AgileThought Inc's (AGIL) CEO Manuel Senderos on Q2 2022 Results - Earnings Call Transcript

Aug. 12, 2022 9:24 PM ETAgileThought, Inc. (AGIL)
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AgileThought Inc. (NASDAQ:AGIL) Q2 2022 Earnings Conference Call August 11, 2022 4:30 PM ET

Company Participants

Mariana Franco - Head of Investor Relations

Manuel Senderos - Chairman and Chief Executive Officer

Amit Singh - Chief Financial Officer

Conference Call Participants

Maggie Nolan - William Blair

Brian Kinstlinger - Alliance Global Partners

Zack Ajzenman - Cowen

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AgileThought Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions].

Participants of this call are advice that the audio of this conference is being broadcast live over the internet and its also recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of call through November 11, 2022.

I would now like to turn the conference over to Mariana Franco, the Company's Head of Investor Relations Please go ahead.

Mariana Franco

Good afternoon, and thank you for participating in today’s AgileThought second quarter 2022 earnings conference call. Our speakers for today's call are Manuel Senderos, Chairman and Chief Executive Officer; and Amit Singh, Chief Financial Officer.

Before we begin, allow me to remind you that some of the comments on our call today, including our business and financial outlook, and the answers to some of your questions may be considered forward looking statements. Such statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC.

The content of this call contains the time sensitive information that is accurate only as of today, August 11, 2022. Except as required by law, AgileThought disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Today's remarks will also include references to non-GAAP financial measures, such as adjusted diluted earnings per share.

Additional information including reconciliation between non-GAAP financial information to the GAAP financial information is provided in the associated earnings press release. This conference call will be available to replay via webcast through AgileThought's Investor Relations website@ir.agilethought. com, where you can also find a copy of our earnings release.

I'd now like to turn the call over to Manuel Senderos, our CEO.

Manuel Senderos

Thanks, Mariana. Good afternoon. And thanks to everyone for joining us. It is a pleasure to be here with you today. During our previous earnings call, I emphasize the expansion of the digital market, which continues to remain strong, along with the work we have been doing to build our team and to continue delivering next generation solutions to our customers.

And speaking with you last quarter, we have made solid progress across multiple fronts of our business that I'm excited to share with you today. I'll start by giving you some highlights for our second quarter results, while providing insights into the underlying business trends and the work we have been doing to address the market.

I will also talk about how we have been transforming to leverage significant digital transformation opportunities both in the near and long-term. This has been again a strong quarter for AgileThought with revenue totaling $46.2 million, above our guidance, and representing a growth of 4.4% versus previous quarter and 18.6% year-over-year.

Our gross margin for the quarter was 33.3%, representing an improvement of 200 basis points versus the previous quarter and 220 basis points year-over-year. Now to talk about the end market. According to industry research firm, IDC, digital transformation spending will sustain its accelerated pace of growth and investments, will reach $3 trillion in 2026.

AI services is forecasted to deliver the fastest spending growth over the next five years. The digital technology services market is expanding quickly, and we continue to see the proof of this in the growing demand from our clients.

In the second quarter of 2022 our LTM, signed TCV remains strong at $239 million, representing 1.4 times LTM book-to-bill ratio. We now have 32 clients generating revenues above $1 million each year. This is five more clients and one year ago and three more than previous quarter.

We have been investing to capitalize on this demand. First with our AgileSquads delivery model, which we officially launched a couple of months ago, when we announced our Eight Technology Guilds.

The Guilds organized our delivery structure according to specific theological expertise, and then form AgileSquads. Squads are the core delivery team for our client accounts formed of anywhere from four to 10 plus engineers, pulled from across the Guilds based on our client needs.

We go-to-market to market units, where each market unit has three main leaders, the market unit head and operations head and a technology head. And then the market units are organized by a major in an industry and a minor in a geography.

This framework enables the sales team to not only provide industry expertise to our clients, but also provide a strong technology perspective based on our Guilds, and allows the delivery teams to continue building expertise on cutting edge technologies.

