Q3 2022 AgileThought Inc Earnings Call

Mariana Franco: 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.

As I mentioned above and the answers to some of your questions maybe 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.

Mariana Franco: The content of this call contains time-sensitive information that is accurate only as of today, November 10, 2022. Except as required by law, AgileThought disclaims any obligation to publicly update or revise any information to reflect events or circumstances that are here after this call.

Remember that 2022.

Except as required by law <unk> disclaims any obligation to publicly update or revise any information to reflect events or circumstances vertex here a third vehicle.

Today's remarks.

Mariana Franco: 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 the GAAP financial information is provided in the associated earnings press release.

Such as adjusted operating income.

Which is how we track performance internally and the easiest way to compare <unk>.

Additional information, including reconciliation between non-GAAP financial information. So they kept financial information is provided in the associated earnings press release.

Mariana Franco: This conference call will be available to 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.

Where you can also find a copy of our earnings release.

I'd now like to turn the kilometers and then within the hour.

Manuel Senderos: Thanks, Mariana. I'm happy to be here again and thanks to everyone for joining us. We appreciate your time today as we discuss our third quarter performance as well as our view for the remainder of the year.

Manuel Senderos: I'm happy to be here again and thanks to everyone for joining us. We appreciate your time today as we discuss our third quarter performance as well as our view for the remainder of the year.

Thanks to everyone for joining us.

We appreciate your time today.

Our third quarter performance.

As well as our view for the remainder of the year.

Manuel Senderos: On our last earnings call, I highlighted our focus on the people organization, which is a key factor for us to capitalize on the digital markets growing demand and for our continuous work to further expand market reach in the digital space. Included in these areas is our decision to center on pure digital work and as a result, exiting nonstrategic business.

Would you say key factor for us to capitalize on the digital markets growing demand for our continuous work to further expand.

Market reach in the digital space.

Included in this areas sort of decision to center. On pure digital work and Thats, a result exiting non strategic business.

On pure digital work and Thats, a result exiting non strategic business.

Manuel Senderos: As reported in our previous quarterly results, we continue to make big strides across multiple fronts of our business. We announced the openings of 2 new offices in Latin America, bringing us closer to current and potential talent. We created a new market unit, technology, media and telecom, US West, which will provide a focused and agile response to a $5 trillion market. We continue to strengthen our AgileThought team with the necessary experience to develop cutting-edge digital solutions for our clients that will ultimately allow our clients to strongly grow in an increasingly digital economy.

We announced the opening of two new offices in Latin America, bringing us closer to current and potential talent.

We created a new market unit.

<unk> media and Telecom U S west.

Which will provide a focused and agile response to a <unk> five trillion dollar market. We continued to strengthen our ideal for our team with the necessary experience to develop cutting edge digital solutions for our clients that will ultimately allow our clients to strongly grow in an increasingly digital economy.

Manuel Senderos: Overall, this has been another strong quarter for AgileThought, with revenue totaling $43.4 million, above our guidance, representing a growth of 7.4% year-over-year despite continuing to exit the noncore business, as announced on our previous earnings call. Our gross margin for the quarter was 34.3%, which represents an improvement of 770 basis points year-over-year and up 100 basis points versus the previous quarter. 

This has been another strong quarter for agile plants with revenue totaling $43 4 million above.

Above our guidance.

Presenting a growth of seven 4% year over year, despite continuing to exit the noncore business.

As announced on our previous earnings call.

Our gross margin for the quarter was 34, 3%, which represent an improvement of 770 basis points.

Year over year.

100 basis points versus the previous quarter.

Manuel Senderos: As you know, the macroeconomic environment remains volatile. However, the demand for digital technology services remained strong and expanded, allowing us to continue partnering with our clients in their digital transformation journeys. There are a few reasons for this. First, we team up with our clients to help increase the revenue and streams or significantly help decrease their costs through our digital transformation services, which allows for a strong value add.

Allowing us to continue partnering with our clients in their digital transformation journeys.

There are a few reasons for this first we team up with our clients to help increase their revenue streams or significantly helped decrease those costs through our digital transformation services.

Which allows for a strong value add.

Manuel Senderos: Additionally, we have intentionally targeted Fortune 1000 companies of clients where there is an opportunity to wisely expand our market reach and grow our footprint. We are focused on working with clients that have strong goals for digital transformation. During the third quarter of 2022, we added 16 logos to our portfolio. All of them, we believe, with a potential to generate revenues above $10 million each year in the midterm.

