AgileThought, Inc. (NASDAQ:AGIL) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Ladies and gentlemen, thank you for standing by. Good morning, and welcome to AgileThought’s First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A webcast replay of the call will be available approximately one hour after the end of the call through August 3, 2023. I would now like to turn the call over to Mariana Franco, the company’s Head of Investor Relations.

Mariana Franco: Good day and thank you for joining AgileThought’s first quarter 2023 earnings conference call. Our speakers today are Manuel Senderos, Chairman and Chief Executive Officer; Eric Purdum, Chief Revenue 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 discussed in the company’s earnings release and other filings with the SEC. The content of this call contains time sensitive information that is accurate only as of today, May 12, 2023.

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 operating income, which is how we track performance internally and the easiest way to compare AgileThought to our peers in the industry. Additional information, including reconciliation between non-GAAP financial information to GAAP financial information is provided in the associated earnings press release. This conference call will be available for replay via webcast through AgileThought’s Investor Relations website at 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 morning, and thanks to everyone for joining us. It is a pleasure to be here with you today to talk about the work and results from our first quarter of 2023. We finished the first quarter with revenues of $41.8 million, representing a year-over-year decline of 5.4% and a sequential decline of 2.8%. Growth in this quarter was partially impacted by the market uncertainty beginning in the second half of March, which delayed some projects by a couple of months. This market uncertainty is also slightly delaying the ramp-up of our newly hired sales team members. As you might remember, at the beginning of the year, we increased our sales team by almost 50%. In addition, under the new leadership of our new CRO, Eric Purdum, we have also actively started exiting several small accounts that do not have the potential to grow materially, but are a huge burden to our SG&A and gross margins.

During first quarter, our gross margin was 34.2%, an increase of 290 basis points year-over-year. Gross margins have been performing better than expected due to our accelerated exit from non-core businesses and of small accounts discussed before, and also, because of the quality of the work we are delivering to our clients. As we mentioned on the previous earnings calls, focus on digital work at clients that have the potential to become $10 million-plus annual revenue clients is a priority and very important part of our strategy to take AgileThought to steady industry-leading top line growth levels. Because of our strong efforts towards gross margin improvement, our gross profit increased 3.4% year-over-year and 5.2% sequentially. On the demand environment, as I mentioned, in the second half of March following the volatility in the banking sector, we did witness an impact in our financial services vertical, which continues in the second quarter.

We witnessed volatility across other industry verticals as well, due to the slightly challenging broader macro environment. That said, we are now witnessing deal activity starting to pick back up again, and we expect a much stronger second half of the year. Digital transformation that helps companies drive revenue growth, makes them more competitive and also helps them save cost is still a priority for businesses across the industries. During our last earnings call, I talked about how we have been investing to strengthen our sales structure. First, by hiring new sales team members and finally, by appointing Eric Purdum, as our new Chief Revenue Officer. Eric is now reporting directly to me, leading our sales and demand generation efforts. I’m sure Eric’s leadership and customer-centric vision will bring our innovative approach to digital transformation to each customer experience, ensuring we make the most out of the huge market opportunity in front of us and deliver the market-leading top line growth we have planned.

Now that we have a strong sales foundation and have all the pieces in place in the delivery structure and people structure, we are ready to focus on AgileThought’s growth. Eric’s disciplined approach will continue to guide our team to carefully keep our new customers and focus on those accounts that can become large accounts with industry-leading margins. During the first quarter of 2023, we added four new logos and opened several new opportunities in some of our more established clients. We will continue to add logos, the right logos, but it is also exciting to see how much space for growth we still have in most of our clients. We have a good record on client trajectory. Starting with small projects on a specific area or technology and growing into other businesses areas and geographies.

