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Exela Technologies inc (NASDAQ:XELA)
Q3 2020 Earnings Call
Nov 10, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the Exela Technologies third-quarter 2020 financial results conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Will Maina. Please go ahead.

Will Maina -- Investor Relations Contact

Thank you, Jason. Good morning, everyone, and welcome to the Exela Technologies third-quarter 2020 conference call. I'm joined today by Ron Cogburn, Exela's chief executive officer; and Shrikant Sortur, our chief financial officer. Following the prepared remarks made by Ron and Shrikant, we'll 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 at exelatech.com. A replay of this call will be available through November 17, 2020. Information on access to replay is listed in yesterday'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 statement 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 recent filed periodic report on Form 10-K, along with the associated press release and 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 reference 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 and investor fact sheet are also accessible on the Investor Relations page of our website.

I'd now like to turn the call over to our CEO, Ron Cogburn. Ron, over to you.

Ron Cogburn -- Chief Executive Officer

Good morning, and thanks, everyone, for joining us on our third-quarter 2020 earnings call. The COVID-19 pandemic has impacted everyone to some degree, including Exela and our customers. While some uncertainty related to the pandemic still remains, we continue to execute well against our plan for value creation in this current environment. Our sequential margin expansion, improving cash flow, and rising liquidity in the third quarter is further evidence of our progress.

We are very proud of the more than 21,000 members of our team who have remained committed to delivering world-class service to our customers amid this challenging time. Their hard work, perseverance, and dedication during the global pandemic have been truly inspirational and motivates us all to continue pushing ahead. To our employees, we thank you for all your efforts and sacrifice. I'd like to begin today by highlighting a couple of slides that help illustrate why Exela is well-positioned to weather the current COVID-19 environment and generate increased profitable growth in the future.

Let's turn to Slide No. 5, and let's discuss an overview of Exela's digital foundation. What I'd like everyone to take away from this page is that we are a global leader in business process automation with significant scale. Our services are focused on the automation of billings and payments by providing technology, services, and analytics.

We serve over 4,000 customers, including 60% of the Fortune 100 across 50 countries. By leveraging our 30-plus years of experience, we deliver mission-critical services to very attractive markets, giving us stability in these challenging times and significant opportunity for long-term profitable growth. Drilling down a bit further into our business, let's look at Slide No. 6, where we have included a breakout of our revenue across several key categories.

This slide gives you insight into the industry verticals we serve and helps to illustrate the breadth and diversity of our revenue mix across geography, industry, customers, and service offerings. In the second column, you will see that we serve some very attractive markets with the higher growth, banking and financial services, and healthcare making up 26% to 24% of our revenue, respectively. Moving to the next column, you can see we have low customer concentration. 60% of our revenue is generated from our top 100 customers.

These customers include some of the world's largest organizations and we have significant headroom to continue growing from our top 100 accounts. With the remaining 40% of our revenue generated from all of the other customers, we are focusing additional sales and marketing attention on account that have the ability to expand significantly. We had success with this strategy with our top 100 customers and continue to apply these same efforts to grow smaller, high-potential customers. Finally, in the last column, we have split our revenue between traditional BPA services and our digital assets, and this is important in today's environment.

Because of the increased demand for these products and services, we are focused on fostering growth in our digital asset group, which I'll discuss in greater detail shortly. The breadth of our services across a diverse mix of geographies, industries, and customers provide stability to our core business even during these unprecedented times is a key long-term competitive advantage for us. Now, let's move to some more recent strategic highlights on Slide No. 7.

In the third quarter, the rebound of customer volumes varied across our industry segments and geographies. However, we are pleased to see a nice sequential uptick in our healthcare business from Q2. We remain optimistic that volumes will continue to improve across our business as companies gradually return to a new normal. From a demand standpoint, we continue to see some very encouraging signs in Q3.