We are focused on working with clients that have strong goals for digital transformation.

During the third quarter of 2022, we added 16, new logos to our portfolio.

All of them, we believe with the potential to generate revenues above $10 million each year in the nature.

Manuel Senderos: As we have mentioned previously, with a growing demand, we are concentrating on accelerating our recruiting capacity. We have announced the opening of 2 new offices, one in the city of Merida in Mexico, which will bolster our presence in the Yucatan Peninsula, the fastest-growing region in the country. The second one in the city of Buenos Aires in Argentina, enhancing our presence in South America, which perfectly complements our strong presence in Mexico.

We are concentrating on accelerating our recruiting capacity.

We have announced the opening of two new offices, one in the city of Meda in Mexico, which will bolster our presence in the Yucatan peninsula, the fastest growing region in the country.

The second one in the city of Buenos highlights in Argentina.

Casino preference in South America, which perfectly complement our strong presence in Mexico.

Manuel Senderos: These openings will help enable the acceleration of our net headcount growth while promoting the professional development and career paths of talent in both regions. Mexico has a large skilled talent pool with the second-largest population in Latin America. Mexico also has 8 highest annual STEM graduates in the world with 150,000 new graduates per year. Argentina, despite being smaller has a strong reputation for boasting some of the most experienced engineering pools in the region too.

Both regions.

Mexico has a large skilled talent pool with the second largest population in Latin America.

Mexico also has eight highest annual stem graduates in the world with 160000, new graduates per year.

<unk> despite being smaller.

A strong reputation for boasting some of the most experienced engineering pools in the region.

Okay.

Manuel Senderos: As we work towards our goals, our efforts around the people organization are not the exception. For that reason, alongside implementing the talent acquisition strategies, we have continued to work towards upgrading the agile thinker experience. Some highlights worth noting. During this quarter, we have propelled our training platforms and partnerships, bringing knowledge closer to our people and helping them continue with their professional development, while, also improving our career management global internal processes, which were started in the last quarter.

For that reason alongside implementing the talent acquisition strategies.

We have continued to work towards upgrading the agile secure experience.

Some highlights worth noting.

During this quarter, we have propelled our trading platforms and partnerships, bringing knowledge closer to our people and helping them continue with their professional development.

While also improving our creative management global internal processes. Were started in the last quarter.

Were started in the last quarter.

Manuel Senderos: As you know, our people organization has been going through a lot of changes. But these have allowed us to become more efficient on our talent allocation and set the foundation to achieve the necessary headcount growth to support our revenue growth plans. At the end of the third quarter, we measured the employees' experience with an ENPS survey, resulting in a very high Employee Net Promoter Score.

But these have allowed us to become more efficient on our Italian allocation.

Set the foundation to achieve the necessary head count growth.

To support our revenue growth plans.

At the end of the third quarter, we measured the employee's experience with USPS survey.

Salting and a very high employee net promoter score.

Manuel Senderos: Additionally, our attrition has been trending down since we started focusing on our people organization. We are proud of our accomplishments in this area and we'll continue to make strides on our employee experience. Attracting well prepared and motivated talent allows us to continue reimagining the future of our clients who are looking to disrupt their markets through new offerings along with the creation of new revenue models.

Attracting well prepared and motivated talent allows us to continue.

<unk> the future of our clients, who are looking to disrupt their market through new offerings, along with the creation of new revenue models.

Manuel Senderos: A great example of vital working with a client in this way is very specific, which is a 100-year-old company and the U.S. leading supplier of residential rollout cards. Their products are used in the recycling and waste management supply chain. They are in a very traditional business and have a desire to create new ways to deliver value for their customers. For that reason, they came on a mission to create software and services that enable the usage of these containers in a very smart and efficient way.

Which is 100 year old company and the U S leading supplier of residential Rollouts cars.

Their products are used in the recycling and waste management supply chain.

They're in a very traditional business and have a desire to create new ways to deliver value for their customers.

For that reason they came on a mission to create software and services that enable the usage of this contagious in a very smart and efficient way.

Manuel Senderos: For our unique engagement model, which we call 3D or discover, design, deliver; which helped define a digital path with new solutions that included prototypes designs. We are now delivering on a suite of new IoT applications that will allow very specific to print, assign, track and self-manage these assets through the life cycle of the processes.