A good example is one of our clients in the financial services vertical, which is one of the top 10 wealth management companies in the US and has been our client for over eight years. We are helping them with a multiyear modernization program of high priority that is essential to the different departments in a highly regulated market. This is a complex initiative that will integrate numerous internal and third-party systems to enable faster decision-making processes, incorporating more data points among other strategic initiatives. We are helping to drive cultural changes by embracing Agile methodology, which creates operational efficiencies. This long-lasting partnership represents the kind of business we want to continue creating, where we contribute to strategic multiyear initiatives, helping the client to be more efficient and provide better experiences for their employees and customers.

While we create more and more stable jobs, it adds value to both companies. The digital world is constantly changing, which makes it title to continuously reimagine everything, including yourself. As this bank, many other companies are working to keep up with the changing environment, trying to invest in the latest technologies to always stay ahead. A good example is this AI revolution. At AgileThought, we have been investing in AI for several years now, but the time has come where everyone from science to business and education are turning to AI and want to make it a part of their business. We have seen an increasing demand from clients and potential clients to understand how AI can help them, and we have decided to launch our Applied AI guild.

Up to now, Applied AI was part of the data and AI guild. With this guild, we will be able to better focus on helping our clients digitally reimagine and imagine intelligent businesses using an AI-first human-centric and platform-driven approach. Our Applied AI guild will have three main practices. Generative AI, causality AI and bespoke machine learning. Generative AI is nascent, but there are already 250 companies in this space. And so far, it has seen six companies reach unicorn status. This wave in the space is rapidly expanding the use cases for generative AI, tackling everything from search engines to motion capture animation and will allow companies in every space to leverage on it. We are currently working with a company in the health care sector, a group of analytical laboratories.

We are using large language models like ChatGPT-4 to automatically generate relevant content that relates their offering with trending conversations in use. We trained it to know and understand our client offering, and it is constantly screening the news and post to produce real-time blog post for its website. This results in a significant increase in the website traffic and engagement, which will ultimately translate in additional revenue for our clients. In today’s world, customer experience and customer engagement are probably some of the most valuable capabilities for businesses. And the gaming industry is a leader in that matter. We believe that the principle of gaming design and gamification can be applied to a variety of industries from medication and health care to finance and retail, and we decided to launch a Gaming guild.

AgileThought has been working in the gaming industry for seven years now, constantly growing the practice in size and complexity and gathering enough expertise to apply it to the rest of the verticals we work on. Our Gaming guild will provide tailored solutions from gate development to player support and metaverse. That with our deep understanding of the gaming industry and commitment to excellence will guide our clients, gaming or non-gaming to succeed and thrive in this exciting and rapidly evolving field. As always, we look forward to enhancing our relationships with our clients by bringing the latest technologies into their businesses. With that, I turn it over to Eric Purdum, our CRO.

Eric Purdum : Thanks, Manuel. And hello to everyone. I’m happy to be here today. I’d like to start by telling you a little bit about myself. I’ve been in the industry for over 25 years and worked in multiple global businesses and built and ran digital transformation practices. During this time, I have led business units centered around IP management, custom engineering application managed services, product management and many others. Prior to joining AgileThought, I was the Global Head of Banking Solutions at DXC Luxoft, where I helped to transform the global team consisting of sales, offerings, product management, marketing, engineering and delivery into a unified team delivering digital transformation programs at scale. Let’s now focus on our clients and their industries.

AgileThought operates in five key market units, and they are all going through a transitionary period. Starting March, we saw some softness in our clients’ investments in both growth initiatives and road map items. Some of the rationale for this was due to their own miss targets and EBITDA losses. Also, due to economic pressures, some of our clients pause to take a deeper look into how they were spending their investment dollars to maximize return on investment. This pullback was felt across all industries and across the competitive landscape. Now that the second half is approaching, we are already seeing the industry shift again towards commencing a strategic and digital initiatives, especially those that have TCO savings, ROI around digital transformation and further adoption of new technologies with one significant example being AI, as Manuel mentioned earlier.