The technology head of the market unit is responsible for drawing on talent from the Guilds' to form an AgileSquads. We approach our clients through our 3D discovery design and deliver, allowing us to offer them end-to-end services, we typically start with a discovery phase.

This is the consulting part of our business where clients need SAS from the perspective of all Guilds. In this phase, we help them decide what problem to solve first, and select the products or platforms to rely on.

The design phase, we leverage our Guilds expertise to drive tailor outcomes considering every aspect of the solution like visuals, functionality, and user experience before moving on to the delivery phase.

During the process, we usually gather feedback or analytics that give rise to an iterative process that allows continuous improvement. Our operating model is a result from drawing best practices and learnings from 20 years in the IT and software development industry.

As we implemented the lessons, our executive team has learned throughout their careers. This model is increasing our speed-to-market on solutions while driving innovation in an agile manner.

Talented, dedicated people are the key to success in our business. And we have been investing in building a world class scalable ecosystem for talented technologists to thrive and grow their career at our firm.

We recently hired a new Chief People Officer, Gonzalo Mones Cazon, who we are very excited to welcome. Gonzalo is an IT services industry veteran with deep knowledge and passion for people and talent growth and retention.

He has experience in building high performing organizations with a people first culture that fosters growth. Our goal and Gonzalo's goals as CPO is to make Agile an employer of choice, not just in Mexico, but in Latin America and the U.S.

Initial key priorities are accelerating recruitment, enhancing global internal processes, and structuring the organization to build clear career paths. Gonzalo has already added to the team a global talent acquisition leader who will zero in on our recruiting process to make sure it is strategic, efficient, and technology focused.

We are already working to open new markets in the region to expand our talent pool. This investments should help us accelerate our net headcount growth, and better connect to the talent.

In the meantime, our sales teams continue working to increase revenue, bringing in new logos and strengthening relations with our current clients. We see a massive opportunity to continue penetrating existing customers as the majority of our top customers are Fortune 1000 companies.

We continue to expand our reach and grow our footprint within our accounts. Delivering and building relationships with our clients is essential in our business, and we know how to do it.

A good example is a Top 10 major health insurance provider located in the U.S. We started with them several years ago working on a small project and as they grew and acquire or became acquired, we were able to grow with them.

We deployed the first low-code tool for a project in 2011, and have been able to consistently expand our footprint into other areas of their business, focusing on next generation applications for the customer base that can propel them into the digital future.

An example is the creation of an RPA solution that significantly reduced redundancies in their pharmacy operations, delivering millions of dollars in benefits for this division. Some of our highlighted differentiators for this client and others are our domain knowledge of their systems and business. Along with an understanding of that integration, evolving into a trusted advisor relationship.

We have steadily and consistently expanded our footprint in this account and have the honor distinction of being their top service provider. With a strong focus on quality of delivery, we are the number one services provider for near shore, competing with other large and small public and private pure play digital service providers.

Besides healthcare, professional services, it's also an area of large opportunity for us, and a key focus of our talent development and our business development. We are currently working with one of the world's largest strategy consulting firms. They needed a way to provide their clients with planning tools to help design target markets before they invested billions of dollars in growing and emerging markets.

The suite of AI driven products which helped them build are used for predicting the size of the market, real addressable sectors, and the investment and capital needed to win in this century [ph].

With a combination of the consulting insights and a digital platform, they are now able to provide an unparalleled speed, planning capabilities for the clients, comprising members of almost every one of our delivery Guilds are AgileSquads quickly move from prototype to production in a short period of time.

Using Agile methods for iteration to redesign the user experience and UI, the data modeling and the engineering combination provided scalability to thousands of users at a rapid pace. This also resulted in a new revenue stream for our clients.

Our clients trust us to help them reimagine the future. And many times, that means helping them build new business models to create growth. One of those clients is a telecommunications firm, attempting to provide solutions that deliver insights for their carrier clients, allowing them to boost revenue.