With new solutions that included prototypes at the times.

We are now delivering on a suite of new Iot applications that will allow Rick statistic to print a side track and self manage this assets through the lifecycle of their processes.

Manuel Senderos: With this innovative new software solutions, very specific customers will be able to improve their costs and sustainability of the waste management collection, handling and recycling processes, creating increased value along the supply chain that will not only benefit the customers, but will help us all take better care of our planet.

Underling and recycling processes, creating increased value along the supply chain that will not only benefit their customers, but it will help us all to take better care of our planet.

Manuel Senderos: Over the next year together, both Agile in very specific will make the 100-plus year old business of waste management, more reliable, more profitable and more sustainable.

Manuel Senderos: Market units are our go-to-market approach, which are organized by a defined focus in an industry vertical in a geography. As I mentioned earlier, we announced the creation of our new TMT US West market unit during this quarter. We had clients in this industry already that were spread along different market units. So the focus of the TMT market unit is to bring these clients together under the same umbrella, emphasize demand generation within the vertical and leverage the industry expertise gained from our diverse projects.

As I mentioned earlier, we announced the creation of our new TNT U S west market units during this quarter.

We have clients in this industry already that were spread among different market units. So the focus of the TMT market units is to bring this clients together under the same umbrella emphasized imagine duration within the vertical and leverage the industry expertise gained from our diverse projects.

Yeah.

Manuel Senderos: Combined with our technology expertise brought by our guild structure, our industry vertical expertise gained and shared among our Agile squad allows us to discover, design and deliver the best solutions for our clients.

Manuel Senderos: As we've mentioned before, our guilds are technology-focused communities of experts. As an example of their work, one of those guilds, user experience engineering has been developing innovative solutions that allow new ways for our customers to create digital products quickly. Working with our long-time partner, Microsoft and their industry-leading product, Visual Studio, we've built a new way for organizations to improve the time from aviation to the delivery of mobile applications into the iOS and Android ecosystems. We are improving the pace from design to downloads, for our clients who want to capitalize on the mobile app as a way to deliver value for their customers.

As an example of their work one of those skills user experience engineering.

Has been developing innovative solutions allow new ways for our customers to create digital products quickly.

Yeah.

Working with our long time partner, Microsoft and their industry, leading product visual studio, we've built a new way for organizations to improve the time from ideation.

Delivery of mobile applications into the iOS and Android ecosystems, we are improving the pace from design to downloads for our clients who want to capitalize on the mobile app as a way to deliver value for their customers.

Manuel Senderos: In today's digital economy, all companies, young and old, across all the industries must create digital mobile experiences to be competitive. We see significant opportunities to introduce AgileThought to new and existing customers through this capability. We have already launched this solution in the market and are actively positioning with our current and prospective clients. One of the clients utilizing this solution is a long-time client Signal.

We see significant opportunities to introduce ideal thought with new and existing customers through this capability.

We have already launched this solution in the market and are actively positioning with our current and prospective clients.

One of the clients utilizing the solution as a longtime client cigna.

Manuel Senderos: Earlier this year, we announced our partnership with ExperienceIT. And I am excited to tell you that it's been very successful for both companies. With our partners at EIT, we are using a global human capital management platform, which is a core platform that accelerates the integration of our clients' acquisitions. 

With our partners at <unk>, we are using a global human capital management platform, which is a core platform that accelerates the integration of our client's acquisitions.

Manuel Senderos: As part of our vision to help our clients reimagine the future, we also focus on helping them modernize and integrate the platforms that are gained through M&A activities. Leveraging these digital assets through mergers and acquisitions can be a daunting task and can make or break the financial model underpinning the acquisition business case.

Leveraging these digital assets through mergers and acquisitions can be a daunting task and can make or break the financial model underpinning the acquisition business case.

Manuel Senderos: Together with EIT, we are accelerating the addition of these new capabilities with our core platform, creating a world-class offering across all of the Americas. This is a multiyear strategic partnership between AgileThought and EIT and this leading HCM platform provider. We will all continue to grow together as a team.

Creating a world class offering across all of the Americas.

This is a multiyear strategic partnership between ideal for it.

And this leading HCM platform provider.

We will all continue to grow together as a team.

Manuel Senderos: As you can see, our growing AgileThought team, driven by our technology professionals continues to develop cutting-edge digital solutions for our clients that ultimately allow our clients to grow and increase profitability in a digital economy. Now I will turn the call over to Amit Singh, our CFO, who will provide additional insights into our financial results.