And as AgileThought, has existing and mature client relationships in each of our market units, we are seeing our clients depend on these relationships as key to solving their business challenges in the second half. We have worked with many of these clients to help them understand the importance of those investments to solve real business problems and how AgileThought is the continued choice for their initiatives through our exceptional delivery abilities and deep understanding of their industry. To solidify the growth of the second half, we have focused on three key areas. First, we are continuing to drive the culture of sales for our internal workforce. In most cases, to deliver top industry growth companies need to go through a transformation stage with a culture and interaction among the different structures Unified become client-centric and growth focused.

This is what we’ve been doing at AgileThought, but it is a process. We’ve worked to encourage everyone in the company to become an ambassador for our brand and our values. We want our customers to have a great experience with us from the moment they hear about us to the moment we deliver the service. This is not just the responsibility of our sales team, but of the entire organization. Simply put, every Agile thinker is accountable for every interaction with our clients every time. Second, we have carefully selected existing and new clients with the potential to become $10 million plus revenue for us and committed to growing them exponentially through 2023 and into 2024. This directly relates to our proven ability to create deep relationships with our clients, understand the industry as to which they operate in and hyper focus on their business problems and how AgileThoughts, technology prowess can solve these problems.

In conjunction to that, as Manuel spoke before, we will also continue to make key exits on accounts that we do not see as strategic or growth accounts and are expensive to deliver. These accounts detract from our focus on industry-leading delivery and profitability. Third and finally, we have continued to attract and retain some of the best talent in the industry. from bringing in top industry sales talent to recruiting the foremost technical and delivery personnel. We truly believe that this investment in our people is what continues to drive the exceptional service for our clients. This is why AgileThought continues to have over 22 accounts that have been with us for five or more years and seven accounts that have been with us for over 10.

Let me walk through some additional key facts about our business, and then Amit will walk through the numbers. Number one, AgileThought is focused on around half of our current accounts across the five market units that make 99% of our revenue with good profitability. These numbers show good diversification of accounts and markets. Number two, AgileThought has nine accounts, all generating over $5 million in revenue over the last 12 months that continue to strengthen their portfolio and show good organic growth towards becoming 10-plus million accounts. We also have identified an additional 11 accounts to focus on that also have the potential to become $10-plus million accounts. Number three, the remaining of our accounts are being restructured to maximize profitability.

And number four, and finally, the pipeline that is driving the second half growth is seven times larger than where the company was last fiscal year at this time. Based on these key facts, the AgileThought business is in a prime position to grow in the second half and continue that growth into fiscal year 2024. Now, I will turn the call over to Amit Singh, our CFO, who will provide additional insights into our financial results.

Amit Singh: Thank you, Eric, and good morning, everyone. Let me start by summarizing the results of our first quarter 2023. I will then discuss our guidance for the year. Revenues for the first quarter of 2023 were $41.8 million, representing 5.4% year-over-year decline and 2.8% sequential decline. As discussed before by Manuel and Eric, revenues in this quarter were impacted by the market volatility that started around mid-March, resulting in some of our projects being postponed. In addition, this market volatility is leading to a delayed ramp-up of our newly hired sales team members. Our decision to focus on long-term growth and profitability also impacted our revenue this quarter as we continue to exit non-core work. As Manuel and Eric mentioned, during this quarter, we also decided to start exiting other small non-strategic accounts, which do not have the potential to become large clients but are very expensive on SG&A to manage.

On gross margins, during the first quarter of 2023, we delivered gross margins of 34.2%, representing a 290 basis point improvement year-over-year and 260 basis points sequential improvement. This improvement is the result of our focus on profitability. I just talked about and to the robust deal governance process we have in place. The average gross margin on the projects we closed during this quarter is already above 35%, and we expect this improvement to continue until our gross margin gets to industry-leading levels. The strong improvement in gross margin led to gross profit being up 3.4% year-over-year and 5.2% sequentially. In the first three months of 2023, we had a material increase in our SG&A, both sequentially and year-over-year. This increase was mainly due to the strong investments in our sales, delivery and people function that began in late 2022 to early 2023.

