Exela Technologies, Inc.
Q3 2021 Earnings Call Transcript

Published: 5 Nov 2021

[Operator:]

Good day and welcome to the Exela Technologies, Inc. Third Quarter 2021 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mark Griffin with ICR. Please go ahead. Mr. Griffin, perhaps your line is muted. We are unable to hear you.

[Mark Griffin:]

Yes. Thank you. Good afternoon, everyone and welcome to Exela Technologies third quarter 2021 conference call. I am joined today by Ron Cogburn, Exela’s Chief Executive Officer and Shrikant Sortur, our Chief Financial Officer. Following prepared remarks made by Ron and Shrikant, we will take your questions. As a reminder, during today’s Q&A session after on today’s call, we will not be able to take questions on the pending exchange offer due to legal restrictions on commenting on securities issuance. Today’s conference call is being broadcast live via webcast, which is available on the Investor Relations page of Exela’s website at exelatech.com. A replay of today’s call will be available through November 12, 2021. Information to access the replay is listed on today’s press release, which is also available on the Investor Relations page of Exela’s website. During today’s call, Exela will make certain statements regarding future events and financial performance that maybe characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current beliefs, assumptions and expectations as of today, November 5, 2021 and are subject to a number of factors that may cause actual results to differ materially from those statements. We undertake no obligation to update any statements to reflect these events that occur after this call and actual results could differ materially from any forward-looking statements. For more information, please refer to the risk factors discussed in Exela’s most recently filed periodic form on 10-K along with today’s press release and the company’s other filings with the SEC. Copies are available from the SEC or the Investor Relations page of Exela’s website. During today’s call, we will refer to certain non-GAAP financial measures. We believe these non-GAAP measures provide additional information on how management views the operating performance of our business. Reconciliations between GAAP and non-GAAP results we discuss on today’s call can be found on the Investor Relations page of our website. Please note the presentation that accompanies this conference call is also available on the Investor Relations page of the website. With all of the mandatory Regulation FD disclosure out of the way, I’m pleased to turn the call over to our CEO, Ron Cogburn. Ron?

[Ron Cogburn:]

Good afternoon and thanks everyone for joining us on our third quarter 2021 conference call. 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

[Shrikant Sortur:]

