AgileThought, Inc. (AGIL) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to the AgileThought's Third Quarter 2021 Earnings Conference Call. As reminder, today's call is being recorded and participation implies consent to such recording. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. With that, I would like to turn the call over to Olga Shinkaruk, Vice President of Investor Relations. Thank you. Please begin.
Olga Shinkaruk: Thank you, operator. Good afternoon everyone and thank you for joining us for AgileThought's financial results conference call for the third quarter ending September 30th, 2021. On the call today, we have AgileThought's Chairman and CEO, Manuel Senderos, and CFO, Jorge Pliego. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results for our company and our therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Today, remarks will also include references to non-GAAP financial measures. Additional information including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the press release. This conference call will be available to replay via webcast though AgileThought's Investor Relations website at ir.agilethought.com. Manuel will begin with an overview of AgileThought, followed by our third quarter highlights. Jorge will then take you through a review of the financials before we proceed to the Q&A section. With that, I'll now turn the call over to Manuel.
Manuel Senderos: Thank you, Olga and welcome to our first earnings call as a publicly-traded company. I know that some of you listening are new to AgileThought story. So, before we go into a review of our recent performance, I would like to spend some time to provide an overview of our business and operating model, and why we believe we are positioned for long-term growth. I'll then turn the call over to Jorge who will walk through our third quarter financial resources in greater detail and discuss our full year 2021 outlook. Our generation is living through a rapidly changing world where our physical lives are increasingly combined with our digital lives. Most businesses need to embrace this new digital world to survive and thrive. AgileThought has a clear vision to help our customers innovate, build, and run the next generation digital enterprise with our world-class AgileThought teams spread throughout the Americas. Our market opportunity is huge. Being a public company, ensures we have the means to achieve our full potential. For many years, Fortune 1000 companies have clustered AgileThought to solve their digital challenges and optimize mission critical systems to drive a business value. We are a pure next generation digital solutions provider. We create modern software for the larger enterprise to enable the digital transformation initiative. We do that with three lifecycle components, innovate, build and run. With all companies innovate on their business model, determine what's the best way to approach the market in a digital way, we build them the applications in a very collaborative fashion using our Agile methodology in the same time zone and then we help him run those applications. We continuously improve on those applications as they run through our DevOps framework. We achieved that in a very competitive way with both onshore teams in the US and nearshore teams throughout Latin America. We addressed a significant market opportunity. The digital transformation market just for services is approximately $750 billion and growing 15% plus and we believe we are very well positioned to take care. We use onshore and nearshore delivery capabilities within an Agile and DevOps framework, which is a very collaborate model. It is all about continuous delivery with very short Sprint's and iterations. So its best done on the same time zone and as close to the customer as possible. We addressed the US market as a primary market, 65.9% of our revenue today comes from the US. Our target is to move up to 85% in the coming years, and the remainder is Latin America, where we primarily serve global customers. In addition to being in the same time zone, so we also have access to the talent pool in most of the relevant countries in Latin America, and in particular, Mexico. Mexico is the eighth largest country in the world and the second largest country in Latin America. It is home to a large talent pool with close to 120,000 STEM graduates per year. Their strong English skills as well as the ability to travel to the US within the free trade market enables us to interact in a very collaborative fashion that Agile development requires. Our gross margin is poised to significantly improve as we do more nearshore versus onshore delivery. We believe a hybrid onshore nearshore model is the best approach, but naturally this varies depending on each engagement. By focusing on expanding our sales capabilities in the US market and expanding our nearshore delivery in Latin America, we have the opportunity to continue to accelerate revenue growth, while expanding our sales capabilities in the U.S. market and expanding our nearshore delivery in Latin America, we have the opportunity to continue to accelerate revenue growth, while expanding our gross margins at the same time. In summary, it's a very clear strategy, more US clients using our agile hybrid model. Finally, we will continue to view M&A as a growth driver, supplementing our organic growth. Over the past six years we have completed 11 acquisitions, so we are very experienced. We expect to continue to opportunistically pursue tuck-in acquisitions to enhance and augment our capabilities, our clients’ portfolio and our talent. With