That ultimately allow our clients to grow and increase profitability in a digital economy.

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 Manuel and good afternoon everyone. I will start by summarizing the results of our third quarter 2022. I will then discuss our guidance for the full year 2022.

I will then discuss our guidance for the full year 2022.

Amit Singh: Overall, our results for the third quarter of this year showed that we continue to strongly move towards our long-term targets. On our last earnings call, we shared with you the decision to exit noncore business. Knowing this decision would impact our revenues in the short term but help us set the base to achieve market-leading revenue growth and margins in the mid long term.

On our last earnings call, we shared with you the decision to exit noncore business.

This decision would impact our revenues in the short term that help us set the base to achieve market, leading revenue growth and margins in the mid to long term.

Amit Singh: Revenues for Q3 were $43.4 million, above our guidance and represented 7.4% year-over-year growth, but down 6% compared to the previous quarter. 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.

But down 6% compared to the previous quarter.

As Manuel mentioned the demand for our end to end additional services is strong and expected to remain so in the coming years.

As enterprises continue to increase their investments in digital transformation.

Amit Singh: During the third quarter of 2022, the U.S. revenues represented 63.2% of our total revenues. Revenues from our top 10 customers represented 61.7% of our total revenues for this quarter compared to 65.1% in the third quarter of 2021. Health care continues to be our fastest growing vertical, with 50.3% year-over-year growth and 9.6% sequential growth. It has become our main industry vertical with 27.3% of our total revenues in the third quarter of 2022, followed by financial services with 27.1% of our total revenues in the same period.

Revenues from our top 10 customers represented 61, 7% of our total revenues for this quarter.

Compared to 65, 1% in the third quarter of 2021.

Healthcare continues to be our fastest growing vertical the 53% year over year growth and nine 6% sequential growth.

It has become our main industry vertical with 27, 8% of our total revenues in the third quarter of 2022.

By financial services, the 27, 1% of our total revenues in the same period.

Amit Singh: Our revenues per billable employee as of the last 12 months ended September 2022 was $79,000 compared to $71,000 as of the same period of the prior year, representing 10.5% year-over-year growth.

Representing 10, 5% year over year growth.

Amit Singh: Turning now to profitability. The gross profit for the third quarter of 2022 was $14.9 million, implying a 34.3% gross margin. We continue our progress towards industry-leading margins, with gross margin improving 770 basis points year-over-year and 100 basis points quarter-over-quarter. This confirms that the efforts to improve our gross margin, such as focusing on strategic clients and revenues are showing strong results.

We continue our progress towards industry, leading margin the gross margin improving 770 basis point year over year, and 100 basis point quarter over quarter.

This confirms that the efforts to improve our gross margin such as focusing on strategic clients and revenues are showing strong results.

Amit Singh: We believe our SG&A as a percent of revenue will also decrease in the mid-long term as we drive economies of scale and operational efficiencies and our near-term strong investments in sales, delivery and people organizations, normalize. Adjusted net loss for the quarter totaled $347,000 compared to a loss of $3.2 million for the same quarter of the previous year. Adjusted diluted EPS for the quarter was negative $0.01 based on 46.2 million average diluted shares for the quarter compared to negative $0.08 for the same quarter of the previous year based on 37.6 million average diluted shares for the quarter.

Adjusted net loss for the quarter totaled 347000.

<unk> to a loss of $3 2 million for the same quarter of the previous year.

Adjusted diluted EPS for the quarter was negative <unk> <unk> based on $46 2 million average diluted shares for the quarter compared to negative <unk> <unk> for the same quarter of the previous year based on $37 6 million average diluted shares for the quarter.

Amit Singh: Moving on to the balance sheet, cash and cash equivalents as of September 30, 2022, was $10.4 million, significantly increasing from the $4.1 million as of September 30, 2021. On working capital, we made an aggressive effort to improve our collection efficiency and reduced our accounts receivable level during the third quarter of 2022.

Significantly increasing from the $4 1 million as of September 32021.

On working capital, we made an aggressive effort to improve our collection efficiency and reduce our accounts receivable level during the third quarter of 2022.

Amit Singh: As of September 30, 2022, account receivable were $33.3 million, decreasing from $38.9 million at the end of the previous quarter. The results of these efforts have allowed us to proactively reduce our accounts payable level, which as of September 30, 2022, were $10.6 million, decreasing from $13.5 million in prior quarter, along with further reducing some other operating liabilities within our balance sheet.