Throughout the pandemic, our dialogue with customers has increased as they analyze the best way to balance reopening physical office locations with enabling work-from-home solutions on a more long-term basis. We estimate that going forward, approximately half of our customers will remain and maintain some level of work-from-home environments, which we believe will drive greater need for Exela services and especially our work-from-anywhere or WFA solutions. Our customers work with us to analyze multiple possible outcomes from the pandemic. They are also seeking greater cost efficiency across their organizations through increased automation.

These demand trends are perfectly in line with Exela's value proposition and helped us to grow our pipeline in Q3, which is then converting into some great new business wins. Let me give you a few examples. In our healthcare segment, we recently signed new business wins with large insurance providers and healthcare systems. In the public sector, we added new wins across U.S.

and European markets, totaling $59 million of annual contract value, which equates to $200 million of total contract value and has begun ramping this quarter. Our Digital Mailroom solution exceeded 100,000 users in the third quarter. We have high expectations for DMR given the strong demand that we are seeing, and we expect significant growth of this product next year. Turning to our outlook for the remainder of 2020 and 2021.

First, I'd like to address quickly the current appraisal litigation proceedings as we may have questions about this later. While we are continuing to pursue our appeal, as you can see from yesterday's 10-Q filing, there's no material change or update in the status to report at this time from what has been disclosed in our prior 10-Q or discussed by us in prior calls. From a business perspective, as I mentioned earlier, we continue to see signs of stabilization in the market even as these uncertainties caused by the COVID-19 continue. We expect customer demand will continue to improve in the fourth quarter and in 2021, barring another significant outbreak or a lockdown.

Moving forward, we are focusing our strategic investment in the solutions and target industry segments where we see the most potential for profitable growth. One such example is our digital asset, which represents approximately 7% of our year-to-date total revenue and include services such as our work-from-anywhere solutions like Digital Mailroom or DMR, and DrySign, which is our e-signature platform, as well as platforms driven by billing and payment, healthcare workflow automation, along with high-speed scanners and other equipment. Let's turn to Slide No. 9.

To help advance our digital growth strategy and more importantly to focus on the increased demand, we recently created Exela's Digital Asset Group or DAG. Our Digital Asset Group, which includes the support of our leading technologists, was purpose-built to foster innovation and to drive growth in our digital assets. We currently serve 245 customers with our digital asset solutions, including 50 additional that were added in October alone. And two-thirds of our DAG customers each generate over $500,000 of annual digital asset revenue.

Year to date, our Digital Asset Group generated $71 million of revenue. Now, the focus industries for our Digital Asset Group include banking, insurance, healthcare, and public sector, our solutions leverage digital technologies to automate business processes across our customers, human resource department, legal and finance department, and accounting functions. Now, let's move to Slide No. 10, and let me touch on what differentiates Exela's digital assets in the market.

Our digital assets are supported by our strategic consulting, our product management, and our professional service teams with deep domain expertise and referenceable deployments across our target industries. We offer highly flexible contract options, such as one- to 10-year term licenses for payment processing, along with other Exela software platforms. Our customers can choose SaaS or per user per month contracts for solutions such as DMR or DrySign. And finally, our digital assets are designed to meet the needs of customers of all sizes from the SMBs to the large enterprises, giving us a significant addressable market to go pursue.

Another critical aspect of our digital assets is our ability to sell these solutions to multiple clients with very little customization or the need for professional services. This model for these solutions supports our very healthy gross margins in the digital assets, which have been some of our largest in the past. Our digital asset group is one key area of continuing investment for Exela to increase the competitive advantages we experience today and to drive our top-line and margin growth over the long term. In closing, we are pleased with our continued progress in the third quarter, particularly in terms of our improved profitability and our liquidity.

While the environment remains challenging due to COVID-19, we remain positive that Exela will emerge a much stronger company. The services we provide are mission-critical, hard to replicate, or take in-house and deliver significant value to our customers through our proprietary digital technology and business process automation. We increase speed, we reduce risk, we drive greater efficiency, all critical business imperatives for today's market. Lastly, please note that we plan to host an innovation day in the very near future, where our broader management team will provide an update on our business, as well as greater detail into our solutions and services and our growth strategy.

