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Exela Technologies, Inc. (XELA) Q4 2018 Earnings Conference Call Transcript

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Exela Technologies, Inc. (NASDAQ:XELA)
Q4 2018 Earnings Conference Call
March 18, 2019 , 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Exela Technologies Fourth Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) And please note that today's event is being recorded.

And I would now like to turn the conference over to Jim Mathias, Vice President of Investor Relations. Please go ahead.

Jim Mathias -- Vice President of Investor Relations

Thank you, William. Good afternoon, everyone, and welcome to the Exela Technologies fourth quarter and year-end 2018 conference call. I'm joined here today with Ron Cogburn, Exela's Chief Executive Officer; and Jim Reynolds, our Chief Financial Officer. Following prepared remarks made by Ron and Jim, we will take your questions.

Today's conference call is being broadcast live via webcast, which is available on the Investor Relations page of Exela's website, exelatech.com. A replay of this call will be available until March 25th, 2019. Information to access the replay is listed in 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 may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties, and are based on current expectations and assumptions.

We undertake no obligation to update any statements to reflect the 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 report on Form 10-K, along with the associated 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 discussed on today's call can be found on the Investor Relations page of our website.

As a reminder, financial results discussed on today's call reflect pro forma combined company results for the business combination of SourceHOV Holdings and Novitex Holdings, which closed on July 12, 2017. Please note, the presentation that accompanies this conference call and an investor fact sheet are also accessible on the Investor Relations page of our website.

We will now begin by turning the call over to our CEO, Ron Cogburn. Ron?

Ron Cogburn -- Chief Executive Officer

Thanks, Jim. Good afternoon, and thanks, everyone, for joining us today. Let's start with slide number four and discuss our 2018 financial summary. We had a solid 2018 and achieved our revised guidance for both revenue and adjusted EBITDA. Our continued investment in developing industry specific and departmental solutions, as well as increased customer awareness are showing good results. Digital Now made the difference.

In 2018, we achieved full year revenue growth of approximately $130 million and a 9% increase in revenue per FTE so $72,000. These investments and our increased customer awareness have helped achieve a growth rate of 14% on our top 200 customers, with low customer concentration and a high customer retention rate of 98%, our goal for 2019 and beyond is to replicate the success we had with our top 200 customers. We believe the large and growing addressable market we operate in provides us with substantial runway for growth and expansion with a focus on our existing customers. We are also committed to sensibly pursuing growth, while deleveraging our balance sheet over time.

We reported a strong top line results for the year of $1.586 billion, an increase of 8.9% on a year-over-year basis, ahead of the industry growth rates. We recorded 15.7% growth in adjusted EBITDA to $283.8 million. And our continued focus on margins resulted in an increase of 110 basis points compared to 2017, reaching a 17.9% adjusted EBITDA margin.

In addition to growing our top line and adjusted EBITDA, during the year, we executed on our savings initiatives, an important part of our ongoing strategy. During 2018, we achieved $64 million in savings, exceeding our initial goal of $40 million to $45 million. And here's an important fact, through a combination of the top line growth and achieving savings offset by investments we made to drive growth and increased awareness, we successfully drove improvement on a year-over-year basis in our adjusted EBITDA margin.

In response to the strong demand for Digital Now, we invested in converting pipeline into revenue. We see a meaningful opportunity or white space to expand our set of solutions we're providing to our customers as we reach new customer segments during 2019.

Beyond 2019, we believe the majority of our current remaining savings will be achieved and our optimization and restructuring expenses will gradually decline. This result -- this will result increasingly in the convergence of adjusted EBITDA and EBITDA.

Looking ahead to 2019 and beyond, we are well positioned to generate long-term sustainable growth. Jim Reynolds will cover our outlook for 2019 in greater detail shortly.

Additionally, we spent a lot of time speaking with our investors during 2018, and one recurring theme, which has come up many times is the need to reduce leverage and we agree with that. Through our prudent use of cash and EBITDA growth, we are working to reduce our net leverage ratio by 5% to 7% this year.

Over the long-term, we're working to deleverage further and achieve a leverage ratio that is more in line with our peer group.

Now let's turn to slide number five and look at the quarter. The fourth quarter provides the first clean quarter -- quarterly comparison of Exela on a year-over-year basis.