We created a secure and scalable AI laboratory for our customer, where large data sets are transforming to machine learning models that train algorithms to predict customers future spending and travel patterns.

Our customer offers these insights to their carrier customers, increasing the end user experience growing revenue for the carriers and our client. The AI Lab is a dedicated area for us to bring a platform approach with a real world use cases in order to create many use cases for product offerings.

As a result, our client now has an additional revenue stream from these customized offers for their customer base. We have the go ahead to significantly grow this lab and help bring more of these new solutions to life. We are confident that this client will be growing in the coming quarters.

In the cognitive computing area, one of our clients, a customer experience firm that provides solutions to large well known consumer brands needed an automated data driven way to provide quicker results and deeper insights for the clients.

We use natural language processing based cognitive services to analyze customer feedback from their end customers and predict the severity of the comments. Through machine learning algorithms we reach 97% accuracy.

It was a challenge, but we were able to reimagine the client contact center data annotation processes. As we review the data we determined that not all feedback is created equal, and certain responses are far more common than others.

To guarantee that the data used in the training was free of bias, we generated synthetic customer feedback comments based on deep learning natural language generation models. The AI based augmented program provided a client the ability to respond more quickly to the end customer inquiries with a faster resolution.

Processing times were reduced from hours and days to milliseconds, allowing for future cost savings and the immediate triaging of complaints. Next up with our clients, two areas look promising.

One using cognitive services to predict the point of sales revenue for our clients customer locations, giving them an early indication of problem areas. Second, also building a conversational AI bots so their system can respond directly to the client in an intelligent way to solve their problems interactively.

To further expand our market reach in the digital space, we have formed a partnership with experience IT, a digital transformation services firm based in Minnesota. This partnering arrangement will enable our clients to benefit from the combined strength of our companies, deepen our relationships, and leverage our integrated delivery squads to rapidly scale and quickly access a global pool of technical talent.

We've already started successfully delivering services for some new combined clients primarily in the healthcare sector. We're excited about the upside potential for both firms and what this exciting partnership means to our clients.

As you can see, our dedicated AgileThought team brings the necessary experience to develop cutting edge digital solutions for our clients that ultimately allow our clients to grow in an increasingly digital economy. We expect our growth story to continue to have long legs and to be driven by our IT professionals are most valuable assets.

Now, I will turn the call over to Amit Singh, our CFO, who will provide additional insight into our financial results.

Amit Singh

Thank you, Manuel, and good afternoon, everyone. Let me start by summarizing the results of our second quarter 2022. I will then discuss our guidance for the next quarter and full year 2022.

We are pleased with our overall results for the second quarter of this year as our business continues to move towards our long term target. Revenues for Q2 were $46.2 million above our guidance and represented 18.6% year-over-year growth and 4.4% sequential growth.

As Manuel mentioned, the demand for our end-to-end digital services is strong and expected to remain so in the coming years as enterprises continue to increase their investments in digital transformation.

During the second quarter of 2022, the U.S. revenues represented 63.4% of our total revenues. We have made good progress on revenue concentration. Revenues from our Top 10 customers represented 60.6% of our total revenues for this quarter, compared to 65.5% in the second quarter of 2021.

Financial services continues to be our main industry vertical with 27% of our total revenues in the second quarter of 2022 followed by healthcare with 23.5% [ph] of revenues of revenues, our fastest growing vertical with 47.4% year-over-year revenue growth and 8.2% sequential revenue.

Our revenue per billable employee as of last fall month ended June 2022 was 79,000, compared to 71,000 as of the same period of the prior year, representing 11% year-over-year growth and 2% sequential growth versus the 77.5000 in the first quarter of 2022.

Turning now to profitability, the gross profit for the second quarter of 2022 was $15.4 million implying a 33.3% gross margin. Gross margin improved materially up to 100 basis point quarter-over-quarter and 220 basis points year-over-year.