Thank you, Ron, and thanks to everyone for joining us this afternoon. I’ll cover our consolidated results and segment revenue, provide an update on our balance sheet and liquidity position and discuss the updated outlook for the full year 2021. Overall, this quarter, we are happy to report the strong progress on strengthening our balance sheet and solidifying our financial position. As we have done in the past, we are reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let’s start on Slide 10 and review our third quarter 2021 results. Revenue for the third quarter totaled $279.2 million, a decrease of 4.7% sequentially and 8.5% year-over-year. Moving on to our financial metrics, our third quarter 2021 gross profit margin of 24.2% is an increase of 90 basis points year-over-year as a result of better cost and capacity management, offsetting the impact from lower revenue. For context, our cost of revenue year-over-year decreased by $22.5 million compared to the corresponding revenue decrease of $26.1 million. Our Q3 sequential results are not comparable due to a few different factors, the seasonality impact, particularly in the EMEA region, being a driver and continued lower volumes and underutilization of resources as a result of COVID-19. Sequentially, our gross profit decreased by approximately $16.4 million or 447 basis points from Q2, primarily due to the impact from revenue decrease and certain onetime impact in Q2 that did not repeat in Q3. For example, the favorable $3.5 million gain from derecognition of an operating lease liability due to production or through the lease termination. Reported SG&A expense in Q3 totaled $43.2 million, up 1% year-over-year, representing 15.5% of revenue. SG&A for Q3 of 2021 included a onetime charge of $3.8 million on our LLPS segment. Net of the onetime charge, our SG&A would have been $39.8 million and would represent 8% decrease year-over-year. Turning to EBITDA and adjusted EBITDA. In Q3 of 2021, we generated an EBITDA of $49.1 million compared to $37.7 million in the prior year period. This included a gain of early extinguishment of debt of $28.1 million for the 3 months ended September 30, 2021. Adjusted EBITDA for the third quarter was $36.4 million, down 25.3% year-over-year and 28.5% sequentially. Our adjusted EBITDA margin for the third quarter of 2021 was 13%, down 292 basis points year-over-year and 435 basis points sequentially from Q2. Capital expenditure in Q3 was $3.6 million or 1.3% of sales, in line with our expectations. Finally, our liquidity for our credit agreement was $227 million as of November 2, 2021, and includes $24 million as add backs for fees paid for advisory and professional services. A detailed view of our third quarter as well as our year-to-date September 30, 2021 results can be found on Slide 14 for your reference. Turning now to Slide 11 to discuss our revenue by segment, revenue for our ITPS segment was $208.3 million, a decrease of $9 million or 4.1% sequentially from Q2. The decline was primarily driven by continued COVID-19 impact as delays in our customers’ return to office plans are affecting our on-site business in addition to seasonality. As indicated by Ron on Slide 5, variations in our public sector revenue due to delays in funding approvals impacted our expected Q3 revenue in this segment. Our ITPS segment remains challenged from lower volumes due to COVID-19, and we continue to believe we are well positioned to see volumes and revenue improve in this segment once COVID-19 impact subsides. Healthcare Solutions segment revenue decreased by $2.2 million sequentially, primarily driven by lower seasonal volumes on our payer business. LLPS segment revenue decreased by $2.6 million due to certain onetime projects that were completed in Q2. 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 confidence as we look beyond 2021 into 2022. Turning to Slide 12, the breadth and diversification of our revenue and industries serve a significant strength for Exela. Two key points that I’d like to make with this page. Plus, we have long tenured and trusted partnerships, providing critical solutions to thousands of customers that cut across every major industry vertical. This enables both stability with our existing customers and gives us tremendous points of reference with prospective customers. Second, with low customer concentration, deep vertical expertise in industries that have the strongest projected growth like banking, financial services, insurance, health care and tech, we are well positioned for growth, especially as the global economy continues to recover post pandemic. Our high-margin DAG business represents 8% of the total revenue. Moving on to Slide 13, I’d like to discuss updates to our balance sheet initiatives and our strategic deleveraging, which will improve our annual cash flow by $15 million. Since we first announced our deleveraging strategy, we have raised $276 million from equity offering through end of September and repurchased $95 million of outstanding debt. As we execute our multi-step strategy, we expect to reduce our interest and loan amortization by $37.5 million on an annual basis. The remaining cash flow improvement of $12.5 million will come from reducing our facility and other lease expense. Our plan is to lower our debt by 25% to $1 billion from $1.355 billion for a financially stronger company as we propel for 2022. As part of our plan to deploy over $400 million of capital, we have commenced an exchange offer for secured notes and senior secured term loans, both of which are due in 2023. As we head into 2022, our next strategic focus will be on investing for growth, and we have made a number of appointment in our focus areas across the business, bringing on seasoned individuals who will help us grow our business. Turning to Slide 14, we covered the quarterly results in detail on Slide 10. On this slide, therefore, I will highlight year-over-year 9-month gross profit and margin performance. Our gross margin for year-to-date 2021 was 25.1%, an increase of 364 basis points over prior year. For context, we have an increase in gross profit of $9 million for the comparative period on a revenue decrease of $106 million. This was possible due to operating leverage improvement, increase efficiencies through the implementation of automation tools and leveraging the success of our work from anywhere model. Looking ahead, we expect to drive additional operating leverage from higher utilization of our revenue growth as our revenue growth improves. Finally, I would now like to provide an update to our 2021 outlook. As discussed earlier, due to variations in unpredictable public sector revenue as well as continued COVID-19 impact, we are updating our revenue guidance for full year 2021 to be in the range of $1.16 billion to $1.18 billion on a reported revenue basis. We are reaffirming all other guidance for the full year, namely gross margin for 2021 to be between 23% and 25%, adjusted EBITDA margin to be between 16% and 17%, CapEx levels of approximately 1% of revenue. Turning to Slide 15, you will see the takeaways from today’s presentation on here. I close by reiterating that we will continue to focus on improving our balance sheet and liquidity while making the right investments to deliver improved performance and operating cash flows to achieve both our short-term and long-term financial goals of growth, margin and free cash flow. We look forward to continuing this progress in the fourth quarter and beyond. Thank you all very much for joining us on the call today. With that, operator, please open the call for questions.