We look forward to providing you with more detail on that in the next few weeks. I'll now turn the call over to Shrikant Sortur to discuss our third-quarter results and our guidance. Shrikant, over to you.

Shrikant Sortur -- Chief Financial Officer

Thanks, Ron. Good morning, and thank you all for joining us. We are pleased with our third-quarter execution and particularly the strong progress we have made improving our profitability metrics for the second quarter. In my discussion today, I'll refer to both GAAP and non-GAAP results.

As a reminder, reconciliations to these metrics are available in our earnings materials. Any reference to corresponding periods of fiscal 2019 include our restated results for the interim period of 2019. For the past three quarters, we have shared the four areas of focus and impact, namely: one, managing the adverse effects of COVID-19 on customer volumes and our financial results; two, the expected impact of the transition revenue; three, capacity and cost structure management with the goal of achieving normalized gross margin performance; and four, our capital allocation policy focused on improving liquidity and cash flow. Despite the challenging macro and business environment, we focused on the matters within our control and delivered strong performance across each of these four areas.

Our team managed to overcome the negative impact of COVID-19 and transition revenue and delivered sequential gross margin and adjusted EBITDA margin expansion. We met our Q3 revenue guidance range we provided on our Q2 earnings call. Let's start on Slide 12 with a review of our third-quarter 2020 results. Revenue for the third quarter totaled $305.3 million, a decline of 18.3% year over year.

On a constant currency basis, Q3 revenue was $302.9 million, representing a decline of 18.9%. Moving to our segments. Revenue for our ITPS segment was $234.4 million, a decrease of 19.9% year over year from $292.6 million in the third quarter of 2019. Our Healthcare Solutions segment revenue totaled $54.2 million, a decrease of 12.7% year over year from $62.1 million in the year-ago period but up a strong 10.2% from the second quarter, driven by increased volumes.

Our legal and loss prevention segment revenue was $16.7 million, a decrease of 11%. Our year-over-year revenue performance mainly reflects negative volume impact due to the COVID-19 pandemic and our exit from certain customer contracts and statement of work, which were not a strategic fit to Exela's vision, which we refer to as transition revenue. Roughly 30% of our year-over-year revenue decline was attributable to reduced volume from COVID-19, with the balance of the decline from roll-off of transition revenue. We remain on track to eliminate the transition revenue by the end of first quarter of 2021 and remove the stranded costs associated with the transition revenue by the end of 2021.

As a reminder, we'll continue to see a delayed positive impact on our gross margins from declining transition revenue as costs take a bit more time to exit the business. When excluding pass-through postage and postage handling revenue with either zero or nominal margin, our total revenue was $254.4 million in Q3, up approximately 1% sequentially from $252.5 million in Q2 of 2020. Our gross profit margin for the third quarter was up 237 basis points year over year and 190 basis points sequentially to 23.3% primarily due to better cost and capacity management, as well as the reduction of stranded costs associated with transition revenue. SG&A expenses for Q3 totaled $42.8 million, down $11.4 million year over year, and represented 14% of sales, driven primarily by lower professional fees, travel expenses, and other costs.

We recorded a gain on the sale of our physical record storage business of $9.8 million in the third quarter of 2020 and is reflected under sundry or other income. Operating income for the third quarter of 2020 was $4.8 million compared with an operating loss of $93.9 million in Q3 of 2019. The year-over-year increase in our operating income was attributable to our gross margin improvement, lower SG&A expense, and lower depreciation and amortization expense versus the year-ago period. Additionally, there was no impairment of goodwill and other intangible asset costs in Q3 of 2020 compared with the $97.2 million in the third quarter of 2019.

Turning to EBITDA and adjusted EBITDA. In Q3 of 2020, we generated EBITDA of $37.7 million, compared to $69.4 million in the prior-year period. Adjusted EBITDA for the third quarter was $48.7 million, up 13% quarter over quarter. Our adjusted EBITDA margin for the third quarter of 2020 was 16%, up 200 basis points sequentially from 14% in Q2, reflecting strong execution of our cost-saving initiatives and essentially flat year over year.