that as backdrop, I would like to now turn to this quarter's performance. We are pleased with our positive business momentum during the third quarter, where we delivered sequential growth of 3.8% over the second quarter, which on average results in a 5.5% quarter-over-quarter growth from Q4 of 2020 to third quarter of 2021. That supports our long term growth target range of 20% to 25% organic year-over-year growth. New bookings and new clients are strong leading indicators for future revenue performance. With 10 new clients added during the quarter and total bookings of $61.4 million, an 11.9% increase Q3 over Q2. Both indicators confirmed that high demand environment for our services and the return on the investment we made on aggressively expanding our sales team in the US market over the last 18 months. We've had lower than normal gross margin in the quarter of 26.6%. Mainly because we hired and sell the large group of consultants on the bench to be ready to start newly sold engagements in Q4, combined with the effects that the new labor law in Mexico had in our Mexican payroll cost. These consultants become billable and we adjust for prices, we expect to see revenue acceleration in Q4 and gross margin expansion. Attrition continues to be a challenge in our industry. But we are actively working on several initiatives to improve retention that are beginning to show progress. We will continue to focus on top line growth in the U.S. market and expanding our nearshore delivery, both underlying components for expanding our gross margin going forward. We anticipate the SG&A investments we have made up front to expand our sales team, ready our foundations for scale and operate as a public company will translate into strong future earnings, as we obtained operating leverage with the current growth trajectory. Thank you for your time and continued support. I’ll now turn the call over to Jorge to discuss our financial results for the quarter and guidance for the year.
Jorge Pliego: Thank you, Manuel, and good afternoon, everyone. Today I am going to talk about our third quarter 2021 results and then about our guidance for the fourth quarter and full year. Moving on to the income statement. Q3 net revenues were $40.4 million, an increase of 3.8% from Q2 of 2021 and an increase of 0.8% year-over-year. The sequential increase was mainly driven by the increasing bookings and addition of new logos as knowledge playing to it. From a geographic perspective to the nine months ended September 30, 2021, revenues from the United States and Latin America operations represented 65.9% and 34.1% respectively compared to the same period of prior year where the US represented 68.7% and LatAm 31.3%. For the nine months ended September 30, 2021, revenues from our top end clients accounted for 65.5% of total revenues as compared to 67.2% in the prior year period resulted in greater diversification across our client bases. For the three months ended September 30, 2021, gross profit margin was 26.6% as compared to 35.1% on the same period of prior year. For the nine months ended September 30, 2021, gross profit margin was 29% as compared to 32.2% and the same period of prior year. The decrease in both in the three and nine-month periods has been primarily driven by the cost of onboarding new hiring and lower utilization due to preparation of new bookings, as well as to the effects of the new labor law in Mexico that came to effect during the third quarter. For the three months ended September 30, 2021, net loss was $10.6 million as compared to a net loss of $10.3 million on the same quarter of prior year. For the nine months ended September 30, 2021, net loss was $14.1 million as compared to a net loss of $19.6 million on the nine months of prior year. I just reiterate for the three months ended September 30, 2021 was a loss of $0.6 million compared to a $4.2 million EBITDA for the same period of prior year. Adjusted EBITDA for the nine months ended September 30, 2021 was $3.1 million versus $17.1 million for the same period of prior year. The decrease has been primarily driven by the impact in gross profit that we’ve already discussed and additional SG&A observed during 2021 related to our investment in growing the commercial organization and preparing for scale, as well as expenses related to become an operate as a public company. Turning to our balance sheet. On August 23, 2021, we successfully closed an equity capitalization of $91.5 million through the completion of our business combination with LIV Capital Acquisition Corporation, comprised by $47.6 million PIPE investment, $5.7 million from proceeds of the trust account and $38.1 million resulting of the issuance of Class A common stock from a convertible debt for CDs. To-date, we covered those $27.5 million our term loans out of which $24.3 million were paid with proceeds from the business combination and the remainder with cash from our balance sheet. We also paid $14 million of transaction expenses and as a result, we ended the quarter with $4.1 million in cash. Now, let's talk about our business going forward. For the fourth quarter of 2021, we expect the total revenue in the range of $42.5 million to $43.5 million, representing a sequential growth versus the third quarter of 5.2% to 7.6% and a growth of 23.3% to 26.2% versus the fourth quarter of 2020. Gross margin for quarter each expected to be within a range of 30% to 31%. Turning now to guidance for the full year of 2021, we expect total revenue in range of $159.1 million to $160.1 million. That is from my side. Thank you very much and back to you operator.