[Operator:]

Thank you. And the first question will be from Josh Siegler with Cantor Fitzgerald. Please, go ahead.

[Josh Siegler:]

Hi, good afternoon. Thanks for taking my questions. So my first one is on the government business that didn’t come in that to us sounds like it was a timing issue, so can you provide some additional color on this component? Do you still expect this business to be recognized in 4Q or perhaps, 2022? And what potential impact do you think it can have?

[Shrikant Sortur:]

Josh, first of all, thank you for the question. I will leave with it and Ron can give you additional details. You’re right, it is timing at this point in time. We expect that – as you probably heard on the Q2 conference call, we expected the project to ramp up late Q3. That did not happen due to the debt ceiling or the funding approval is not procured by the government, and therefore, this is getting pushed out. From a timing perspective, we are waiting to see how this will unfold. It most likely could be a 2022 type of an event, but still unknown. Ron, you want to add the specifics behind that.

[Ron Cogburn:]

Yes. So this is Ron speaking. So yes, to Shrikant’s point, in dealing with some of these federal agencies and we work with some of the largest – the struggle that Congress has, we see this, I guess, once ever 4 years on debt ceiling, has caused everybody to tap the brakes with commitments to move forward with either projects or continued growth in certain statements of work. So while we proposed on this new statement of work, which is substantial for us, about ready to pull the trigger, the agency paused for a moment as they were restricted through this, I guess, the exercise that Congress is putting them through. So we’re very hopeful that we will see this come back to life here by the end of the year. If not then 2022 would be a very good spot for it to kick off.

[Josh Siegler:]

Great. I appreciate the color there. And then switching gears a little bit, you guys have made significant progress on your capital structure this year. What in your opinion is the next step to take with the balance sheet? Obviously, you have a lot of moving pieces here, but what’s the next incremental impact here? And what – how do you think the current steps you’ve taken will impact your future cash flow? Thank you very much.

[Shrikant Sortur:]

Yes, Josh, I think it’s crisply laid out, deploying $400 million of capital, a, to reduce debt, 25% levels to get to the $1 billion range. And more importantly, also secure the interest costs and savings targeted at $37.5 million right now in addition to deploying the capital to reduce some operational costs like the lease and other equipment costs. So in total, we are targeting the $15 million improvement to cash flow. We are deploying the capital.

[Josh Siegler:]

Thank you, guys.

[Ron Cogburn:]

Thanks.

[Operator:]

And the next question will come from Zach Cummins from B. Riley Securities. Please, go ahead.

[Zach Cummins:]

Hi, thanks for taking my questions. I’m just tailing off into the Healthcare Services segment. I mean it’s kind of surprising to see that decline on a sequential basis. Can you give me some more insight into what drove that sequential decline and then kind of your confidence in being able to consistently grow in that segment going forward?

[Shrikant Sortur:]

Actually, Q3 tends to be a soft quarter for Healthcare, so to speak. And then again, Q4, it picks back up. In Q1 and Q2, Healthcare revenues tend to be higher as well. And then in Q4 because of the year-end enrollment as well as annual exams go through, we will see more revenue. So, on that count, not entirely surprising that we had a seasonality impact on the payer business, so the $2 million delta, why we expected more to come through, $2 million delta doesn’t concern us as much from a seasonality perspective.

[Zach Cummins:]

Understood. And just on the $227 million liquidity number that you reported, I mean, can you give me the breakdown there in terms of the different components there just to get a better sense of the actual cash that you have?

[Shrikant Sortur:]

Sure, Zach. In line with a couple of further earlier reporting, it remains the same, approximately $24 million of the add-backs and approximately $22 million to $24 million of availability in our facilities. So if you back that out, the rest is cash.

[Zach Cummins:]

Understood. I will jump back into the queue. Thank you.

[Ron Cogburn:]

Thank you.