The results of these efforts have allowed us to proactively reduce that accounts payable level, which as of September 32022 were $10 6 million decreasing from $13 5 million in Brian quarter, along with further using some other operating liabilities in our balance sheet.

Amit Singh: Now we are at a comfortable working capital level. But we will continue working on further optimizing our cash cycle that will continue to support our investments in our growth initiatives. EBITDA guidance for the third quarter of 2022, and while the exit from the noncore revenue base will continue in 4Q, we feel comfortable about 2022 full year results.

So we will continue working on further optimizing our cash cycle that will continue to support our investments in our growth initiatives.

We beat our guidance for the third quarter of 2022, and while the exit from the noncore revenue base will continue in Q you feel comfortable about 2020 full year results.

Amit Singh: We now expect our full year 2022 revenues to be at least $176 million in constant currency, representing at least 10.9% year-over-year growth versus prior expectation of full year revenues of at least $174.7 million, representing 10% year-over-year growth.

<unk> at least 10, 9% year over year growth.

It's Brian our expectation of full year revenues of at least $174 7 million, representing 10% year over year growth.

Amit Singh: As we mentioned earlier, and our third quarter results indicated, we are progressing very nicely with our gross margin growth trends. At the same time, we continue investing strongly across our sales, delivery and people function, which together, we believe, will position us for industry-leading top line growth and margins.

Amit Singh: Given the strong trends in gross margin, we are raising our full year 2022 gross margin guidance range to 31.5% to 32.5% versus 31% to 32% before. Thanks, everyone, for participating in the call. I'd now like to turn the call back to Manuel for any closing remarks. Manuel, please?

32, 5% versus 31% to 32% before.

Thanks, everyone for participating in the call.

I'd now 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 margins progress towards our long-term goals.

In conclusion, we are currently in a transition year just at the inflection point, we remain confident about our topline growth in our gross margin progress towards our long term goals.

Manuel Senderos: We believe we have built the base to benefit from the strong digital transformation 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 question-and-answer session.

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: Ladies and gentlemen, if you wish to ask a question on today's call you will need to press star then the number one on your telephone. If your question has been answered and you wish to withdraw your request, you may do so by pressing star one again. If you are using a speakerphone, please pick up your handset before entering your request and speaking on the call. One moment please for the first question. Our first question will come from the line of Josh Siegler with Cantor Fitzgerald. Please go ahead.

Operator: If your question has been answered and you wish to withdraw your request, you may do so by pressing star one again. If you are using a speakerphone, please pick up your handset before entering your request and speaking on the call. One moment please for the first question.

Operator: Our first question will come from the line of Josh Siegler with Cantor Fitzgerald. Please go ahead.

Unknown Speaker: Hi guys, this is Keeler on for Josh today. Congratulations on the great results and thanks for taking our questions. So gross margin, as you mentioned, came in particularly strong. I was hoping you could go into a little more detail on the trends you saw there and whether you expect those to continue into 2023? And any more color there would be great.

Gross margin as you mentioned came in particularly strong I was hoping you could go into a little more detail on the trends you saw there and whether you expect those to continue into 2023 and any more color there would be great. Thank you.

Manuel Senderos: Yes. Thanks for the question. That's a very important question because that's actually our focus right now. We want to have plans with those margins where we're delivering high value [indiscernible]. So we're prioritizing that.

That's a very important question because thats actually our focus right now we want to have partners with.

But margins were delivering high value to them.

Interesting.

So were priority prioritizing debt so.

Manuel Senderos: So I would say most of our new engagements, if not all, are coming in at various gross margins. We're targeting above 40% on all new engagements. So we'll see that improvement as contracts get renewed and new engagements come through the pipeline. We expect that margin to continue [indiscernible] discrete level kind of gross margins.

Most of our new engagements if not all are coming in at various gross margins, we're targeting about 40% on all new engagements. So we'll see that.

Improvement.

Contracts get renewed.

Engagements come through the pipeline.

We expect.

Good morning.

Between level kind of gross margins.

Unknown Speaker: That's great. Thank you. And then if I could get in a second one. It seems that you are still experiencing very robust demand for your services. I think last quarter you said you need to hire around 150 billable employees per month to meet that demand. Are you still on track with that and has anything changed about that metric?