Adjusted operating income for the first quarter of 2023 was negative $1.2 million, down from $1.1 million in the same period of 2022. Adjusted net income for the quarter totaled negative $4.2 million, down from negative $0.4 million in the same quarter of the previous year. Adjusted diluted EPS for the first quarter of 2023 was negative $0.09 based on 47.3 million average diluted shares for the quarter, compared to negative $0.01 for the same quarter of the previous year based on 46 million average diluted shares for the quarter. We have been focusing on profitability and strategic accounts, and it will continue to be our top priority for the year. In addition to our efforts on top line and gross margins, we also recently launched our SG&A optimization plan.

This initiative has been a collaboration among all the teams across the company to analyze and identify efficiencies and has allowed us to significantly reduce our full year SG&A forecast by more than 15% and is helping us along with our gross margin improvement to target a higher adjusted operating income for the full year than we previously expected. Moving on to the balance sheet, our cash and cash equivalents as of March 31, 2023, added up to $3.2 million. During the first quarter, we repaid debt of $2.1 million. We additionally paid $2.1 million interest expense and approximately $0.9 million of debt-related cash expenses. Total debt, net of unamortized debt issuance costs as of March 31, 2023, and was $84.5 million. Now, I would like to give an update on our financing activities.

As you previously disclosed, on April 18th, we entered into a forbearance agreement, regarding our $64 million financing agreement and our $21 million credit agreement, as to which are in both payment and covenant compliance default. The forbearance agreement, terminated by its terms on May 10th, we are in active discussions with our lenders, regarding extending such force. We also continue to work with our legal and financial advisers, in evaluating all strategic alternatives. Although we remain confident, there can be no assurances that we can reach such an extension agreement or recapitalization plan on acceptable terms, if at all. As I trust, you can appreciate; we are unable to comment on any of these discussions at this time. Now, let’s talk about our outlook for the full year 2023.

We remain focused on executing revenue growth acceleration, and we’ll continue working towards improving our profitability year-over-year. We will also continue to focus on strategically selecting the right customers and projects, while exiting non-core and small non-strategic accounts that together will help us deliver industry-leading growth and margins. Our successful efforts to exit the non-core business, as we announced a couple of quarters ago, should be completed during the second quarter of the current year, which, along with the ramp-up of all the new sales team members, should lead to strong revenue growth towards the second half of the year. We now expect full year 2023 revenues of $185 million or 4.6% organic year-over-year growth.

We now expect gross margins for the full year in the range of 34.5% to 35.5%. Additionally, as a result of our strong focus on profitability, we expect the full year 2023 adjusted operating income to be at least $13.7 million, implying at least 20.2% year-over-year growth. Thanks, everyone, for participating in the call. I’d like to turn the call back to Manuel, for any closing remarks.

Manuel Senderos: Thank you, Amit. In conclusion, we believe we are very well positioned to make the most out of the digital transformation demand across the world, and bring strong sustainable growth for the long-term. And with that, I’d like to turn the call over to the operator, so that we can begin the questions-and-answer session. A note, in the Q&A session, we will not discuss anything related to our financing forbearance and liquidity.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Maggie Nolan from William Blair. Your line is open.

Operator: And your next question comes from the line of Brian Kinstlinger from Alliance Global Partners. Your line is open.

Operator: And your next question comes from the line of Josh Siegler from Cantor Fitzgerald. Your line is open.

Operator: And your next question comes from the line of Mayank Tandon from Needham & Company. Your line is open.

Operator: [Operator Instructions] Your next question comes from Joseph Vafi from Canaccord Genuity. Your line is open.

Operator: And there are no further questions at this time. I will now turn it back over to management for some final closing comments.

Manuel Senderos: This is Manuel. I just really appreciate everybody coming on to our call. I hope we answered most of your questions and give more clarity to where we’re going. So, thanks very much.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.