Operator: Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
Maggie Nolan: Thank you and congrats on your first public earnings call here. I wanted to ask maybe Manuel, what do you think are some of the most important areas of execution for you to achieve your growth ambitions? And kind of an update on your efforts there and confidence in continuing that quarterly growth rate that you laid out in your remarks?
Manuel Senderos: Yes, sure. Hello Maggie, you too, to hear you on the call. So, we believe that our biggest opportunity to continue to grow in the US market. So, we're doubling down on our investment and growing our sales team in the US market. We did big investments over the last 18 months that has really paid off and total contract value has gone way up. So we're very happy with that. But -- so we'll continue to focus on that. We believe if our focus is growing the US market and also growing our delivery in Latin America, we have a good chance to accelerate our growth trajectory and also increase gross margins. Today, the main constraint, I would say to revenue growth is mainly our hiring pace, rather than sales. I think the sales are doing very, very well. And we're trying to keep up with the hiring pace and growing our teams.
Maggie Nolan: Very good. And when you think about that hiring pace or the level of quarterly headcount additions, what's a normalized level that we can expect on that quarterly basis going forward?
Jorge Pliego: So we're, we're shooting for a 300 monthly hires. Today, we’re -- some months, we did close to that 250, 280. So that that makes it about, let's say, net that is 650 to 700 per quarter. We also have to account with attrition that the whole industry is being affected with, we've been able to bring it down a bit. But we're still having, let's say, 75 people go out the door every month. So, net additions are more like 220, 225 on a monthly basis.
Maggie Nolan: Understood? And can you talk through some of the new policies or procedures that you have in place to manage your people and manage that kind of retention piece of the process?
Jorge Pliego: Sure, so we've made good progress there. And we're very proud of that. And we've also already seen the effects of attrition coming down, especially in October, we saw a good decrease. So, the way we will look at is that, when people have trade, they're basically having somebody else giving them the promotion. They will probably get inside of the company on a yearly evaluation model. So, we basically went away from the yearly evaluations and now are doing evaluations on the spot. If people fit the profile to have a promotion based on their skills, based on their valuations that they can ask for immediately with their managers, they can move up the ladder and get a promotion quicker. We believe that that's the main -- our defense on getting our people comfortable that they can grow within our company at the rate that they can learn, that they can get more skills. And we've seen a very good reaction from our teams with that new policy that we just put in place about a month ago. The reception was very, very good. And we believe that's the core of accretion. When somebody else is not giving them a higher a salary for the same level, they're actually giving them a higher salary for a larger level or a step up. So we're trying to do that internally and moving our people faster through the pyramid. And that also allows us to really hire faster on the university level, college level, bringing them through our academies. So we’ll move our people on the higher part of the pyramid faster, we're able to then replenish underneath of the pyramid also faster. And I think that's the long-term successful model.
Maggie Nolan: Okay. Thank you. And then Jorge, on the gross margin side of things, can you give us a sense for quantify or some color on kind of some of the one-time items that would cause that step-up into the fourth quarter of gross margin? And then, what some of the medium or longer-term drivers of gross margin are for the business?