Manuel Senderos: No, I think that's the correct metric. It's difficult to assess when you're also prioritizing high value. And we are reducing staff in other areas where we were doing low value engagements that we didn't want. So the net headcount is kind of difficult to grasp.

It's difficult to assess when you're also prioritizing high value. And we are reducing staff in other areas where we were doing low value engagements that we didn't want. So the net headcount is kind of difficult to grasp.

Manuel Senderos: But yes, the target for 150 monthly is still there. And we're building strongly on our recruiting team and our people organization to be able to have a buffer there and actually have more capacity than 150. So that when we'll continue to accelerate our revenue growth, we'll have enough supply to engage in those projects.

We continue to accelerate revenue growth, we'll have it in house.

Apply to.

Engaging those projects.

Unknown Speaker: Okay, great. Thank you very much and thank you for taking our questions today.

Manuel Senderos: Sure. Thanks for joining.

Operator: Your next question will come from the line of Mayank Tandon with Needham & Company. Please go ahead.

Mayank Tandon: Thank you. Good evening. Congrats on a strong quarter. I wanted to start with just maybe more macro given that's the question on everyone's mind. You had a good quarter and the guidance for 4Q also is very impressive. But just in terms of the sales cycle decision-making, are you seeing any indications of a softening, which might then potentially impact 2023? And any directional guidance you can give for next year would be help as well at this juncture. I know it's a little bit early, but any sort of directional thoughts around that would be helpful.

Mayank Tandon: But just in terms of the sales cycle decision-making, are you seeing any indications of a softening, which might then potentially impact 2023? And any directional the guidance you can give for next year would be help as well at this juncture. I know it's a little bit early, but any sort of directional thoughts around that would be helpful.

Manuel Senderos: Sure. So we haven't seen any decline on the demand. We've seen actually quite strong demands, new engagements with big projects and things to do. I would say when we see this type of downturn for a lot of clients, it's also a signal to double down on digital investments to be more efficient and bring in either more revenues or bringing SG&A down. So we've seen a lot of that, especially in the financial sector. We have large engagements coming through the pipeline, which are mainly geared to both accelerating revenue and lowering SG&A for them. So demand feels pretty strong. On the next year, we feel pretty confident about accelerating growth. Once we clean up the engagements for clients where we didn't feel we were really adding a lot of value and we didn't have the right gross margin. Once that gets cleaned up, we feel pretty good about accelerating from 2023 onwards with very healthy new clients with healthy gross margins.

Haven't seen any decline on the demand.

We've seen actually quite strong demands, new new engagements with big projects and things that.

I would say when we see this type of downturn.

For a lot of clients is also a signal to double down on digital investments to be more efficient and bring in either more revenues or bringing SG&A down. So we've seen a lot of that especially in the financial sector with large.

Engagements coming through the pipeline.

Which are mainly geared to both et.

Accelerating revenue and lowering SG&A for them. So it feels pretty strong on the next year, we feel pretty confident about accelerating growth once we clean up the the engagements with clients, where we didn't feel we were really adding a lot of value and we're going to have the right growth.

Margin ones that gets cleaned up we feel pretty good about accelerating from from 'twenty.

2023 onwards.

With very healthy new clients with healthy gross margins.

I'll just add too.

Amit Singh: Just to add to Manuel's point, even net-net despite getting out of -- or despite continuing our efforts to get out of noncore accounts on an overall growth basis, next year should be a faster growing year for us compared to 2022 and then to the earlier question about gross margins as well. We're making strong progress already as displayed in our 2Q and now 3Q results and our full year guidance being raised. We still expect, as we move into next year that those gross margins to continue showing year-over-year improvement. As a company, as we have discussed in the past, our target is for our revenue growth, obviously, to be much higher than where we are ending this year. And our gross margins to start trending or getting closer to that 40% gross margin level.

On an overall basis next year should be a faster growing year for us compared to 2022 and to the earlier question about gross margins as well, we're making strong progress already.

Just.

Just made in <unk> and now <unk> results.

And our full year guidance being raised we still expect as you move into next year.

Those gross margins to continue showing year over year improvement as a company as you discussed in the past our.

Target is for our revenue growth, obviously to be much higher than.

We're where we are ending this year.

And our gross margins to start trending are getting closer to that 40% gross margin level.