Revenue for the fourth quarter totaled $399.6 million compared to Q4 of 2017, which was $386 million, an increase of 3% on a year-over-year basis and a little more than 4% on a sequential basis.

Adjusted EBITDA for the quarter totaled $75.3 million compared with Q4 '17 adjusted EBITDA of $63 million, an increase of 20% year-over-year and an increase of 9% sequentially.

Along with the growth we are generating on the top line, I was very pleased to see an improvement in fourth quarter adjusted EBITDA margin of 260 basis points to 19% compared to 16% in Q4 2017. That is significant. The financial metrics I just highlighted are driven by a combination of a number of factors, including the impact of Digital Now efforts are providing as well as our focus on geographies and investments.

I want to walk through a few of these facts that are noteworthy. Remember the global bank customer we talked about that went live on January 1st of this year. In our ongoing discussions with this customer, they decided it was in their best interest to increase the contract duration by two years resulting now in a five year contract term with a total contract value of approximately $165 million, impressive, and further proves that our strategy is working.

Additionally, we won several new deals with the Digital Now strategy in 2018, including two of which that were enterprise level. Both of these engagements were for global banks that were existing customers. This year, we are also introducing Exela SmartOffice. SmartOffice is interconnected workplace technologies and services that power the office of the future to date. These are complementary to our existing offerings, which help transform the front office, energy and facilities management, logistics and fulfillment for our customers. SmartOffice will provide on demand services with connected devices to facilitate green initiatives, reduce waste and ultimately enhance the employee and visitor experience.

Now let's turn to slide number six. Revenue per FTE is a metric we track very closely. We believe this metric demonstrates our effectiveness in applying solutions to bring automation to our engagements and lower the variable cost. We have increased revenue per FTE overall by approximately 9% to $72,000 per FTE and 11% on an organic basis, which is up from $66,000 at the end of 2017. Our revenue per FTE metric is among the highest in our peer group in the BPO industry. Exela is driving growth without adding people, which is very unique for our industry.

Looking closely at our headcount, we have been adding people to key areas, including sales, marketing, finance and other key areas throughout the organization, where we have been effective in lowering headcount is within the operations of Exela by leveraging our technology strength.

Going forward, we see a significant opportunity to continue to grow our European footprint. We recently opened an office in Amsterdam and launched our EMEA business strategy team. Amsterdam is a thriving tech hub for crossborder collaboration, and our team there is driving Exela's growth, thought leadership, and go-to-market execution. This model closely follows the model -- successful model, we implemented for Exela's US business strategy team.

Our Amsterdam team is well positioned to address the business process automation needs for our multinational customers. This office opening closely follows the opening of our innovation center in London.

Geographically speaking, the US brings in the majority of our revenue. It's 85% during 2018 with 40% -- 46% of our total headcount. The rest of the world generates 15% of the revenue with 54% of the total headcount. The effect of this revenue and headcount mixture is significant to the gross margin improvement potential as the automation story continues to unfold.

Now let's turn to slide number seven. Our strategy to grow within our existing customers is resonating, (inaudible) speaking solutions to drive change realizing the benefits of digital transformation. In some cases, like the global bank example I just mentioned after the customer understands the breadth of our platforms and solutions, they make the decision to outsource processes that have never been outsourced before in their organizations. These new found avenues of opportunity are very significant to us.

Our strategic deal teams are focused on identifying these opportunities to expand within our top customers, while partnering with them on their digital journeys. We seek to build on our successful engagements to increase the number of statements of work and master service agreements within these existing customers.

We're discussing with our customers our platforms and solutions that address their mission critical challenges, such as our revenue cycle management, digital mailroom, recruit to hire, Exela Robotics, enterprise information and management, business process management, workflow automation, contract management and of course, Exela SmartOffice, just to mention a few.

We have a broad and sticky revenue base, with low customer concentration at the end of Q4, our top 20 customers contributed 36% of our revenue. The top 100 contributed 61% of our revenue. The top 200 contributed 73% of our revenue. We have a great customer list with over 60% of the Fortune 100 and our ability to grow within these customers has a measurable and very positive result.