[Operator:]

Thank you. And the next question will come from Alex Graf from Cowen. Please, go ahead.

[Alex Graf:]

Thank you. Good afternoon. Just a quick one on the updated guidance. Can you maybe help break that down a little bit, what’s really driving that? Certainly, some of it is from the public sector contract you mentioned. Can you maybe help us understand how much of that is or how much of the takedown guidance is also tied to any transitional revenue?

[Shrikant Sortur:]

Sure. Maybe I give a very high-level answer and then we can drill down to the specific as much as you need. First of all, we are in the midst of working on multiple fronts and options, right? That’s been the focus and the improvements we have made overall from all the way to late 2019 to now reflect where we are focused on from a strategy perspective and how we have executed. That said, one point is on comparative purposes, right? $150 million – we talked about $150 million of transition revenue. We talked about last year impacted by approximately $90 million of COVID revenue. And then there was asset sales impact of almost $30 million. So we’re talking about $270 million or so of revenue, which we knew were impacted year-over-year. That as the backdrop I’ll point out – even before talking about the revenue guidance takedown, I’ll point out that the two things at least from our perspective internally what we are focused on is that the base revenue is stable, number one; number two, all of our sales metrics are looking up. And you saw that slide on this quarter where we have higher percentages for – from the perspective of sales, the pipeline growing, the renewables growing and expanding with existing customers, right? All of that said delayed sales cycle and ramp may impact when you look at it from a quarter-to-quarter perspective, but it’s all about timing. So our focus is going to be on margin and cash flows. I just want to reiterate that. That said, lastly, as we talked about, when we looked at the guidance, particularly from movement or changes or unpredictability, the public sector revenue and the impact that we have as a business had on COVID – continued impact, we decided to take it down and be conservative the number.

[Alex Graf:]

I see. Okay. I guess. So in terms of going back to kind of what year-over-year was the $150 million of transitional revenue, is there any additional transitional revenue baked into this particular guidance number? Or should we still think about that transitional revenue as being around $150 million?

[Shrikant Sortur:]

Not a whole lot, but it is bound to tail off a little bit, just based on the timing of the transition revenue exits, right? It’s not going to be in the $30 million, $40 million range like the run rate from early 2020 or mid 2020. But there is bound to be a little bit of it, not a whole lot.

[Alex Graf:]

Okay, thank you. And then lastly, just on the debt balances, the company has been repurchasing both bonds and loans in the open market. Can you maybe give us a sense of what the debt balances look like currently subsequent to any repurchases after the quarter?

[Shrikant Sortur:]

We had one. You will see the more specific details when we file our Q, most likely on Monday. But high level, you saw the net debt stat also on our debt, right? There is a breakup on the roll up of the net debt of 1247 – $1.247 billion.

[Alex Graf:]

Right. Yes. There I just didn’t know if we – probably in the queue, you’ll have the breakout of what it is between and bonds and loans and anything that’s happened since the quarter. I think the number there is, as of September 30, right?

[Shrikant Sortur:]

That’s correct. Yes.

[Alex Graf:]

Yes. Okay, that’s it for me. Thank you.

[Shrikant Sortur:]

Thanks, Alex.

[Operator:]

And the next question will be from Jerry Wang from Carlyle. Please, go ahead.

[Jerry Wang:]

Hey, Shrikant. Just a quick one. I think you might have mentioned $270 million, call it, in revenue delays or revenue impacts, $150 million low-margin revenue, $70 million COVID delays. What was the last $50 million you mentioned?

[Shrikant Sortur:]

The last $30 million was the asset sales, Jerry. It’s for the two businesses that we sold in early to second quarter of 2020.

[Jerry Wang:]

Right. Okay. I think you might have guided some growth in the second half of this year. Was – what percentage of that miss was driven from kind of timing from the federal government budgeting process?

[Shrikant Sortur:]

Yes. So to frame that question that way, just to clarify, right, my response to Alex was specifically year-over-year impact, right, so saying $270 million of revenue – annual revenue, not on apples-to-apples basis. If your question is second half impact is not necessarily that much. From a guidance perspective, again, since you asked me to give you additional color, heading into our Q2 call, we still had potential public sector revenue to come through in with Q2 with inoculation. We expected a lot more of the business to be back up and running, if not pre-COVID levels, at least much better than what we are experiencing right now. That is the reason for the guidance change, so to speak.

