AgileThought Inc (NASDAQ:AGIL) Q4 2021 Earnings Conference Call March 31, 2022 4:30 PM ET
Company Participants
Scott Gordon – Core IR, Investor Relations
Manuel Senderos – Chairman and Chief Executive Officer
Ana Hernández – Chief Financial Officer
Conference Call Participants
Maggie Nolan – William Blair
Brian Kinstlinger – Alliance Global Partners
Operator
Ladies and gentlemen, thank you for standing by. Good day, and welcome to the AgileThought Inc. Fourth Quarter and Full Year 2021 Financial Results and Corporate Update Conference Call.
At this time, all participants are in a listen-only mode [Operator Instructions]. Participants on this call are advised that the audio of this conference call is being broadcast live over the Internet and also being recorded for playbacks purposes. A webcast replay of the call will be available approximately one hour after the end of call to June 30, 2022.
I would now like to turn the call over to Scott Gordon of Core IR, Company’s Investor Relations Firm. Please go ahead, sir.
Scott Gordon
Good afternoon. And thank you for participating in today’s AgileThought conference call. Joining me from the Company’s leadership team are Manuel Senderos, Chairman and Chief Executive Officer; and Ana Hernández, Chief Financial Officer. 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 of the company and are therefore forward-looking statements. The content of this call contains time information that is accurate only as of today, March 31, 2022. Except as required by law, AgileThought disclaims any obligation to publicly update or provide any information to reflect events or circumstances that occur after this call. Company’s actual results may differ materially from its 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’s remarks will also include references to non-GAAP financial measures, such as adjusted EBITDA. 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 by a webcast through AgileThought’s Investor Relations Web site at ir.agilethought.com. Manuel will begin in with an overview of AgileThought, followed by the company’s fourth quarter highlights. Ana will then take you through a review of the quarterly and full year financials before we proceed to the Q&A section.
With that, it’s my pleasure to now turn the call over to CEO, Manuel Senderos. Manuel, please go ahead.
Manuel Senderos
Thanks, Scott. Good afternoon, and thanks to everyone for joining our fourth quarter and year end conference call. For those still a bit new to our story, I will provide a brief corporate background before highlighting the key themes and results from 2021, as well as our outlook for the coming year. We are a leading provider of next generation software development and digital transformation services for our corporate clients. Many of which are Fortune 1000 companies. We leverage our engineers and IT professionals to help our clients achieve their business goals and accelerate ROI. While our corporate customers are diverse across many industries and end markets, they all share the desire and need to adapt to the evolving digital landscape. The driving forces of mobile, analytics, cloud technologies, AI and IoT, just to name a few, are extremely strong secular wins that are forcing companies across the world to accelerate, or in many cases, begin their digital transformation process. This digital transformation services are the fastest growing segment of IT services. This market is forecasted to grow up to 15% annually over the next four years. In fact, industry analysts as Gartner expect this market segment to reach 750 billion by 2024. Only a small fraction of businesses have begun digital transformation, which is expected to account for 53% of overall tech spending by 2023.
So against that background, how does AgileThought fit into the IT landscape? We deliver full lifecycle software offerings and implement interwoven technologies to help our clients digitally positions themselves. We segment our full cycle capability into three verticals. We call innovate, build and run, which offers strategic consulting, digital delivery services and digital operation services, respectively. Our clients especially value our custom product development capabilities, our agile development methodologies and the iterative design process we have developed, which allow for continuous improvement as they run through our DevOps framework. Our blue chip clients are the logic operators in their [industries] that have ample IP and digital transformation budgets. Currently, corporate clients based in the US account for approximately 65% of our revenue. However, we’re focusing our sales and new client efforts in the US with a goal of reaching 85% on that metric within two years. We service this our clients utilizing our growing team of approximately 2,600 employees, of whom 87% are in Latin America with the remainder based in the US. Thus, we use a strategic hybrid onshore near-shore approach, as we benefit from being able to tap into a deep pool of [stemmed] talent in Latin America with a regional focus on technology.