Customer retention rates remained very high at 98%, with 85% of our revenues in America and then expanding presence in EMEA, which grew, by the way, 55% year-over-year. We're very optimistic about our prospects for 2019. Today, the rest of the world generates only 15% of the revenue based on 2018.

Closing 2018, we had 10 customers generating $25 million in annual revenue. Now this is up from $6 million at the close of 2017. And another important highlight is we added 62 customer generating over $1 million in annual revenue in 2018, which now totals 259 customers.

Now, this is up from 197 at the end of 2017. This increase demonstrates the effectiveness of our efforts to grow within our existing customers and gain wallet shares.

Additionally, I am pleased to share with you that the investments we have made in our customer facing organization have resulted in substantial increase in our pipeline, effectively doubling it from last year, consistent with our strategy, we're seeing an increase -- an increasing proportion of the pipeline from higher automation deals and we're adding additional work and revenue streams within the existing customers.

Now let's turn to slide number eight. Slide number eight covers the acceleration of Exela's growth and arguably is one of the most important slides in our presentation today. This slide illustrates what's possible and probable.

Since Exela's inception less than two years ago, our efforts to grow were first focused with our top customers. They were the first to hear in detail about the combined scale and the solutions Exela could provide. And with the investments we made in increasing customer awareness, the results have been impressive accelerating the top line growth.

Of note and a direct result of our focus in our strategy, our top 20 customers grew 22%, most of which is organic. This is amazing and it's a demonstration of the opportunity among the remaining customers. The top 200 customers grew 14% of which 11% was organic and overall, Exela's consolidated growth rate was 9%, of which, 4% was organic. These results give us confidence in 2019 to replicate our top 200 strategy throughout the other customer segments and continue to invest in business development and increasing customer awareness.

In closing, before I hand the call over to Jim for a discussion of the financials, 2018 was a great year for Exela Technologies, highlighted by our growth and continued roll out of our Digital Now suite of solutions. We significantly expanded our presence in Europe, opening a sales office and an innovation center, and we achieved $64 million in saving initiatives. We're excited about 2019, which has gotten off to a great start with more opportunities and greater market penetration.

We are looking forward to continuing to enable our customers on their digital journeys, and we believe Exela with Digital Now is well positioned for growth going forward.

And now, I'd like to hand the call over to Jim Reynolds, who will discuss our financial results in greater detail. Jim?

Jim Reynolds -- Chief Financial Officer

Thanks, Ron. Before I start, I would want to let everybody know 2e intend to file a Form 12b-25 Notification of Late Filing with the US Securities and Exchange Commission, because we will be filling our Annual Report on Form 10-K for fiscal year 2018 after today's deadline. The filing of the Form 12b-25 grants an automatic 15-day extension for the filing of our Annual Report.

We are postponing the filing because we experienced an unanticipated delay in completing certain requested accounting information relating to one of our tuck in acquisitions we completed during 2018. This business is not material to our results. We anticipate our filing of Form 10-K prior to the expiration of the 15-day extension period.

Based on its review of the Company's disclosure controls and procedures, the Company's management expect to conclude that the Company's disclosure controls and procedures were not effective. Notwithstanding such weaknesses, the Company's management expects to conclude that the consolidated financial statements to be included in the Form 10-K will present fairly in all material respects, the Company's financial position, results of operations and cash flows for the periods to be presented in the Form 10-K in conformity with GAAP.

Let's start with slide 10. Fourth quarter revenue totaled $399.6 million compared to $386.3 million in Q4 of 2017, an increase of 3.4%. Our largest segment, ITPS, which represents 81% of our quarterly revenue grew 7.6% on a year-over-year basis. Our Healthcare Solutions and Legal and Loss Prevention segments declined 6.2% and 22.6%, respectively.

Fourth quarter adjusted EBITDA was $75.3 million and improved by $14.5 million or 20% from the fourth quarter of 2017. During the quarter, there were two non-cash charges that impacted our results. First, in early 2018, we changed our go-to-market strategy and branding as Exela.

As a result of this, we had to write-off all of our legacy asset trade names during 2018. This increased our amortization expense by $7.1 million in the fourth quarter and $23.7 million for the year.