Mayank Tandon: Understood. Amit, if I can just sort of extend on that question in terms of the -- exiting up the noncore revenue, could you just size it in terms of the impact for 2022 that is embedded in your expectations? And then when does that basically go away? In other words, when do we have a clean slate on the top line?

If I can just sort of extend on that question in terms of the.

Exiting the non core revenue could you just size it in terms of the impact.

For 2022 that is embedded in your expectations and then when does that basically go away in other words when do we have a clean slate on the top line sure sure.

Manuel Senderos: Sure. Sure. So what we have said in the past is around call at around 50-ish percent, 10% to 15% of our revenue is what we define as noncore revenue and it falls in various geographies and different verticals. And we are very aggressively working on, call it, not renewing a lot of that work or not continuing performing in a lot of -- or sort of delivering on a lot of that work. But it will likely take 4 quarters for us to completely get rid of it. So starting in 3Q, it will likely go on until the mid of next year, the majority of that happening likely in the first 3 quarters.

I'll, let around 15 ish percent 10, 15% of our revenue days will be defined as noncore.

Revenue and it falls in various geographies and different.

Verticals and we're very aggressively working on.

Got it.

<unk> a lot of that work are not continuing.

Performing on a lot of actually delivering on a lot of that work, but it will likely take four quarters for us to completely get rid of it so starting in <unk>. It will likely go on until the middle of.

Next year, the majority of that happening likely in the first three quarters.

Mayank Tandon: Got it. Great. Thank you so much for taking my questions. Congrats again.

Manuel Senderos: Thank you very much.

Operator: Your next question will come from the line of Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Brian Kinstlinger: Okay, great. Thanks for taking my question. I wanted to start with recruiting. You made some strategic hires to improve on this department's execution. You've opened 2 new offices, but those are rather new. Has there yet been any improvement in the recruiting trends? Any numbers you can provide to help us with context would be great. And a while back when I first met the management team and this predates Amit, demand is exceeding supply of talent for AgileThought. How would you characterize that today?

Made some strategic hires to improve on this department to execution. We've opened two new offices those are rather new.

Is there yet, but any improvement in the recruiting trends.

The number you can provide to help us with context would be great.

A while back when I first met the.

And the team and this predates Amit.

Demand.

Exceeding supply of talent or agile thought how would you characterize that today.

Manuel Senderos: Yes, good question, Brian. Thanks for joining. Look, we completely revamped the people organization just recently by appointing Gonzalo, I think it was 3 months back. The first item on the agenda was actually getting closer to our people and working on a lot of things that impact their careers and the way we work with them. So the first benefit of that when you're talking about net additions was really reducing the attrition rate. We've seen a big reduction month-over-month and we're very excited about that. And that was the first thing on his plate. On the recruiting side, I would say we're not where we want to be yet. He's doing a lot of changes. He's changing some people in the team; he's adding additional individuals. We just opened the office in Buenos Aires. It's going to be the center for recruiting in Latin America. 

Look, we completely revamped the people organization just recently by appointing Gonzalo, I think it was 3 months back. The first item on the agenda was actually getting closer to our people and working on a lot of things that impact their careers and the way we work with them. So the first benefit of that when you're talking about net additions was really reducing the attrition rate. We've seen a big reduction month-over-month and we're very excited about that. And that was the first thing on his plate. On the recruiting side, I would say we're not where we want to be yet. He's doing a lot of changes. He's changing some people in the team; he's adding additional individuals. We just opened the office in Buenos Aires. It's going to be the center for recruiting in Latin America. 

We have completely revamped that people organization just recently by appointing one sided I think it was three months back.

The first item on the agenda with essentially no.

Getting closer to our people and working on a lot of things that impact their careers and the way we work with them. So the first benefit of that when you are talking about net additions was really reducing the attrition rate we've seen a big reduction month over month, and we're very excited about that and that.

Was the first thing one can say.

On the recruiting side.

I would say, we're not where we want to be yet.

He is doing a lot of changes. Changing some people in the team deciding additional individuals we just opened the office in women aside is going to be the centre for recruiting in Latin America.

Changing some people in the team deciding additional individuals we just opened the office in women aside is going to be the centre for recruiting in Latin America.

<unk>.

Manuel Senderos: He's hiring key individuals with good experience with recruiting at scale. So I would say that we're still in the works. We expect that to be up and running and humming by the end of Q4. So we are improving already in recruiting, but not where we want to be. We need a couple of months additional. But net headcounts are improving significantly because attrition is coming down. 

