Exela Technologies, Inc. (XELA) in Irving, Tex., provides transaction processing solutions, enterprise information management, document management, and digital business process services worldwide. The company operates through three segments: Information & Transaction Processing Solutions (ITPS); Healthcare Solutions (HS); and Legal & Loss Prevention Services (LLPS). XELA shares have slumped 68.5% in price over the past year and 74.2% over the past six months to close yesterday’s trading session at $0.68. The stock has been down 22.7% for the past month.

XELA saw a steep decline in revenue growth in its last reported quarter. Moreover, the company’s financial performance has been sluggish over the past few years. Its revenues have declined 9% over the past three years. Also, its EBIT and EBITDA have decreased at CAGRs of 42.2% and 25.5%, respectively, over the same period, while its levered FCF declined at a 40.2% CAGR. The company seems to have failed to ride the pandemic-induced tech wave and benefit from digital transformation demand across industries. In addition, its significant debt burden is concerning.

However, the stock has been gaining momentum of late, climbing 5.9% in price over the past five days. XELA’s recent contract renewals and partnership expansions have helped lift the stock.

Here is what could shape XELA’s performance in the near term:

Strategic Partnerships

Last week, XELA announced a renewal of its services contract with a leading consulting firm for its Digital Mailroom solution, reaffirming the 20-year relationship. “We are proud of our long-standing partnership and the expansion of our strategic DMR platform renewal,” said Suresh Yannamani, President of Exela. He added that the company is witnessing solid demand for its DMR platform in the SMB and enterprise customer segments.

XELA also expanded a contract with a top global bank. The company currently offers payment clearing, case management, payment fraud detection, and mortgage payments services. The contract expansion will include foreign payment processing services. Also, the company recently announced that it had augmented an existing relationship with a large technology services provider for several Medicaid programs nationwide.

Also, this month, XELA announced a list of extended partnerships, including an expanded relationship with Mastercard in the EMEA region to support Giro payments and processing automation in Norway utilizing XELA’s XBP platform. These partnerships should continue contributing to its revenue stream.

Lackluster Financials and Significant Debt Burden

XELA’s total revenues decreased 8.5% year-over-year to $279.23 million in its fiscal third quarter, ended Sept. 30, 2021. Its gross profit declined 5.1% from its year-ago value to $67.50 million, while its operating income decreased 50% year-over-year to $2.42 million. Also, its net loss came in at $13.21 million, down 53.4% year-over-year. The company’s loss per share declined 85% from the prior-year quarter to $0.09.

The company has total debt of $1.52 billion, and its trailing-12-month cash balance is $146.18 million, which translates to net debt of $1.38 billion. XELA’s covered ratio is 0.12, which questions its ability to service its debt and meet its financial obligations. Also, its quick ratio stands at 0.71. In addition, the company’s trailing-12-month net operating cash flow came in at a negative $37.21 million, while its levered FCF stood at $24.62 million.

Poor Profitability

XELA’s gross profit margin and EBIT margin of 23.74% and 1.74%, respectively, are 52.5% and 80.9% lower than the 49.99% and 9.13% industry averages. And its net income margin of negative 13.54% is substantially lower than the 6.49% industry average.

Furthermore, XELA’s 1.63% ROTC is 66.9% lower than the 4.91% industry average, while its negative 13.60% ROA compares with the 3.85% industry average.

POWR Ratings Reflect Uncertainty

XELA has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Stability, which is in sync with its 1.85 beta.

XELA has a C grade for Sentiment. This is justified because analysts expect its revenues to decline 5.7% year-over-year in the about to be reported quarter ended Dec. 31, 2021, but its EPS is expected to improve 62.5% year-over-year in the same period.

Of the 117 stocks in the Financial Services (Enterprise) industry, XELA is ranked #55.

Beyond what I have stated above, one can also view XELA’s grades for Quality, Growth, Momentum, and Value here.

View the top-rated stocks in the Financial Services (Enterprise) industry here.

Bottom Line

The company plans to reduce its debt by 25% and leverage its financial strength to expand its cash flow in 2022. However, XELA’s current debt burden and insufficient cash flow, coupled with its lean profit margins, are expected to continue to worry investors about its prospects. Furthermore, with concerns over the forthcoming interest rate hikes this year, investors are aggressively selling off tech stocks, making XELA highly volatile. Thus, we think it could be wise to wait for the company to generate significant profits and improve its underlying fundamentals before investing in the stock.

How Does Exela Technologies, Inc. (XELA) Stack Up Against its Peers?

While XELA has an overall POWR C Rating, one might want to consider taking a look at its industry peers, Forrester Research, Inc. (FORR), Consumer Portfolio Services, Inc. (CPSS), and Donnelley Financial Solutions, Inc. (DFIN), which have A (Strong Buy) ratings.

Note that DFIN is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

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