We then foster new hires with a corporate culture and training programs to build a sustainable workforce that forms the foundation for our anticipated growth. The regional proximity to our US clients and the ability to offer client support in most of the time zones for our US clients make our near shore delivery a win-win for both sides. The bottom line for us is that as we increase our mix of revenue from US clients and expand our near shore delivery from Latin America, we can accelerate revenue growth and improve gross margin percentage. Couple this basic strategy with the recent achievement of minimum scale to obtain operating leverage of the SG&A that is in place to support our multiyear growth targets, we can now expect to grow our bottom line at a faster rate than our top line. As we have previously indicated, our long term goals are organic revenue growth of 20%, gross margins of 35% and adjusted EBITDA margin of 18%. In addition to our strong organic growth, another significant growth driver is M&A. As illustrated by 11 acquisitions completed over the past six years, we will continue to look for tuck in acquisitions [that] can strengthen our capabilities and offerings, while providing additional sustainable upside and operating leverage.
With that background, let us now turn our attention to where we are today. The year 2021 was transformational for agile, as we made considerable progress on several key elements of our strategy; positioning the company for accelerated growth in 2022 and beyond; our decision to invest aggressively in our US focused commercial sales force has paid dividends, as we have delivered four consecutive quarters of sequential sales growth; added 36 new customers to our enterprise customer base in 2021; and signed new contracts or TCV worth 218 million, which represent a strong one 1.4x book-to-bill ratio for full year 2021. We have also made tremendous strides this year in both our recruitment initiatives and additions to our senior management team. In 2021, we added a net of 298 billable employees to our staff despite a competitive market for talent. Our attrition shows initial signs of steady decline as a benefit of new internal programs and employee benefits, while our recruiting efforts continue to drive new talent into the AgileThought family.
Turning our attention to our financial performance during the fourth quarter of 2021. Revenue increased 22% year over year and 4.2% sequentially to 42.1 million, both growth rates align well with our targeted 20% year over year organic revenue growth. We added nine new clients during the fourth quarter and 36 in total in calendar 2021. This is compelling evidence that our investments are beginning to pay off, as new client acquisitions is critical component of our accelerating long term growth. The trend in new client acquisition is strong as we have added 19 new clients in the second half of ‘21 as compared to 17 in the first half of ’21. We are further excited about trends in contract bookings and increased percentage of revenue from the US. Thus far in the first quarter of 2022, total contract value in the fourth quarter of 2021 was 53 million, which was up 130% year over year and represented a book to build ratio of 1.2x. Encouragingly, our internal data thus far indicate that bookings in the first quarter of 2022 will increase 25% sequentially, paving the way for strong revenue growth later in calendar 2022.
In the third quarter of 2021 gross margin percentage was a bit weak due to increased staffing ahead of new projects and engagements that were expected to start fourth quarter of ‘21. However, gross margin percentage rebounded to more historically consistent levels of 29.7% in the fourth quarter, leading to 41% year over year and 16% sequential increases in gross profit. Key to our growth is our ability to source and onboard talent to convert expanding bookings to revenue. As we consistently deliver sequential organic revenue growth, we do expect quarterly gross profit and gross margin to potentially fluctuate over the next couple of quarters as we ramp up our talent acquisition and onboarding, and prepare teams for new projects. However, we anticipate that our strategic focus on securing higher US revenue mix coupled with an increase in our near shore delivery will lead to an increasing trend in gross margin percentage in the coming quarters and in particular, in second half 2022. Again, we are targeting 35% gross margin in the longer run as compared to 29.7% gross margin in the fourth quarter.
With our higher expected revenue and margins, we also expect to see a substantial improving trend in adjusted EBITDA. In many respects, we are right on the cusp of that right now. It is worth pointing out that over much of 2021, we have been scaling our organizational structure, making investments for future growth and preparing to enter the public market. All these elements have come with increased cost in our SG&A, but some of these expenses will have run their course and we believe such expenses will begin to normalize going forward. SG&A as a percentage of revenue is expected to decline, increasing our operating leverage in the process and accelerating our adjusted EBITDA growth.
Turning to the balance sheet. We materially reduced our debt — total outstanding debt of $57 million as of December 31, 2021 compared to $137 million on December 31, 2020. In ’22, we expect to continue our deleveraging effort, refinance our external credit facility in the second quarter, which will extend the maturity, lower our interest costs and provide greater operating capital and flexibility. In summary, our strategic objectives are to grow our market share in the digital transformation market, place more emphasis on acquiring new businesses in the US, increase our near shore delivery in our engagement and grow Latin American billable employee base. We believe we are extremely well positioned to continue to execute on these goals in the coming quarters.