Second, as part of our annual impairment test, we recorded a non-cash charge of $48.1 million related to the impairment of goodwill and intangibles in our LLPS segment due to lower operating results.

For the full year 2018, revenue totaled $1.586 billion, an increase of 8.9% when compared to 2017 on a pro forma basis. Revenue growth during the year was driven by our top 200 customers. We saw revenue in this group increase over 14% during 2018, well ahead of our consolidated growth rate. This is a result of the investments we made in the business development team, innovation centers and small tuck in acquisitions along with the positive impact of Digital Now business model.

From a revenue segment perspective, ITPS revenue totaled $1.274 billion in the year, up 12.6%. The increase in ITPS revenue is largely driven by our results from Digital Now and inorganic growth, which was approximately 5%.

Healthcare Solutions revenue for 2018 totaled $228 million, a decline of 2.4%. The decrease was due to a decline in volumes from a single customer, who lost a contract from one of its customers offset by a ramp up of our new business.

In addition, we believe that the recent healthcare asset acquisition we announced in December will help drive growth in this segment, and our LLPS revenue totaled $84.6 million, a decline of 7.7% for the year. As we have discussed, the results in this segment are event-driven and project-based. The decrease is due to a lower net revenue from our legal claims administration services and approximately $4.5 million from the sale of a few non-core consulting practices.

Gross margins were 23.7% in 2018 and impacted by higher business optimization expense incurred, which is primarily recorded in our cost of revenue. We expect ongoing impact to gross margins as we continue to deliver on the Company's savings initiatives as well as continued digital transformation of our customer contracts. These actions will position us to improve gross margin in future periods.

SG&A for 2018 totaled $184.7 million and was 11.6% of revenue. The decline in SG&A is due to no deal costs paid in 2018 impact from our savings flow through and this was offset by our continued investment in our customer facing organization as well as higher costs associated with being a public Company.

Moving to taxes, as a result of the tax laws passed in 2018, the historical benefit we receive from our ability to deduct interest on our debt was subject to limitations. This resulted in an increase in our income tax expense of approximately $30 million during the year.

From a cash perspective, we paid about $5.3 million in income taxes globally. At December 31st, 2018, we have approximately $317 million of net operating loss carry-forwards available to offset pre-tax income.

Our adjusted EBITDA for the year totaled $283.8 million, an increase of 15.7% and our adjusted EBITDA margin for 2018 improved to 17.9% or 110 basis points.

Moving to slide 11. Looking at the bridge from EBITDA to adjusted EBITDA, the first box in the bridge is other, which includes non-cash charges of $49.2 million and $122.5 million and debt extinguishment costs an impairment of the LLPS business in 2018 -- in 2017. The remainder of these costs relate to employee stock option expense and asset disposal costs.

The next adjustment in our walk is the optimization and restructuring charges. This item relates to our investments made to achieve cost savings. During 2018, optimization and restructuring expense totaled $68.2 million for the year and $21.2 million in the fourth quarter. The breakout of the fourth quarter consisted of $14.2 million in headcount costs, $6.2 million in vendor related cost and $0.8 million in facility costs. We believe 2018 represented the high watermark in terms of optimization and restructuring expenses. And in time, we expect these costs to gradually decline as we implement our transformational model.

The final adjustment is a transaction integration costs which are -- were incurred to create Exela in the third quarter of 2017.

To summarize, the gap between EBITDA and adjusted EBITDA narrowed by $142.5 million in 2018. This is consistent with our goal to have adjusted EBITDA and EBITDA to converge over time.

Turning to the capital structure on slide 12. On December 31, 2018, total liquidity was $116 million and net debt was $1.42 billion. We had cash of $44 million excluding restricted cash for our credit agreement and an undrawn $100 million revolving credit facility, of which $20.6 million, was set aside for standby letters of credit.

Our buyback program remains in effect, and we will continue to be opportunistic. Since we launched the buyback in 2017, we have purchased in total approximately 2.5 million shares.

On the next slide, our business outlook. We expect our full year 2019 revenue to be in the range of $1.66 billion to $1.7 billion, resulting in growth of 5% to 7% year-over-year on a constant currency basis.