[Jerry Wang:]

Okay. So you would say the majority of it?

[Shrikant Sortur:]

Yes. But since we are talking about it, Jerry, I’d also like to again hit upon the specific points. Our stable – we feel very confident about our stable revenue. While COVID impact is ongoing in certain ways for us, we are focused on liquidity, which in turn helps us to deploy capital to reduce debt. And in turn, it’s driving down our interest cost, right? So our focus has been on margins and cash flow improvement. The reason I say that on a question about guidance is, I just don’t want to focus on top line alone, right. We have to also look at our overall strategy. So, when you have a debt service of $170 plus million and when we can execute and reduce it by $50 million, that’s a game changer, right. One feeds the other. So, while we are talking about revenue, I also want to keep the big picture in mind as to what we have been doing and what our goals are.

[Jerry Wang:]

Yes. Got it. The – on expenses, your gross profit was actually not very different. I think your margins have gotten a lot better through the year, but your adjusted EBITDA is lower this quarter. Your SG&A is still – is up, even though your revenues are down. I know you had that non-cash other charges. Can you just help me just parse through kind of the puts and takes on how you got to that $36 million? What is – first, what is that non-cash and was there additional SG&A expenses in the quarter that was more…?

[Shrikant Sortur:]

Yes. So again, to give you a high level there, sequential quarter comparison is always difficult, right. That’s what I was pointing out. In Q1, we were favorably impacted by a pickup of $3.5 million. We have also had certain one-time projects that came in at higher margin. Admittedly, Q3, our revenue decrease impacted margins. Plain and simple, that’s what it is, right. We need to do – we need profitable revenue growth. That said, that is why we want to look at YTD basis or annual basis. That’s why I pointed out, even though year-to-date, our revenue declined $106 million, our gross profits were up by $9 million. That even saw some of the one-timers. And in terms of your question specifically to the quarter, the – I don’t pick the other charges that you indicated. But on SG&A, there was a $3.8 million one-timer, in frequent, we do not expect that to repeat. So, on that count, it was lower. And then on the add-back part, if you – I don’t know what specific line item you are looking at for other charges. I can help you with that, if you want. But those are specifically to the one-timers that I talked about just now plus the negative add back, so to speak, for the gain on extinguishment of debt. That’s where you will see that number probably.

[Jerry Wang:]

Okay, understood. Great. Thank you.

[Shrikant Sortur:]

Yes. No problem Jerry.

[Ron Cogburn:]

Thanks Jerry.

[Operator:]

And the next question comes from Randall Klein from Avenue Capital Group. Please go ahead.

[Randall Klein:]

Hi guys. Thanks for taking the call and nice job on working on the balance sheet and liquidity. You guys are in much, much greater shape these days.

[Ron Cogburn:]

Thanks.

[Randall Klein:]

Yes, two, some quick questions. The first was really quick. Ron, will you start off and then that came up a couple of times the $50 million cash flow improvement. Obviously, that’s focused on interest and lease expense savings. And I think you mentioned, Ron, obviously, on top of that, I am assuming directionally, you guys are hoping to do something very material on EBITDA, gross margin, call EBITDA, net profit, etcetera. And that’s really – you are not – you said you are not guiding to 2022, I assume that’s why you are not kind of talking about it. But I assume that’s kind of a hope on top of these other kind of more regular way savings. Is that correct?

[Shrikant Sortur:]

That’s partly correct, Randall. First of all, thank you for acknowledging the positive. Ron, I will take this since it’s number based.

[Ron Cogburn:]

Yes.