The initiatives we mentioned in our last few earnings calls are showing results and we continue to progress towards the goal of achieving industry leading gross margins. The efforts to improve our gross margins include high degree of focus towards strategic clients and revenues as well as our constant efforts to increase efficiencies in our delivery infrastructure and to drive pricing increase.

Our SG&A as a percentage of revenue will also decrease in the mid long term as we drive economies of scale and operational efficiencies. Adjusted net income for the quarter total $1.9 million compared to a loss of $1 million for the same quarter of the previous year.

Adjusted diluted EPS for the quarter was $0.04, based on $46.3 million average diluted shares for the quarter, compared to negative $0.03 for the same quarter of the previous year based on $34.5 million average diluted shares for the quarter.

Moving on to the balance sheet, we made an aggressive effort to reduce our accounts payable level during the second quarter of 2022. As of June 2022, accounts payable were $13.5 million, significantly decreasing from $23.1 million at the end of the previous quarter.

Despite this, our cash and cash equivalents as of June 30, 2022, were $11.3 million, up from $2.7 million as of March 31, 2022. As discussed previously, the primary goal of the company going forward is to focus on strategic clients and revenues that help us drive industry leading revenue growth and margins in the near and long term.

Also, previously, we have spoken about a small portion of our revenue, which is not core to our business and strategic goals. We as a company are now aggressively focusing on exiting from that non core revenue base.

This has a very short term impact on our overall revenues. And hence, we now expect our fiscal 2022 revenues to be at least $174.7 million in constant currency, representing at least 10% year-over-year growth. We expect that third quarter revenues to be at least $42.1 million in constant currency.

These efforts along with our robust bookings over the last several quarters, recent revenue and margin growth trend, strong demand environment, and expected improvement in our employee hiring and retention should help us further accelerate our revenue and gross margin transposed 2022.

As our second quarter results indicate, we are progressing well with our gross margin growth trends. However, we believe at this point, we should strongly invest in our employee hiring, training and retention efforts, which is critical for our go forward revenue and margin growth goals. Hence, we are keeping our 2022 gross margin guidance unchanged at 31% to 32%.

Thanks, everyone, for participating in this call. I'd like to turn the call back to Manuel for any closing remarks. Manuel, please.

Manuel Senderos

Thank you, Amit. In conclusion, we are currently in a transition year, just at the inflection point. We remain confident about our top line growth and gross margin progress towards our long term goals. We believe we have built the base to benefit from the strong digital information demand and positioned us well on the path of industry leading performance in the coming years.

And with that, I'd like to turn the call over to the operator so that we can begin the questions and answer session.

Question-and-Answer Session

Operator

And we will now begin the question and answer session. [Operator Instructions] And our first question today will come from Maggie Nolan with William Blair. Please go ahead.

Maggie Nolan

Hi. Thanks for all the updates. It was great to hear how your strategy is becoming really focused. I'm wondering if you could follow up and comment on how much of your revenue or the client portfolio is kind of related to things that you still consider to be non core projects, and then the timeline for exiting that type of business?

Amit Singh

Hey, Maggie. Thank you for your question. This is Amit. So, in the past, we have talked about around 10%, 15% of our revenues, which we consider as non core. And our efforts are to very aggressively in the coming quarters to do sort of not continue that work. But at the same time we are seeing strong growth on the other side of our business. But we hope in the next few quarters we should be able to completely agree with that, that part of our revenue base.

Maggie Nolan

Okay. That's helpful. And then, in the areas that you do identify as kind of core to that that future growth strategy, would you characterize that spending as discretionary or how do you view the resilience of kind of client budgets tied to those areas, if we do see clients become a little bit more cost conscious in the coming months?

Amit Singh

I mean, the type of work that we do, which is helping a client drive their top line and helping a client be competitive in their broader industry. We are actually seeing a strong demand environment for that. And the type of services that we provide, we actually feel those are the -- that type of work is actually the necessary work that the clients need to do, especially if there is a little bit of softness in the end market, because that is the time when the need for the services that we provide actually increases even more, because clients want to need -- the clients want our help to better drive their top line and be more competitive as we design. So we're very confident about the demand environment in front of us. And the bookings trend that you're seeing in the past several quarters are sort of an indication of that.