Excluding pass-through revenues, our Q3 2020 adjusted EBITDA margin was 19.1%, up 200 basis points quarter over quarter. Moving to Slide 13. This slide illustrates the strong progress we made in the third quarter, improving our margins, setting the stage for a continued upward trajectory. As we discussed with you on our last call, our gross profit and adjusted EBITDA margins reached a low point in the first quarter of 2020.

In Q2, we delivered 148 basis points of sequential gross margin improvement and 190 basis points of adjusted EBITDA improvement despite a sequential $58 million reduction in our revenues. In Q3, we generated an incremental 190 basis points of sequential gross margin expansion and 200 basis points of adjusted EBITDA margin lift. Furthermore, despite the $68 million year-over-year revenue decline, we delivered 237 basis points of gross margin expansion and kept our adjusted EBITDA margin stable versus Q3 of 2019. This positive result on our margin is a direct result of our continued laser-focus on our ongoing cost-saving initiatives.

As we've mentioned previously, we also have additional cost-saving initiatives that are currently under examination, such as work-from-home policies that will extend beyond the COVID-19 pandemic, driving reduction in our facility cost as an example. Now, let's move on to Slide No. 14 to discuss our strategic divestitures and our liquidity. As discussed in the past, the company had originally targeted $150 million to $200 million of sale proceeds from certain non-core assets.

Since then, we have completed divestitures of $50 million to date as part of the announced plan. We'll continue to explore and implement additional actions to improve our liquidity. This includes our plan to complete additional asset sales as targeted, accelerating the alignment of our businesses to our traditionally working capital-light model and executing against our planned cost initiatives, including cutting stranded expenses associated with our transition revenue. We have a plan in place to achieve our near-term liquidity target of $150 million.

Our total liquidity for 2020 was $77 million and our total net debt was $1.477 billion. I would now like to close by discussing our fourth quarter and full-year 2020 revenue guidance. For the fourth quarter of 2020, we expect total revenue to be in the range of $300 million to $310 million. On a sequential basis, our fourth-quarter revenue guidance reflects higher volumes from Q3 2020, offset by absorption of transition revenue elimination.

On a year-over-year basis, our Q4 revenue is expected to be negatively impacted by lower volume compared to the fourth quarter of 2019, primarily as a result of COVID-19 and approximately $9 million of decline attributable to the revenue contribution from the noncore asset quote, as well as the aforementioned exit of transition revenue. For the full-year 2020, we expect total revenue to be in the range of $1.28 billion to $1.29 billion. I'd like to thank you very much for your time today. With that, operator, please open the call for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] First question is from Allen Kato from Beach Point Capital. Please go ahead.

Allen Kato -- Beach Point Capital -- Analyst

Hi. Thanks for taking my question. First, when I look at the 4Q guidance and the year-over-year decline rate in that quarter versus 3Q, it looks like it's a little bit lower. Could you just explain some of the drivers behind that, if it's seasonality, or maybe just kind of like the lumpiness of the transition revenue? That would be helpful.

Shrikant Sortur -- Chief Financial Officer

Sure, Allen. This is Shrikant here. Let me take that. One, I would start off with there's still the uncertainty of the COVID environment.

Q4 usually we see an uptick with the higher healthcare volumes. But we need to wait to see how that will unfold for Q4. That is being factored in for the uncertainty that has. And then the transition revenue, as we rightly said, and it was there in my prepared remarks, we are actually expecting higher volumes, including some of the ramps that we discussed briefly in Ron's presentation.

That is going to be potentially offset by the transition revenue declines for Q4 as well. So we kept it fairly steady with Q3.

Allen Kato -- Beach Point Capital -- Analyst

Got it. And going to the Q, on the cash flow statement, I noticed there was, I think, a $9 million payment this quarter for the acquisitions made in early 2019. Can you just go into a bit more detail on what those were and if there's any kind of similar pending potential payments outstanding?