[Shrikant Sortur:]

Yes. Randall, we are multi-front, right, both. As I have said, focus on strengthening our balance sheet as well as continue to improve our profitability. That said, for the $37 million and also the overall $50 million target we have for cash flow, it really matters, particularly a lot of that is going to come from interest cost savings as we deploy the capital and reduce the debt. That matters because on the capital structure, if you look at it, it’s the $170-plus million of debt service that’s creating challenges, so to speak. The best thing for us to do, as we deploy capital and reduce interest cost is, it frees up a lot of free cash. In turn, it’s going to feed all of our investment and growth in the business. So, as you have seen over the last few quarters, we have continued to focus on margins, continued to focus on the business and operations. This is in addition, the capital structure fixes, in addition to that one piece to other, so to speak. Did that address your question or do you…?

[Randall Klein:]

Yes. I mean, well, look, I agree, obviously, the $50 million is great and important. It was just – I was trying to differentiate fundamentals on the income statement and margins, which sound like, yes, of course, you are trying to increase revenue and increase margins by definition. And I guess, again, given you don’t have 2022 projection, per se. You can’t really put a number on that today, which is fine. I have no issue with that.

[Shrikant Sortur:]

Right.

[Randall Klein:]

Okay. And then second question is your implied Q4 guidance effectively since you have three quarters now, and you are still you are updating your 2021 guidance. It seems like there is a decent – there is actually a rebound in revenue. There will be revenue growth Q3 to Q4 and potentially, pretty good profitability. It’s a little hard to tell exactly, if you take a look at your EBITDA margin guidance, it’s I think, 16% to 17%, and yet you are only 15% year-to-date, which implies a nice jump, although kind of gross margin looks like it’s more flat. So, I guess that begs the question. On your last quarterly call, you said the O&R charges should be running about $20 million for the year or $5 million a quarter. Directionally, is that still true so we can kind of back into what we think kind of EBITDA before O&R charges would be?

[Shrikant Sortur:]

Right. There are two or three different elements that you touched upon there, right. First of all, you are right. There is an expected revenue growth in Q4. We are usually favorably impacted by the seasonality, both on our healthcare business as well as, more importantly, in the EMEA region, where we have usually higher Q4 revenues. That is number one. And number two, you were looking at it in the right way from an adjusted EBITDA perspective as well, given 15.3% or so for year-to-date to get to 16%, we should hit the 50 or so level. So, the way to look at it is also, if you look at what we did in Q2, that in Q2, we were benefited by one-timers. Q2 results repeating in Q4 will get us there, so to speak. So, it’s not insatiable sitting at this point in time, but we need to continue to execute.

[Randall Klein:]

Got it. Great. Okay. I will go back into the queue. Thanks.

[Shrikant Sortur:]

Thank you. Thank you, Randall.

[Ron Cogburn:]

Thanks Randall.

[Operator:]

The next question will be from Amer Tiwana from Imperial Capital. Please go ahead.

[Amer Tiwana:]

Hi guys. Thanks for taking my question. I just wanted to reconcile something, looking at your tender offer, I am not asking about that, but that says that you are going to use about $225 million of cash. And looking at your liquidity that you just reported, you have about $227 million. Assuming that the tender goes through, can you sort of talk about the back-end liquidity of the company, what the number would be, or how do you intend to sort of manage it?

[Shrikant Sortur:]

Sure, Amer. Again, thanks for the question. Even though it’s not specific to the tender offer, it’s in a roundabout way having to discuss about that whole mechanics, right. So, instead of talking about that, let’s just talk about the fact that you will probably have to give credit to the fact that we have set liquidity targets. We have achieved those. We are able to generate cash or raise cash. So, the way we look at it is, any of the multistep strategy that we are planning on, we have the ability to execute on what we need to, right. We have a sufficient capital and we will take care of execution. From a sources perspective, there is going to be multiple levers. In generation of cash, we have the S3 out there, raise more cash. We have other levers, too, right. So, we are absolutely going to be very strategic and intentful on what we want to do and how we want to do it. I will put it that way.

[Amer Tiwana:]

So, would you have the ability to maybe put like another sort of bank facility or something in place to? Is that also a part of the equation, or – I am just trying to figure out what those levels…?

[Shrikant Sortur:]

Yes. Absolutely fair question Amer. Absolutely fair question. But since you are on the mix of it, I don’t know if I want to discuss all of those specifics, right. Like I said, and I said there are multiple levers, obviously we are working on multiple things and any of those, yes.