For the first quarter of 2019, we estimate revenue to be between $405 million to $415 million. For 2019, adjusted EBITDA for the year to be between $305 million to $335 million, representing a year-over-year growth of between 7% to 18%.

CapEx is expected to be between 2% to 2.5% of revenue. Our capital allocation for 2019 is a priority to pay down debt. Our goal is to reduce the net leverage between 5% to 7%. This reduction will be achieved through a combination of growth and EBITDA and using cash to pay down debt.

In closing, we had a solid 2018 and are pleased with our results.

That concludes our formal comments. Operator, let's open the queue up for questions.

Questions and Answers:

Operator

Thank you, sir. And we will now begin the question-and-answer session. (Operator Instructions) And today's first questioner will be Joseph Foresi with Cantor Fitzgerald. Please go ahead. Joseph Foresi, your line is open. And our next questioner today will be Brian Essex with Morgan Stanley. Please go ahead.

Jonathan -- Morgan Stanley -- Analyst

Thanks for taking my question. It's Jonathan on for Brian. Your fiscal '19 guidance implies deceleration of revenue growth. Can you walk through that?

Jim Reynolds -- Chief Financial Officer

So I think if you look at the revenue growth, right, we're currently guiding 5% to 7%. We feel really good about the results from Digital Now. And of course, when you look at our revenue growth for 2018, approximately 5% was inorganic. So when we're quoting our 2019 guidance, we're looking at organic growth, which would be an increase from the 4% reported.

Jonathan -- Morgan Stanley -- Analyst

Got it. And last quarter, you talked about market growth in the BPO space, where were you fall relative to that for fiscal '19?

Ron Cogburn -- Chief Executive Officer

Well, this is Ron. We're still a really small part of that addressable market, if you'll remember, we're just a little over 1%. We feel really good about the industries that we serve, the banking financial services and insurance and healthcare, are largest two segments. And between those two, they have growth between 5% and 6%. So we feel very comfortable and where we set with those two industries.

Jonathan -- Morgan Stanley -- Analyst

Appreciate it. Thanks, guys.

Operator

And our next questioner today will be Dan Dolev with Nomura. Please go ahead.

Dan Dolev -- Nomura -- Analyst

Hey, guys. Can you hear me?

Ron Cogburn -- Chief Executive Officer

Yeah.

Jim Reynolds -- Chief Financial Officer

Yes, we can.

Dan Dolev -- Nomura -- Analyst

Yeah, I'm actually going to take the other side of this trade. So, I mean, your guidance is very, very strong. I feel like it's above our numbers for 2019. And it looks like -- as you said it's accelerating on an organic basis. And also EBITDA, say -- the EBITDA guidance seems above our numbers. Can you maybe give us sort of the level of confidence you have in achieving that guidance? Thank you.

Jim Reynolds -- Chief Financial Officer

Sure. Thanks, Dan. As we've discussed historically, we typically have about 90% visibility into the next 12 months.

With respect to the revenue, if you remember, we have somewhat of a wide range. But back in the fall, we announced the transaction with the large bank that contract ramped up at the beginning of the year. So we're very pleased with that. In addition, and at the end of December, we closed healthcare acquisition that will also help drive the results for 2019.

Operator

And our next questioner today will be Matthew Roswell with RBC Capital Markets. Please go ahead.

Matthew Roswell -- RBC Capital Markets -- Analyst

Yes. Two questions first, the numbers question and I'm sorry if I missed it. Do you have the fourth quarter kind of apples-to-apples organic growth? I know you gave it for the full year just now.

Jim Reynolds -- Chief Financial Officer

I don't have that readily available. Sorry.

Matthew Roswell -- RBC Capital Markets -- Analyst

Okay. Okay, that's fine, thanks. Now we can circle back later. And then I guess the second question is, it looks like you did not find any large clients in the quarter, but I was wondering, if you could talk about the possibility in what sort of number that you're thinking about for FY '19?

Ron Cogburn -- Chief Executive Officer

That's not exactly what we said, Matthew, when you think about it, we talked about -- two, what we call enterprise deals that we signed late last year. We didn't identify the fourth quarter. We typically don't give guidance per quarter. But those two enterprise deals were for global banks that were existing customers and which we were able to kind of process the land and expand strategy that we've used so well.

