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spk02: Good afternoon and welcome to Agile Thoughts' third quarter 2021 earnings conference call. As a reminder, today's call is being recorded and your 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. If anyone should require operator assistance during the conference, please press pound zero on your telephone keypad. With that, I would like to turn the call over to Olga Shinkaruk, Vice President of Investment Relations. Thank you. Please begin.
spk04: Thank you, operator. Good afternoon, everyone, and thank you for joining us for Agile Thoughts Financial Results Conference call for the third quarter ending September 30th, 2021. On the call today, we have Agile Thoughts Chairman and CEO, Manuel Sanderos, 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 are 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 earning release and other SEC filings. Today's 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 to Agile Thoughts Investor Relations website at ir.agilethoughts.com. Manuel will begin with an overview of Agile Thoughts, followed by our third quarter highlights. Jorge will then take you through a review of the financials before we proceed to Q&A section. With that, I'll now turn the call over to Manuel.
spk08: 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 Agile PodStory. 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 resource 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. All businesses need to embrace this new digital world to survive and thrive. Digital Thought has a clear vision to help our customers innovate, build, and run the next-generation digital enterprise, with our world-class agile teams spread throughout the Americas. Our market opportunity is huge. Being a public company assures we have the means to achieve our full potential. For many years, Fortune 1000 companies have trusted Agile Thought to solve their digital challenges and optimize mission-critical systems to drive business value. We are a pure next-generation digital solutions provider, We create modern software for the large enterprise to enable the digital transformation initiatives. We do that with three lifecycle components, innovate, build, and run. We help companies innovate on their business model, determine what's the best way to approach the market in a digital way. We build in the applications in a very collaborative fashion using our agile methodology in the same time zone. And then we help them 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 address 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 share. We use onshore and nearshore delivery capabilities within an agile and DevOps framework, which is a very collaborative model. It is all about continuous delivery with very short sprints and iterations. So it's best done on the same time zone and as close to the customer as possible. We address the U.S. market as a primary market. 65.9% of our revenue today comes from the U.S. 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, 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 their ability to travel to the U.S. within the free trade market, enables us to interact in the 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 U.S. market and expanding our near-shore 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 U.S. slangs 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 talking acquisitions to enhance and augment our capabilities, our client's 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 confirm the high demand environment for our services and the return on the investment we made on aggressively expanding our sales team in the U.S. market over the last 18 months. We have lowered the normal gross margin in the quarter of 26.6%. mainly because we hired and held a 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 costs. As these consultants become billable and we adjust our 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 in 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 obtain 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.
spk07: 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 full quarter and the 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 increase in bookings and addition of new logos, as Manuel explained before. From a geographic perspective, for the nine months ended September 30th, 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 U.S. represented 68.7% and LATAM 31.3%. For the 19 months ended September 30, 2021, revenues from our top 10 clients accounted for 65.5% of total revenues as compared to 67.2% in the prior year period, resulting in greater diversification across our client bases. For the three months ended September 30th, 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 30th, 2021, gross profit margin was 29% as compared to 32.2% on the same period of prior year. The decrease in both the three and nine-month periods has been primarily driven by the cost of onboarding time of new hirees 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 same nine months of prior year. Adjusted EBDA for the three months ended September 30th, 2021 was a loss of 0.6 million compared to a 4.2 million EBDA for the same period of prior year. Adjusted EBDA for the nine months ended September 30th, 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 already discussed. An 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 and operate as a public company. Turning to our balance sheet. On August 23 of 2021, we successfully closed an equity capitalization of 91.5 million to the completion of our business combination with Lead Capital Acquisition Corporation, comprised by 47.6 million of type investments a 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 facility. To date, we have reduced 27.5 million of 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 a 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. Growth margin for the fourth quarter is 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 the range of $159.1 million to $160.1 million. That is from my side. Thank you very much.
spk05: I'm back to you, operator.
spk02: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
spk03: 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?
spk08: Yeah, sure. Hello, Maggie. Good to hear you on the call. So we believe that our biggest opportunity is to continue to grow in the U.S. market. So we're doubling down on our investment and growing our sales team in the US market. We did a big investment 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. 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 growth margins. Today, the main constraint, I would say, to revenue growth is mainly our hiring pace rather than our 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.
spk03: 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?
spk08: So we're shooting for 300 monthly hires today. Some months we get close to that, 250, 280. So that makes it... about, let's say, net, let's say, 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, you know, net additions are more like 220, 225.
spk05: on a monthly basis.
spk03: Understood. And can you talk through some of the policies or procedures that you have in place to manage your people and manage that kind of retention piece of the process?
spk08: Sure. So we've made good progress there. 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 look at it is that when people are trade, they're basically having somebody else giving them the promotion they would probably get inside of the company on a yearly evaluation model. So we basically went away from the yearly valuations and now are doing evaluations on the spot. If people fit the profile to have a promotion based on their skills, based on their evaluations 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 our main defense on getting our people comfortable, that they can grow within our company at the rate that they can learn and 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 attrition. When somebody else is not giving them a higher 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 if we 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 a long-term successful model.
spk03: Okay, thank you. And then, Jorge, on the On the gross margin side of things, can you give us a sense for Quantify or some color on 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?
spk06: Sure. Hi, Maggie. How is it going? Absolutely. I can tell you the impact that we have, which is if you would isolate the one-time events that we have during the quarter, we can talk probably about, I would say, up to six points. This piece on the new high-risk that were not made billable immediately counted for about 3.5%. We have another point on people that are already within the organization, but that we couldn't make billable 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 Avido Vera point. And then the Mexico labor change, which impacted, you know, not only our industry, I would say even some of our customers, you know, like in the financial services industry, for instance, we had to redocument our 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 were kind of one-off. We're obviously correcting prices very quickly in many of them, so we will recover this increasing 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 you is all of them have projects assigned already for Q4. are going to be, you know, the things that are going to help us correct, you know, the situation that we face in the margin in Q3.
spk03: That's really helpful. Thanks. And then last one from me.
spk08: If you don't mind, I'd like to add one thing that I think is important. On our largest 25 clients in Q3, the average gross margin is actually 34%. So we feel very comfortable with the gross margin 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 billable in Q4, what we'll see is accelerated revenue, we'll have more revenue, and also the gross margin will come back to a normal 30 to 31%.
spk05: That's helpful. Thank you.
spk03: 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?
spk05: Thank you. Jorge, you want to take that one?
spk06: Yeah, give us a second, Maggie. We can tell you that because we basically, since we had the negative profit, we removed the share piece, the specific share piece over there. But it's going to come down to 41.9 million shares at this moment, Maggie.
spk03: Okay, great. Thanks for the time. Thanks for taking my question.
spk05: Thank you. No problem.
spk02: Our next question comes from the line of Brian Kingslinger with Aligned Global Partners. Please proceed with your question.
spk01: 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 U.S.,
spk08: Yeah, hi, Brian. Thanks for the question. So it is different. The U.S. labor market is much tighter. And as you know, we have 30% of our delivery still done in the U.S. 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 teams faster through 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 that's 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 constraint for revenue growth. The sales are definitely there.
spk05: We just need to be able to grow the team as fast as we can. Great. Thank you very much.
spk02: And we have reached the end of the question and answer session, and I'll turn it back to Manuel for final remarks.
spk08: Well, I 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'll continue to improve. We feel very comfortable with the guidance we're giving for Q4, and hope to meet you there in February. So thanks, everyone.
spk02: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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