of $1,064.1 million, a slight decrease of 1.2% compared to the previous year. However, the company's gross margin improved significantly, reaching 21.7% in 2023 compared to 18.5% in 2022, driven by a focus on operational efficiency and cost optimization initiatives.
For the nine months ended September 30, 2024, Exela reported total revenue of $773.63 million, a decrease of 3.3% or $26.05 million compared to the same period in the prior year. The decline in revenue was mainly attributable to the ITPS and HS segments, offset by growth in the LLPS segment. Breaking down the performance by segment:
- The ITPS segment generated $524.94 million in revenue, representing 67.9% of total revenue. This segment experienced a 4.7% decrease compared to the previous year, primarily due to exiting contracts and statements of work from certain customers that the company believed were unpredictable, non-recurring, and not a strategic fit. The sale of the high-speed scanner business in June 2023 also contributed to a $5.5 million decrease in revenue.
- The HS segment generated $186.57 million in revenue, accounting for 24.1% of total revenue. This segment saw a 1.2% decrease compared to the previous year, primarily due to lower volumes from both new and existing healthcare customers.
- The LLPS segment generated $62.13 million in revenue, representing 8% of total revenue. This segment experienced a 3.4% increase compared to the previous year, primarily due to an increase in project-based engagements in legal claims administration services.
In the most recent quarter, Exela reported revenue of $269,168,000, showing a year-over-year increase. However, the company faced challenges in profitability and cash flow, with net income decreasing to -$26,388,000, operating cash flow (OCF) declining to $4,708,000, and free cash flow (FCF) dropping to $4,358,000, all representing year-over-year decreases.
Liquidity
The company's liquidity position, as measured by its current ratio, stood at 0.35 as of September 30, 2024, indicating potential concerns regarding its ability to meet short-term obligations. The quick ratio, a more stringent measure of liquidity, was 0.31, further highlighting the need for Exela to strengthen its cash flow management and working capital optimization strategies.
The company's debt burden remains a significant concern, with a debt ratio of 2.00 as of September 30, 2024. This high level of leverage, coupled with the current macroeconomic challenges, could hinder Exela's ability to navigate the market effectively and pursue strategic initiatives. The company's interest coverage ratio, a measure of its ability to service its debt, stood at -0.15, indicating potential challenges in meeting its debt obligations.
As of September 30, 2024, Exela reported $45.61 million in cash, restricted cash, cash equivalents, and cash included in assets of disposal group held for sale. This liquidity position underscores the importance of the company's ongoing efforts to optimize its operations and improve its financial flexibility.
Operational Highlights and Challenges
Exela has been proactive in addressing the operational challenges it has faced, including the impact of the COVID-19 pandemic and the ongoing global supply chain disruptions. The company has implemented cost optimization measures, such as workforce reductions and facility consolidations, to improve its operational efficiency and profitability.
In 2022, the company experienced a significant network security incident, known as the "2022 Network Outage," which impacted its operational and information technology systems. This incident resulted in lost revenue and incremental costs, leading Exela to submit a $44.6 million insurance claim. While the company has settled a portion of this claim, the full resolution of the matter remains ongoing, with the potential for further legal proceedings against the insurers.
Exela's strategic initiatives have also included the exploration of a spin-off of its business process automation (BPA) business, which includes the HS and LLPS segments, as well as a portion of the ITPS segment. This proposed transaction, if completed, would allow the company to sharpen its focus on its core ITPS operations and potentially unlock additional value for shareholders. However, the company has since announced the abandonment of this spin-off plan.
Amid these transformative changes, Exela has also faced significant challenges related to its public listing. In 2024, the company received notification from Nasdaq that it was in violation of the exchange's listing requirements due to the decline in its market capitalization. Despite the company's efforts to regain compliance, it was ultimately delisted from Nasdaq, and its securities began trading on the OTC Pink market.
Outlook and Future Prospects
Exela's future prospects are inextricably linked to its ability to navigate the complex landscape of business process automation and adapt to the rapidly evolving technological landscape. The company's strategic focus on cloud-enabled platforms, automation, and data-driven insights positions it well to capture the growing demand for digital transformation solutions across its target industries.
However, the company's high debt levels, liquidity concerns, and the ongoing challenges posed by the delisting from Nasdaq present significant hurdles that Exela must overcome. The company's success will hinge on its ability to effectively manage its capital structure, optimize its operations, and continue to innovate and differentiate its offerings in the highly competitive BPA market.
Exela continues to focus on optimizing its operations, reducing costs, and investing in strategic initiatives to drive long-term profitability and growth across its three business segments. The company's ability to execute on these initiatives while addressing its financial challenges will be crucial in determining its trajectory in the coming years.
Conclusion
Exela Technologies is a company in transition, navigating a complex set of challenges and opportunities. While the company's historical track record and diverse service offerings provide a solid foundation, its financial and operational performance continues to be tested by macroeconomic headwinds and strategic pivots. As Exela works to strengthen its balance sheet, enhance operational efficiency, and capitalize on the growing demand for digital transformation solutions, investors will closely monitor the company's ability to execute its turnaround strategy and deliver sustainable long-term value.
The company's performance across its three segments—ITPS, HS, and LLPS—reflects both the challenges and opportunities in the business process automation market. While the ITPS and HS segments have faced revenue declines, the growth in the LLPS segment demonstrates the potential for targeted expansion in specific service areas. Exela's ability to leverage its strengths in each segment while addressing operational inefficiencies will be crucial to its future success.
As Exela continues to navigate its financial and operational challenges, the company's focus on cost optimization, strategic divestitures, and targeted growth initiatives will be key factors in determining its ability to return to profitability and create value for stakeholders. The evolving landscape of digital transformation and business process automation presents both opportunities and challenges for Exela, and the company's ability to adapt and innovate will be critical in shaping its long-term prospects in this dynamic market.