We also talked about early this year the healthcare assets. So we have -- and if you'll remember, I also mentioned, our pipeline effectively has doubled in the last year for these types of engagements that are related to Digital Now or the expansion of the digital journey for our customers. So we feel very strongly about that.

Matthew Roswell -- RBC Capital Markets -- Analyst

Okay, maybe I missed it. The number of clients with more than $25 million of annual revenue was it $10 million?

Ron Cogburn -- Chief Executive Officer

Yeah, it's 10, growing from 6 in 2017.

Matthew Roswell -- RBC Capital Markets -- Analyst

Right. And I guess I had 10 as of the end of the third quarter, but obviously the large bank contract didn't ramp up until -- until January, right?

Jim Reynolds -- Chief Financial Officer

That's right.

Matthew Roswell -- RBC Capital Markets -- Analyst

Okay. Okay. Thank you very much.

Operator

And the next questioner today will be Joseph Foresi with Cantor Fitzgerald. Please go ahead.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. Can you hear me Okay?

Ron Cogburn -- Chief Executive Officer

Yeah, Joe.

Jim Reynolds -- Chief Financial Officer

We can now, Joe.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Yeah, maybe they didn't like my question, so they muted me. Sorry about the phone (ph) problem. Anyways, you mentioned the pipeline doubling, but the growth rate kind of year-over-year is fairly consistent. So what can you tell us about sort of the conversion rate? Is an element of conservatism on the top line and expectations for next year? Have conversion rates changed? Is there anything in the top line we should know about?

Jim Reynolds -- Chief Financial Officer

Yeah. I think -- thanks for the question, Joe. I mean, we feel good about our conversion rate. I think the size of the pipeline is strong. And, just like this year for the full year, we actually hit a revised -- upward revised revenue guidance. So we have great visibility into the revenue and feel pretty good.

I think we're still a new public Company, 18 months or so. And we're trying to be somewhat conservative as we look at the potential for Digital Now, which is gaining traction in our front office. So we'd rather come out, feeling good with that 90% visibility on the top line.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Okay. And then just on the first quarter, I think you said it was 4.5 to 4.15. If I run that through the year, it's sort of puts you at the bottom end of that top line guidance, how should we think about seasonality around the numbers heading into next year?

Jim Reynolds -- Chief Financial Officer

Sure. Typically what happens from a seasonality perspective, we have strong transaction volume that starts to hit at the end of Q1 and into the second quarter. Third quarter tends to come down a little bit. We're going to be a little more impacted. If you remember now Europe makes up about 15% of our total revenue for the year. So people do go on vacation, I guess, over there.

And then for Q4, we tend to see an uptick as people are spending budgets and then within healthcare, most of the time, people have hit their deductible, so the transactions tend to increase along with open enrollment.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. And then on the margin guidance, I think it's $305 million to $335 million. What puts you at the top end versus the low end on the margin side?

Jim Reynolds -- Chief Financial Officer

So what gets us there is really the flow through on our savings. That's one of the things, we've been working on since we launched the transaction, we feel good about it. So it's a combination of that and then the type of deals that we close and how quickly we can achieve the margin. There is still costs we need to take out on some of these tuck in acquisitions and we're looking to change that margin profile as we implement our suite of technology.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. So, I mean, if I extrapolate that sounds like the margins will sort of gradually improve throughout the year. Is that fair?

Jim Reynolds -- Chief Financial Officer

We don't give quarterly guidance, but that's throughout the year as we continue to implement.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Okay. And last question from me. Any thoughts around how we should think about this by business line? Any -- -- anything you want to point out on specific contracts? I know you got the ITPS in the healthcare legal, but maybe you could just talk a little bit about sort of your expectations for both businesses?

Jim Reynolds -- Chief Financial Officer

So where I would say is if from an industry's perspective, we're really strong in banking and finance, which is where ITPS rolls into. From a healthcare perspective, we feel very strong that -- but that's clearly just, healthcare payer and provider business, which we've invested in with this deal we closed in December. We look to expand within both segments, they are strong and growing. And then within our legal, that's still event-driven. We've invested but not as much as we've invested in our other two industries that we're really focusing on.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

And our next questioner today will be David Phipps with Citigroup. Please go ahead.