Shrikant Sortur -- Chief Financial Officer

That particular transaction was related to the software assets that we purchased back in the day. It was a staggered payout. And in Q3, the next installment was due, and we settled that. At this point in time, there's nothing that we are aware of in a similar nature from a cash flow perspective.

Allen Kato -- Beach Point Capital -- Analyst

Got it. Just two more for me. I guess, first, can you talk about any progress on stranded cost removals in the quarter? And any actions or particular lines of service you might have exited or started to rationalize in the third quarter?

Shrikant Sortur -- Chief Financial Officer

Sure, Allen. We continue to go down the path of identifying, eliminating, whether it's transition revenue or stranded cost. But to be fair, you also saw the announcement around DAG, continued focused on our DMR, and all of the other positive things that's happening in the business coming back. And being specific to your question, the transition revenue is at the run rate that we expect it to be related to the stranded cost.

Yes, you're seeing the cost coming off. That's one of the drivers for the quarterly increase in gross margins. Obviously, like I said, we do tend to see offsets to some of these cost saves. But coming back to the standard costs once again, yes, it's slow and steady.

The stranded costs are coming out of the system.

Allen Kato -- Beach Point Capital -- Analyst

Got it. Sorry, did you guys say that the strength of your transition revenue is at the kind of ultimate run rate? Or did I mishear you there?

Shrikant Sortur -- Chief Financial Officer

That is correct. Ultimate run rate.

Allen Kato -- Beach Point Capital -- Analyst

OK. So in quarters going forward, there should be a minimal impact in the year-over-year comparison by transition revenue going away?

Shrikant Sortur -- Chief Financial Officer

Correct. Wouldn't you look at it from a sequential perspective from a minimal impact? Think about it. 2019 versus 2020, there is going to be a bigger impact related to transition revenue, right? Q3 versus Q4, not as pronounced.

Allen Kato -- Beach Point Capital -- Analyst

Right, right. I guess my point is by second quarter – you know, first quarter, second-quarter '21, it will be gone.

Shrikant Sortur -- Chief Financial Officer

Correct, yes.

Allen Kato -- Beach Point Capital -- Analyst

But the year-over-year impact should be sequentially less each quarter now?

Shrikant Sortur -- Chief Financial Officer

Correct. Correct. Yes.

Allen Kato -- Beach Point Capital -- Analyst

So like 4Q and then 1Q, the transition revenue comping year-over-year will be less impactful.

Shrikant Sortur -- Chief Financial Officer

Right. Yes.

Allen Kato -- Beach Point Capital -- Analyst

And the last question. I saw in the Q, I think there's $77 million of liquidity also in your presentation. So, one, how is that facility availability split up between the AR facility and the RCF? And then I have one follow-up question after that.

Shrikant Sortur -- Chief Financial Officer

Sure. I think it's there in our Q2. If you notice, it's $37 million or so of approximate availability of borrowing capacity on all of our global availability, OK. $4 million of that is on the AR at this point in time as of that particular date.

So not yet, the global availability.

Allen Kato -- Beach Point Capital -- Analyst

Right. I think I also saw there's letters of credit on the revolver.

Shrikant Sortur -- Chief Financial Officer

Yes. We are netting that out. We are not factoring in any availability on the revolver.

Allen Kato -- Beach Point Capital -- Analyst

OK. So if the $37 million minus $4 million is not available on the AR facility and it's not available on the cash flow revolver, where is it coming from?

Shrikant Sortur -- Chief Financial Officer

We have availability on our global facilities. Outside of the AR, we have other availability.

Allen Kato -- Beach Point Capital -- Analyst

Got it. So just quickly, what facilities are those? Or is there any one that accounts for the majority of that? Are you talking about like an accordion or some other kind of like equipment?

Shrikant Sortur -- Chief Financial Officer

No. We have availability on our international facilities.

Allen Kato -- Beach Point Capital -- Analyst

OK.