And with that, I will now the call over to our CFO, Ana Hernández, who will provide additional insights into our quarterly and yearly financial results. Ana?
Ana Hernández
Thank you, Manuel and good afternoon, everyone. I would like to provide a summary of our fourth quarter 2021 financial results. Revenue in Q4 was $42.1 million, an increase of 4.2% sequentially from Q3 and an increase of 22% year-over-year. The sequential increase was driven by the conversion reliability of the talent we hire during the third quarter to fulfill our bookings and the addition of low logos as we discussed before. Gross margin percentage in the fourth quarter rebounded to 29.7% versus 26.6% in the third quarter of 2021. Upfront cost in the third quarter to build our headcount ahead of projects starting in the fourth quarter normalized as digitalization, leading to improved gross more margins in the fourth quarter. On a year-over-year basis, gross profit increased 41% from fourth quarter of 2020 to fourth quarter of 2021.
Adjusted EBITDA for the fourth quarter was $283,000 versus a loss of $597,000 in the third quarter of 2021 and $722,000 in the fourth quarter of 2020. Elevated SG&A to support revenue acceleration and public readiness expenses were a key negative contributor to our profitability measures in 2021. We expect our SG&A expenses will begin to normalize going forward as a percentage of revenue. Net loss for the fourth quarter was $5.9 million as compared to a net loss of $10.8 million in the third quarter of 2021, and a net loss of $6.6 million in the fourth quarter of 2020.
Now I will discuss full year 2021 results. Revenue for 2021 declined 3.2% year-over-year to $159 million from $164 million in 2020, as we live behind the last effect that COVID has on some specific clients, which are all now on a stable and growing trend. From a geographic perspective, for the full year 2021, revenues from our United States and Latin American operations represented 65% and 35% respectively compared to the same period of prior year where the US represented 69% and LatAm 31%. Revenues from our top 10 clients accounted for 65% of our total revenues in 2021 as compared to 67% in the prior year period, resulting in [Technical Difficulty]. Gross margin percentage for 2021 was 29.2% as compared to 30.8% in 2020. The decline in gross margin is explained by the investment made during the year, particularly in the third quarter to staff and onboard talent ahead of new projects with the objective of converting a larger portion of bookings into revenue. Noteworthy, the gross margin of our top 20 strategic clients for 2021 was 33.8%.
Adjusted EBITDA for 2021 was $3.4 million as compared to $17.9 million in 2020. The decreases in revenue and gross margin percentage along with increased SG&A expenses used to build the company’s readiness for scale and becoming a public company contributed to the decrease adjusted EBITDA. Net loss in 2021 was $20 million as compared to a net loss in 2020 of $26.3 million. While 2021 had lower gross profits and higher SG&A and stock based compensation expenses than those respective amounts in 2020, these factors were more than offset by $16.7 million impairment charge in 2020.
Switching to the balance sheet, in [August] 2021, we closed an equity capitalization of $91.5 million through our business combination with LIV Capital Acquisition Corporation and came public in a simultaneous transaction. In December 2021, we closed a $25 million equity transaction. Much of the proceeds from these two transactions were used to reduce our bank debt, which began 2021 at $98 million and end of the year at $41 million. Total debt at year end 2021 stood at $57 million, down from $137 million at the start of the year. We are in the process of refinancing our expanding term loan and expect for the outcome of these results will bring more favorable terms and flexibility than our existing facility. Cash at year end 2021 was $8.6 million and common share outstanding at year end 2021 was [50,402,763]. Now I would like to provide forward guidance for the first quarter of 2022. For the first quarter, we expect total revenue in the range of $43 million to $43.3 million. Gross margin percentage for the first quarter is expected to be within a range of 28.3% to 28.6%. So that concludes my prepared remarks.
And now I would like to turn the call back to Manuel for any remaining remarks.
Manuel Senderos
Thank you, Ana. In conclusion, we are confident about our competitive positioning and expect to show operating leverage as 2022 unfolds. The continued evolution of digital transformation across the global economy provides significant tailwinds for us, and we expect to capitalize in such secular tailwinds for the benefit for shareholders. And with that, I’d like to turn the call over to the operator so that we can begin the question-and-answer session. Operator?