David Phipps -- Citigroup -- Analyst

Thanks for taking my questions. Could you talk a little bit about the acquisition that you made to the healthcare acquisition, kind of give us the size for sales maybe, or what components that might exist in either the healthcare or the ITPS businesses?

Jim Reynolds -- Chief Financial Officer

So what I would tell you, it helps us round down our healthcare solution. We perform a fair amount from the beginning when the claims incurred all the way through to the coding and then delivery. So it just helps out round out, incremental volumes. It's really an exciting relationship that we have as a result of that transaction.

Ron Cogburn -- Chief Executive Officer

Yeah. It's Ron. Let me give you a little more detail. What this does? It covers several of the services that we already provided, for medical coding, work, records, management claims, payment processing, dispute resolution. We added 250 employees globally when we did this acquisition. And it puts us squarely as a growth trajectory for our healthcare segment for this year. So we're very excited about this acquisition.

David Phipps -- Citigroup -- Analyst

And could you talk a little bit about the some of the cash impacts of not being able to deduct the interest? That we look forward into 2019 or as we had in 2018?

Jim Reynolds -- Chief Financial Officer

Sure, we -- if you think about it, we still have about $317 million of net operating losses, which are shielding us from any cash taxes. So we still anticipate similar to this year, a majority of that disallowance to be sheltered with our NOLs. So we feel there'll still be cash taxes between $7 million and $10 million.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

I know you don't give quarterly guidance, but last year, from fourth quarter to first quarter, you had a big jump in both sales and margins. Is there anything in particular that would be different from that going forward this year?

Jim Reynolds -- Chief Financial Officer

I think, all I would say is typically, toward the end of the year and fourth quarter, there's a lot of spending that goes on under use it or lose it budgets. So I mean that we typically see a benefit from that aspect. And typically in Europe, there's a solid push.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Okay. Final question, in the latest 10-K that's pretty standard, do you want that out in the next 15 days. Could you talk a little bit about the controls and procedures language that you have there?

Jim Reynolds -- Chief Financial Officer

I think all I would say is, under the rules, this is our first year of SOX compliance, which is, highly complicated when you put together companies through acquisitions to achieve and have enough time to actually test all the controls that are operating.

So it's kind of -- it's either there or it's not. We feel good in our ability to address the control deficiencies. And I think, as I said, we feel good that from a substantive perspective, we have no issues within our numbers.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Okay. Those were my questions. Thank you.

Operator

And our next questioner today will be Marlane Pereiro with Bank of America Merrill Lynch. Please go ahead.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Hi. Thank you for taking my question. I just have a very quick one. When you were talking about your leverage, can you just repeat again, it's -- my connection was a little bit out of where you see leverage going? And could you also just indicate roughly what the leverage target range is that you're comfortable with running the business? Thank you.

Jim Reynolds -- Chief Financial Officer

Sure. When I was talking about 2019, our capital allocation is to pay down debt this year and our goal is to reduce our leverage to be between 5% to 7% and it will be achieved through a combination of our growth and EBITDA and using cash to pay down the debt. From a leverage ratio, what we'd like to do is get in line more with our peers, which we've quoted historically is around three times.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Okay, great. Thank you.

Operator

And our next questioner today will be Tara Lavin (ph) with Cowen. Please go ahead.

Tara Lavin -- Cowen -- Analyst

Hi. Thank you. Are there any notable changes you've been noticing in the competitive environment? And then I just have one follow up question.

Ron Cogburn -- Chief Executive Officer

And Jerry, (ph) this is Ron. At the end of the day, a lot of folks are looking to provide the services that have what we'll call technology enabled or AI or cognitive. These are all things that we have built ourselves and deployed through our platforms for years. When we go forward in the market now, our Digital Now strategy is a combination of our existing technologies along with the automation that we've talked about, whether it's business process automation or AI and it allows us to have, I would say is stickier relationship or a deeper relationship. And as our customers adopt this Digital Now strategy, the higher they go the technology stack, the stronger the relationship we have with them.

As an example, when you look at our top 20 customers, the average tenure now is well over 15 years. It's only possible with the technology that we've built and that we provide is proprietary and the automation that we continually roll out year-after-year.