Jorge Pliego: Sure. Hi, Maggie. How's it going? Absolutely, I can tell you the impact that we have, which is -- if you will isolate the one-time events that we have during the quarter, we can probably about I would say, is up to 6 points. This piece on the new hire is that we’re not maybe leveled immediately counted for about 3.5%, we have another point and people that already within the organization, but that we couldn't make the level because we need them to focus a bit on the setup of all the projects that are kicking-off in Q4, maybe added for about another point of the about zero point. And then the Mexico labor change, which impacted the -- not only our industry, I would say even some of our customers, like in the financial services industry, for instance. We had to read documents or contracts to basically be everyone compliant with what the law requires now, may impact in another two to three points. So those, I would say, are the three components that work kind of one-off. We're obviously correcting prices very quickly in many of them. So we will recover these things -- this increase in cost that we have. And obviously moving very quickly into the utilization of our bench people that we showed in Q3, which -- what I can tell is, all of them have projects assigned already for Q4, are going to be the things that I want to help us correct the situation that we face in the margin in Q3.
Maggie Nolan: That's really helpful. Thanks. And then last one for me…
Jorge Pliego: Let me add…
Maggie Nolan: Yeah, of course.
Jorge Pliego: Yeah. Sorry. Maggie, if you don't mind, I like to add one thing that's I think, important. On our largest 25 clients in Q3, the average gross margin is actually 34%. So, we feel very comfortable with gross margins that we have in our accounts. And this was just a utilization issue, mainly utilization issue during the quarter. But as those people become billable, or have become visible billable in Q4, what we'll see is accelerated revenue will have more revenue, and also we have gross margin will come back to normal 30% to 31%.
Maggie Nolan: That's helpful. Thank you. The last one for me would just be on the quarter, what was the diluted share count? And now that you have some of these pieces finalized from the convertible debt and the warrants? Where do you expect that share count to be in the coming quarters? Thank you.
Manuel Senderos: Jorge, you want to take them?
Jorge Pliego: Yeah, give us a second Maggie, we can, we can tell you that, because we basically, since we had the negative profit, we'll remove the share piece – the specific share piece over there. But it's going to come down to 41.9 million shares at this – at this moment, Maggie.
Maggie Nolan: Okay. Great. Thanks for the time. Thanks for taking my questions.
Jorge Pliego: Thank you.
Manuel Senderos: No problem.
Operator: Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.
Unidentified Analyst: Hi. This is Matt in for Brian. So just to expand on the previous question, we're seeing a lot of labor challenges. And I was wondering, if you could talk about some initiatives you're taking to more rapidly meet higher demand? And if you're having the same labor challenges near shore as you are in the US?
Manuel Senderos: Yeah. Hi, Brian, thanks for the question. So it is different, the US labor market is much tighter. And as you know, we would have 30% of our deliveries still done in the US. So as we move more into the Latin American markets that becomes easier for us. The way for us to accelerate hiring in Latin America is through the college hires. So coming back to my original point, if we're able to move our team started to the pyramid, and have them promoted faster as they gain experience and skills we're then able to open more spaces below on the pyramid where we can hire from college. And as where we've been very, very successful that we can hire it at scale. So we're really increasing our relationships with more universities and we're increasing the size of our recruiting team now with 50 individuals just for recruiting, because yes, that is exactly our main – our main constraint for revenue growth. The sales are definitely there. We just need to – to be able to grow the team as fast as we can.
Unidentified Analyst: Great. Thank you very much.
Operator: And we have reached the end of the question-and-answer session. And I'll turn it back to Manuel for final remarks.
Manuel Senderos: Well, really appreciate everybody's time and interest in the company. I think for the first quarter, we're satisfied with the numbers we've put out there. Obviously, we will continue to improve where we feel very comfortable – comfortable with the guidance we're giving for Q4. And hope to meet you there in February. So thanks, everyone.
Operator: And this concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.