Shrikant Sortur -- Chief Financial Officer

Yes.

Allen Kato -- Beach Point Capital -- Analyst

Just quickly on the debt footnote. Where would I see that? Is that just another?

Shrikant Sortur -- Chief Financial Officer

You will not see the breakup. That's why I'm hesitant to give an exact split of it. You'll not see -- it's availability. It's not on the debt footnote.

You will see it in the growing concern footnote, the net total.

Allen Kato -- Beach Point Capital -- Analyst

OK. Got it. I was trying to tie where that is in the financial statement.

Shrikant Sortur -- Chief Financial Officer

Yes, 30.5 billion is the right number, not 37.

Allen Kato -- Beach Point Capital -- Analyst

OK. But it's still not going to show up in the debt. But noted, it will just be kind of off-balance sheet basically.

Shrikant Sortur -- Chief Financial Officer

Correct.

Allen Kato -- Beach Point Capital -- Analyst

OK. So off-balance sheet availability. OK. So then starting from $77 million of liquidity as of early November, I know there's disclosure about the minimum liquidity covenant.

So could you just kind of roll us forward on getting the necessary -- the liquidity hurdle to pay the January coupon while also being in good standing with those minimum liquidity covenants? I think you anticipate that all just being kind of like operating improvement, maybe some additional liquidity sources externally or maybe like asset sale or so. Just kind of rolling us forward to that moment in time would be helpful.

Shrikant Sortur -- Chief Financial Officer

Sure. Given the probable importance of the question, let me give you a more detailed answer here, right? Let me pivot back to our original plan. Our focus has been on improving liquidity and cash flows. We have covered that in multiple prior earnings calls.

We have told what the plans are. We are focused on, one, we have a plan in place to achieve near-term liquidity target of $115 million or so, right? The focus is also on gross margin expansion. That comes in multiple forms, profitable revenue growth, controlling SG&A costs when it comes to EBITDA margins, not gross margins, obviously. And that focus has not changed.

In terms of your question around next bond payment, one thing that I can say is, we are certainly operating at a very heightened awareness as we have discussed many times in the past, right? We manage the business almost on a weekly basis, including having a pulse in the liquidity. Now, we believe in our ability to execute, number one, we have levers in our multiple. But there's another important thing that I want to kind of cover, right? We need to see the margin dollars to come through. There's transition revenue that's exiting.

We can take out the stranded cost, improve our cash flows, we are scaling profitable revenue. What I would like to say is between now and the bond payment, we have some sufficient run rate that we think we'll make to get the additional liquidity.

Operator

The next question comes from David Foropoulos from Unum. Please go ahead.

David Foropoulos -- Unum Group -- Analyst

Thanks for the color, guys. Hey, just a follow-up on that. To get to this sufficient liquidity, can you maybe just give us color on -- I know this is a non-coupon payment quarter, but any color on expectations for free cash flow here in the near term?

Shrikant Sortur -- Chief Financial Officer

I think the best indicator is if you look at our adjusted EBITDA back out O&R, that gives you a good indicator of free cash flows. In the non-cash and other charges, there's an element of cash payout, but it's not 100%. Maybe something like severance is part of that. But adjusted EBITDA left O&R can give you a good indicator of the free cash flow for a quarter.

David Foropoulos -- Unum Group -- Analyst

So the O&R that the prior guide was 40 million to 45 million for the year, I think you're about 36 year to date. So is that still the best way to think about it?

Shrikant Sortur -- Chief Financial Officer

Correct. Yes.

David Foropoulos -- Unum Group -- Analyst

OK. So kind of moving on to the divestitures. I think about a year ago, you guys talked about the two-year strategy. You've done 2, I guess current rate, get $150 million to $200 million of proceeds.

I guess, your $50 million there thus far. Is that timeline in light of the pandemic backdrop we're in here and such? Is that timeline, which gives you only another year, is that still intact here? Or is that going to be pushed out a little bit?