Tara Lavin -- Cowen -- Analyst

Thank you. And then in terms of your innovation center built, are you seeing any successes with the sales strategy?

Ron Cogburn -- Chief Executive Officer

Yeah. So here's the beautiful thing -- and have you been to one of the innovation centers?

Tara Lavin -- Cowen -- Analyst

Yes. The New York City one.

Ron Cogburn -- Chief Executive Officer

Okay. Yeah. So that was our first one. That was sort of the showcase. We brought customers, many customers through the Charles Street, New York location, through the Dallas location, through London Shard. And what happens if you're a customer and we here are typically are customers that we talked about the group that's over a $1 million. So they're the prime target. So we're doing one or two things for them. And maybe their competitors, not competitors, but other folks in the same industry. We do several things for a larger enterprise customer. We're able to showcase for them in a real time through demonstrations, demos -- live demos, all the technology we're trying to offer to them that meet the requirements for their particular services.

When we do that in that environment, we're able to have a very active and interactive dialogue with them about the benefits, the features and how you go to market with the services we provide, say the -- these services are pointed toward consumers and if it's a banking or insurance, we're able to help them in their marketing with their customers.

Tara Lavin -- Cowen -- Analyst

Perfect. Thank you.

Operator

And the final questioner for today will be Arun Seshadri with Credit Suisse. Please go ahead.

Caroline Joyce -- Credit Suisse -- Analyst

Hey guys. This is Caroline Joyce on for Arun today. Just a few, first, how you expect the GAAP EBITDA range to be in 2019?

Jim Reynolds -- Chief Financial Officer

So we haven't given out any guidance on a GAAP perspective. What I will tell you is, with the range of that we've given for 2019, we still expect some business optimization costs to occur as we transition our existing customers and the new contracts, we'll have similar amount of non-cash charges, which is primarily related to our stock option plan and our issues that have been granted. So that's kind of how it looks.

Caroline Joyce -- Credit Suisse -- Analyst

Okay, great. Thanks. And then I guess on that same line, could you outline at all what you expect after transaction and integration and then optimization and restructuring expenses for 2019?

Jim Reynolds -- Chief Financial Officer

We have not given guidance to that number. What I will tell you is we're still going to be incurring these as we have, continued to take on -- tuck in acquisitions, there's still work to be done there, and as we roll out our technology, we're still incurring duplicate costs associated with this roll out.

Caroline Joyce -- Credit Suisse -- Analyst

Okay, great. That makes sense. And then lastly, just sequentially, it seems like the gap between EBITDA and adjusted EBITDA increased a little. Could you guys talk about that from a sequential standpoint? Thank you.

Jim Reynolds -- Chief Financial Officer

So I think the big thing that really impacted us during the year, while some non-cash charges related to impairment and additional amortization that were recorded that are onetime in nature that have no cash impact.

Caroline Joyce -- Credit Suisse -- Analyst

Okay. Yeah. That makes sense. Thanks.

Operator

And this will conclude our question and answer session. I would not like to turn the conference back over to the CEO, Rob Cogburn for any closing remarks.

Ron Cogburn -- Chief Executive Officer

Thanks. We really appreciate everybody participating in the call today, and we really appreciate the questions. You can follow up with us directly after this and most of you do. If you haven't had the chance to visit one of our innovation centers, please reach out to Jim Mathias, and let us know, we'd love to host you and your team at one of these centers. It will make a meaningful impact. Thanks for participating, and we'll see you on the next quarter's call. Thank you very much.

Operator

The conference has now concluded. Thank you all for attending today's presentation, and you may now disconnect your lines.

Duration: 51 minutes

Call participants:

Jim Mathias -- Vice President of Investor Relations

Ron Cogburn -- Chief Executive Officer

Jim Reynolds -- Chief Financial Officer

Jonathan -- Morgan Stanley -- Analyst

Dan Dolev -- Nomura -- Analyst

Matthew Roswell -- RBC Capital Markets -- Analyst

Joseph Foresi -- Cantor Fitzgerald -- Analyst

David Phipps -- Citigroup -- Analyst

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Tara Lavin -- Cowen -- Analyst

Caroline Joyce -- Credit Suisse -- Analyst

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