Question-and-Answer Session
Operator
[Operator Instruction] And the first question comes from Maggie Nolan with William Blair.
Maggie Nolan
Can you walk us through how your near shore value proposition is being received by existing and potential clients in light of some of the geopolitical events that are affecting the industry? Are you seeing incremental opportunity here?
Manuel Senderos
We are seeing incremental opportunity both from existing customers, new customers and even from our competitors, which have been impacted by the conflict in Russia and Ukraine and it’s they’re asking for help. So we are seeing increased demand due to that. We also believe that there’s going to be a more conscious shift from our customers to geopolitical risks, and try to probably diversify their positions in that sense.
Maggie Nolan
And then on the talent side, it sounds like you’re going to continue to kind of rev that hiring engine. Can you talk about which delivery geographies you’ll be focused on and the current kind of competitive environment for talent in those areas, and whether that’s changed of late?
Manuel Senderos
So we’re very focused on growing Mexico as our key stronghold. And we’re doubling down on Mexico in that regard for recruiting, making agreements with universities to have some more college hires to do that. We’re also increasing our near shore utilization from Brazil where we already have 250 consultants that we believe that it’s a nice talent pool there to be tapped to use for near shore. Argentina will also be growing for us. So I will say those three geographies in Latin America are our main focus.
Maggie Nolan
And then I believe, Ana, you mentioned that SG&A would come down as a percentage of revenue over time. Are the investments in the sales force complete for a period of time? And then do you view those sales reps as completely productive at this point in time, or is there additional kind of leverage from them over the next quarters or years?
Ana Hernández
I think Maggie the sales investment that we did, I believe that is now really giving us fruits of basically the talent engine that would be up there. At this juncture, I believe that we are well positioned for what we are expecting during the first half of the year with the current size of the team that we have. Perhaps in second half, we would be evaluating to keep investing on that sales engine if we want to expand our selves in other practices like maybe high tech and media and entertainment is something that we have been evaluating too. But at this point, with investments that we did in last year, we believe that we have a pretty solid team to provide the growth that we are expecting during the first half of the year.
Operator
[Operator Instructions] The next question is from Brian Kinstlinger with Alliance Global Partners.
Brian Kinstlinger
Can you talk about wage inflation for a candidate with the same credentials as last year? If you hire someone today versus a year ago, how much higher are salaries for new hires for either experience or recent grads? And then maybe in turn talk about how pricing is trending as well.
Manuel Senderos
So yes, of course, we are seeing wage inflation. We’re also seeing more competition from companies, including companies that were based in East Europe that are trying to expand their operations in Mexico. So we are seeing that pressure in the Mexican market. We do believe the Mexican market is large enough to be able to handle that in terms of talent pool. Our response for wage inflation is really providing a faster career path for our consultants and allow them to get promoted quicker rather than having to absorb wage inflation within the current position. So for us, the response is train them quicker and progress them through career path quicker. Now we’re also seeing very good progress over the last two quarters in increasing pricing with existing customers. And they have all been very open to having that discussion with us, and we are seeing increased pricing with existing customers. And obviously all our new customers are coming on at much higher rates than with what we have in our install base.
Brian Kinstlinger
My follow-up is from business development perspective, which of your industry verticals that you focus you see the strongest growth opportunity in near term based on your pipeline? And then the similar question, if you look more at the longer-term perspective, is there one industry that maybe outweighs in terms of the opportunity that you see ahead?
Manuel Senderos
So we see a huge opportunity in healthcare where we have a very good presence. We think there’s a lot of — still large customers to be had and midsize customers also where we’ve been very successful in landing as new clients. So we think healthcare is a big opportunity. A lot of companies that are primarily technology based in their operations have been very good new clients for us throughout last year. And as Ana mentioned we see in the future opening up that new high tech and media and entertainment industry for us, we’re looking at a good path to opening that up maybe in the second half of the year where we also see a lot of demand and opportunity.
Operator
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Manuel Senderos for any closing remarks.
Manuel Senderos
Well, thanks, everybody that participated. We really appreciate you spending the time with us and trying to understand our story. I hope we were clear enough in explaining ourselves. So thank you and enjoy your afternoon.
Operator
And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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