Maggie Nolan

That's really helpful. And then last one for me, you talked about several initiatives, one of which was driving some pricing increases. What level of price improvement is kind of baked into your revenue guidance from today for the full year? And then, what were the macro considerations in setting that guidance?

Amit Singh

Sure. So if you look at our guidance for the full year, where we've talked about in the past, generally pricing increases this year are anywhere from mid to high single digit, which are very much in line with sort of the wage inflation that we are seeing everywhere as well. When it comes to macro, the demand environment remains extremely strong. So, we are not seeing any indication of any type of any pushback from any clients or any slowdown. So our guidance currently estimates that this environment stays this way for the rest of the year. And all indications that we are getting from the clients indicate for such type of an environment.

Maggie Nolan

Okay. Thanks for all the updates.

Amit Singh

Thanks Maggie.

Operator

And our next question will come from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Brian Kinstlinger

Hi, good evening, guys. Thanks for taking my questions. I wanted a few to start on gross margin. If I punch in the numbers, right, Latin America is still growing faster than North America or the United States. So it's a less favorable mix. So can you talk about how you achieved such a stronger gross margin in the second quarter compared to the first quarter? What were the things that more than offset that mix?

Manuel Senderos

That's a very interesting question, Brian, thanks for attending. We've actually been surprised by the strong demand in Latin America. We didn't expect it to be so strong. I think the key here has been we've been very disciplined and focused on the right client profile. So Latin America is very few clients that fit our profile, but we are in most of those. And we've been able to drive price increases with them as well, in a way that gross margins are getting closer to the gross margins would get with the U.S. customers utilizing near shore. So it's actually been a pleasant surprise in that regard.

Brian Kinstlinger

Great. And then, you obviously communicated and winding down of non strategic customers? Can we assume that those are mainly Latin American customers where you're not generating a reasonable gross margin, and that those staff, or the resources used to do deliver that service will be redeployed on to areas where you have more demand?

Manuel Senderos

Yes. I wouldn't say that they're just in one geographic region, they will have a few of them in both regions. But what I would say is that, as we try to be more disciplined and focus on having customers that are not utilizing us in the best way, which is really doing outcome based work. They distract resources from the company. And we want to be very disciplined and focus in the clients that are really utilizing us for high end work, outcome based work. And that's the reason that we're making this call. We're being very, very selective on the profile of accounts that we have, and the type of spending that they're doing, the type of work we're doing for them. So that way, we can focus all the organization in the same direction and not having different parts of the organization pulling us in different directions. So, ultimately, I think it's best for growth.

Brian Kinstlinger

Great. And then from a demand perspective, I'm curious how conversations have changed at all. For example, in economic downturn, you've been clear the demand environment is not changing. But is there any change in their tone positive or negative, for example, if a company feels a need to more rapidly deploy its digital strategy? Or if they maybe are changing in terms of the tone of their conversation, despite not yet changing budgets? And if so, maybe talk about each of the verticals if they are?

Amit Singh

Absolutely. So if -- and I think it comes back to the same question kind of ties into. If we have the right client profile where we're doing work, which is actually transforming their business models to be more competitive in their industry and be successful. They actually want to accelerate and by no means they're slowing down that investment. I'd say, even in a slowdown -- economic slowdown, they would rather invest on technology that will make them more efficient and more competitive. So, we haven't seen any discussion of a slow down. We have actually been very successful as you've noticed in doing price increases with our current customer base, and they have been very well received. So far, we still feel pretty good.