Shrikant Sortur -- Chief Financial Officer

No. At least, again, we have talked about it enough, but giving you a very specific answer at this point in time, we see no reason for the timeline to be pushed out. We are on target. We are staying on track.

So when we have more details, we'll certainly provide. But we feel confident about where we are right now.

David Foropoulos -- Unum Group -- Analyst

OK. And then another question on the transition rev that you talked about. Did you say that the runoff that's complete in Q2 or Q1 of next year?

Shrikant Sortur -- Chief Financial Officer

Yes, Q1 of next year, 2021.

David Foropoulos -- Unum Group -- Analyst

And did you quantify how much -- I mean, I know you did this quarter, but how much the hit will be and then how much you have left to run off there?

Shrikant Sortur -- Chief Financial Officer

We are looking at an annual run rate of 150 million, right, when we started the year. The Q1 runoff was lower than what it was in Q2 and Q3. You can do the math, you'll see what we said, the shortfall of whatever 70% came from.

David Foropoulos -- Unum Group -- Analyst

70% of the shortfall?

Shrikant Sortur -- Chief Financial Officer

Yes.

David Foropoulos -- Unum Group -- Analyst

OK. So kind of back into it there.

Shrikant Sortur -- Chief Financial Officer

Right.

David Foropoulos -- Unum Group -- Analyst

OK. And traditionally, Q4 has been kind of, if I remember correctly, a heavy software license quarter. Is that going to be the case this year that kind of expect -- I know you kind of said margins are going to be a little bit better. Is that one of the tailwinds there?

Shrikant Sortur -- Chief Financial Officer

Yes. The margin being better is -- obviously, we're talking about near term, not specifically to Q4. I'll come back to that in a minute. But you're right, David.

Q4 traditionally is a strong quarter for us. We see the software sales come through. We see there's a seasonality associated with Q4. We'd love to have that back this quarter, Q4 as well.

But given that we live in an interesting and uncertain time, we are unsure as to how it will play out. But there are things in the pipeline that we are hopeful will come aboard in Q4.

David Foropoulos -- Unum Group -- Analyst

With the uptick that we've seen in COVID cases, have you seen any commensurate hit to the uptick in volumes that you've seen since the April-May low?

Shrikant Sortur -- Chief Financial Officer

Not yet. Interestingly, not yet. I think with healthcare, as you saw, there was a quarter-over-quarter pickup in our revenues, right? It's all fueled by additional volumes. Again, where we are uncertain or we don't want to put something out there, let's say, Q4, traditionally is higher healthcare volumes.

People are trying to run-off of all of your claim, get done with all of the year-end procedures. We don't know how that will pan out this year, right? So that's where it's wait and watch. But coming back, healthcare, particularly in Q3, healthcare, payment processing, and DMR are areas where we definitely saw a much higher uptick in volume. If anything, it was the print volumes that were potentially down, but then we're moving to ePresentment.

And then customer on-site, wherever we serve, we're still seeing softness, but then that's dependent on customer strategy versus something being in our control.

David Foropoulos -- Unum Group -- Analyst

All right. Well, I will jump back in the queue here. Thanks for the color. I appreciate it.

Shrikant Sortur -- Chief Financial Officer

Yep. No problem. Thanks, David.

Operator

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to Ron Cogburn for any closing remarks.

Ron Cogburn -- Chief Executive Officer

Thanks, operator. I want to thank everybody for participating today at the quarterly call. Look forward to seeing you on the next call. But in between now and then, look for an invitation from us for innovation day, product services day, and look forward to talking with everybody then.

We'll be showcasing all of our solutions and services with a big emphasis on our Digital Asset Group. Thanks, everyone, and we look forward to seeing you next quarter.

Operator

[Operator signoff]

Duration: 38 minutes

Call participants:

Will Maina -- Investor Relations Contact

Ron Cogburn -- Chief Executive Officer

Shrikant Sortur -- Chief Financial Officer

Allen Kato -- Beach Point Capital -- Analyst

David Foropoulos -- Unum Group -- Analyst

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