[Amer Tiwana:]

Understood. I think all of my other questions were answered. So, thank you very much there.

[Shrikant Sortur:]

Thanks Amer.

[Operator:]

And the next question is a follow-up from Josh Siegler from Cantor Fitzgerald. Please go ahead.

[Josh Siegler:]

Hi, great. Thanks for taking my follow-up. I just wanted to turn focus over towards one of the growth drivers of the business here, the Digital Asset Group. Given the outsized growth you have experienced this year in DMR and DrySign, do you expect the Digital Asset Group to be a larger part of the mix as we move into 2022? And how do you expect that to impact your margins just on a higher level?

[Ron Cogburn:]

This is Ron. Let me give a – just a walk through that. So, I won’t talk about the numbers, but what I do talk about is the adoption. And this is really what we have been doing since the beginning of the year with both DMR and anything that’s one of the platforms within the Digital Asset Group. So, whether it’s DrySign or DMR, we have eagerly been watching the growth quarter-over-quarter of new users. So, as we have seen that adoption rate exceed anything we imagine, we look at that. And for 2022, we see this expanding not only in just the number of users, but in the geography and the presence and also some additional features or products. So, we are very excited about that. Right now, I think DAG was 8% of our of revenue. So, it would be an expectation that, that would become a larger contributor, and it is one of our higher gross margin business units. So, we are very excited about where that will take us.

[Josh Siegler:]

Great. That’s very helpful. And then just diving a little bit further into that, can you provide an update on the SMB sales force and how that’s been progressing?

[Ron Cogburn:]

Yes. I think we mentioned we have been picking up some new talent as we go along the way. Part of the challenge in this market is to find those folks and to be able to secure them, but we have had a lot of success in all our geographies. And as we launch in 2022 and continue through the rest of this year, I think you will be able to see through press releases or announcements things that we have had success with. So, we are very excited about the folks and leadership in terms of what they are doing to drive the new sales and just the general adoption itself. It’s a great comfort to us and our look at the strategy for 2022.

[Josh Siegler:]

Great. Thank you very much, Ron.

[Operator:]

Thank you. And the next question is also a follow-up from Zach Cummins from B. Riley Securities.

[Zach Cummins:]

Yes. Thanks for taking my follow-up questions. Just wanted – help me bridge the gap of the expected debt pay-down. I think you outlined $355 million in expected debt pay-down. Is that already including the $95 million that you have paid down year-to-date? I am just looking at the tender offer, assuming that $250 million of debt can be retired with cash. So, I am just trying to bridge the gap there in terms of your plans to hit that debt pay-down target.

[Shrikant Sortur:]

Sure. It does not include $95 million already, it does not. It’s an addition.

[Zach Cummins:]

Understood. That’s helpful. And then finally, can you just give me an update on the cost savings plan at this juncture? And kind of where you are at right now and what you can expect to start flowing through the model next year?

[Shrikant Sortur:]

Sorry, a quick follow-up. The $355 million or what you are talking about, it includes the $95 million.

[Zach Cummins:]

Okay. Thank you. So, it include that, $95 million.

[Shrikant Sortur:]

Yes.

[Zach Cummins:]

Got it. And just on the cost – yes, the cost savings plan.

[Shrikant Sortur:]

Cost savings plan, this $12.5 million of the cost savings is items that are either executed at the end of Q3 are in process in Q4. We had some equipment and lease savings executed late Q3. So, it will start flowing through in Q4, and then we have another basket that we are executing in Q4. These are very specific initiatives that we are going after this quarter.

[Zach Cummins:]

Alright. Understood. It’s helpful. Thanks for taking my questions.

[Shrikant Sortur:]

No problem. Thank you.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Ronald Cogburn for any closing remarks.

[Ron Cogburn:]

Thanks, operator. And once again, thanks to everyone today for participating in our call, and thanks for the questions. And as always, if you feel like you have other questions you would like to ask, feel free to reach out to our Investor Relations group. I will be glad to get back with you. Thank you and we will see you again next quarter.

[Operator:]

And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.