Now within that, your question goes around the industries. Healthcare was the outlier this -- this quarter was really, I think, 45% growth year-over-year. So really, really strong. We've been able to capture new logos in the space, and the spending in healthcare has been very strong. And the other area where we believe that there's a lot of strong demand. And that's probably the reason why Latin America was strong this quarter is financial services. A lot of what we do in Latin America has a big financial services component to it with large global banks. And they've also upped their spending. So those two industries, I would say, I've seen the strongest demand over the last six months.

Brian Kinstlinger

Great. And then lastly, we saw the announcement of your Chief People Officer, and that's great to see. But on the supply side, if we talked, I think three months ago, and six months ago, you would have said demand exceeds supply. So first, is that still the case? And then, maybe talk about the progress you're making? Because if you look at I think the numbers and again, I'm not sure I put them in right. But I thought the Latin American headcount was marginally down to flat compared to the first quarter. So maybe talk about the effects of trician. Or, what's going on there?

Manuel Senderos

Yes. Actually, it's interesting that a lot of the growth that we've experienced over the last two quarters has most to do with price increases, and going into the right engagement with the right projects, and less to do with net additions in headcount. And that is because as we prioritize the high value add work, we're also letting go people that are working on the low value add work. So they net out more of a flattish net additions for headcount. We would expect that to materially change going forward in the second half of the year, as we kind of transition more into this more focused, disciplined way. We brought in a revamped team in both the Chief People Officer would consider joining the company. And then he reorganized the team and bring in some additional key people for the recruiting side. So we're really investing heavily in the recruiting capabilities so that we can really scale for the growth that we want to achieve in the coming years.

Brian Kinstlinger

Okay. Thanks for taking all my questions.

Manuel Senderos

Thank you, Brian.

Operator

[Operator Instructions] Our next question will come from Zack Ajzenman with Cowen. Please go ahead.

Zack Ajzenman

Thanks. Couple of questions from us. First on the new logo ads, looks like the company and its three clients this quarter versus nine in the prior. So just kind of curious if you can give us an update on the outlook on business development activity in the context of the current macro? And also just wanted to confirm whether the hurdle for new business gross margin stands at 40%?

Manuel Senderos

Yes. Thanks for joining us, and thanks for the question. So, first of all, yes, the hurdle for us is to achieve 40% gross margin. And that is the main reason that we want to really focus on the outcome based work, and focus all the organization towards that. Because we are signing all of our new engagements with current clients, and with new logos above 40% gross margin. So we feel very strongly about that possibility. And the idea of focusing on the firm in achieving that. So that's the first point. The second, as you might recall, around 90% of our business comes from existing customers. So the first quarter has been very focused on growing existing customers, implementing price increases with them, and implementing a lot of change in our delivery model and our guilds. So all of that has taken a lot of work inside and explanation to our end customers has been very well received and positively received.

The other component of growth, obviously, is the new logos, which is always important. It was stronger in the first quarter. And there were less logos in the second quarter. But I wouldn't say it's an indication of slower demand. It's just sometimes one deal closes in one date and they can move right a little bit. But we don't see really a decline on the demand.

Zack Ajzenman

Okay, understood. And just a follow up on wage inflation. How would you characterize current wage inflation levels? Is it saying better or worse than what kind of the industry has seen over the past 12 months?

Amit Singh

Zack, this is Amit. So wage inflation levels remain around the same levels that you have seen over the past one year or one and a half year, because the demand for talent in the tech space still pretty strong. But that being said, as Manuel mentioned, we've been very successful in client by client being able to drive price increases to more than make up for the wage inflation.

Zack Ajzenman

That's helpful. Thank you.

Operator

And this will conclude our question and answer session. I'd like to turn the conference back over to Manuel for any closing remarks.

Manuel Senderos

As always, I really appreciate everyone joining on our questions. We feel very strongly about the direction that the company is going and especially around a team that we've been able to build over the last, I would say 18 months. Really the team that we have right now is superb team that has the capacity to operate at very large scale. So I feel very, very glad and comfortable with the current direction that we're going. So really appreciate everybody's participation and we're happy to see you in the next one or on one-on-ones.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line at this time.

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