Recruiting that scale, so I would say that we're still in the works, we expect that to be up and running and humming and by the end of Q4. So.

So we are improving already in recruiting.

But not not where we want to be.

We need a couple of months additional but.

Net head counts.

Our improving significantly because attrition is coming down.

Okay.

Brian Kinstlinger: And are you able to share what the billable headcount is and maybe what utilization is so we can get a picture of that?

Manuel Senderos: You're on mute, Amit. 

Youre on mute.

Amit Singh: Sorry. So let me give you the exact number. Our average billable headcount is a little more than 2,200, so I think 2,227 for this quarter. And what was the second question, sorry?

So let me give you the exact number our average billable head count is a little more than 2002, hundreds I think 'twenty to 'twenty seven.

Florida, Florida this quarter.

And what was the second question sorry.

Brian Kinstlinger: Utilization.

Amit Singh: Yes. So on utilization level, right now, we are around high 80s percent on utilization. As we move forward and this whole recruiting and everything normalizes, we will be -- the ideal place for us to operate would be around that low to mid-80s. But currently, we are at the high 80s level.

Utilization as you move forward.

And this whole recruiting and everything normalizes, we will be there.

The ideal place for us to operate would be around that low to mid eighty's with currently.

At this level.

Brian Kinstlinger: Great. That was very helpful. And then maybe for either one of you, discuss the new governance around the contracts that come in that are new around 40%. How is that being handled? And then help us reconcile the gross margin in the fourth quarter implies 31.5% or lower. You're bringing on higher margin contracts. You're getting rid of low-margin contracts. I think pricing is up, if I'm not mistaken, maybe there's a couple of less billable days. But maybe help us about puts and takes that drive you close to the low point of the year.

<unk> discussed the new governance around.

The contracts that come in at or around 40% how is that being handled.

And then help us reconcile the gross margin the fourth quarter implies 31, 5% or lower youre, bringing on higher margin contracts youre getting rid of low margin contracts and.

Pricing was up if I'm not mistaken.

Maybe there's a couple of less billable days, but maybe help us get puts and takes that drive.

You're close to the low point of the year.

Manuel Senderos: Yes, absolutely. So the first thing we put in place is a deal governance committee where every new engagement of significant size goes through it and needs to get approved. It has to have the right gross margin, the right type of delivery or the right scoping, technology, et cetera and also the right working capital profile, right? So we -- because we want to grow in a healthy way, so we're being very, very careful on taking on clients that are really committed to doing digital transformation in a good way and they're not just looking for a good deal. We're looking for clients that are really committed to high-end work. So that governance works every week. And we make sure that every new deal comes at the right gross margin above 40-plus percent. And it's the right customer. We are very strict on what we defined at the ideal client profile which is a customer that is committed to investing above $10 million per year with us for a long term, for a long time. And it's not just a one time engagement for a simple fix. So we're being very, very cautious on how we select our customers and we want to have top AAA customers that are really committed.

Deal Governance Committee, where every viewer engagement.

Significant size goes through it needs to get approved it has to have the right.

Gross margin the right type of delivery will underwrite scoping technology et cetera, and also the right working capital profile right. So because we want to grow in that Sanofi ways, we're being very very careful.

Taking on clients that are really committed to doing digital transformation in a good way and they're not just looking for a good deal.

We're looking for clients that are really committed to two high end work. So that governance works every week and we make sure that every new deal comes the right gross margin above 40% 40, plus percent and then the right customer we're very strict on what we define that the ideal client profile.

With just the customers that.

Committed to investing.

About $10 million per year with us for a long term for a long time and it's not just a one time.

Engagement for a simple fix so where are we.

Being very very cautious on how we select our customers and we want to have top AAA customers that are really committed.

Amit Singh: And then, Brian, just to add to that. As you know, around 90% of our revenue in a given year comes from existing customers. So it's a process, right? Every time we are renewing work or renewing different type of work with our clients, we are raising the pricing levels to slowly, slowly bring our gross margin closer to 40% across the board.

The pricing levels to slowly slowly bring gross margin closer to 40% across the board.

Amit Singh: But it takes some time for that whole thing to flow through. So that's why while all the new work we are signing and a lot of the work that we are signing, it's all at a very encouraging gross margin level. And year-over-year, thinking of that, call it 100, 150 basis point improvement in gross margin, that's a good way to think about our business.

Wow all the new work, we are signing in a lot of New York, maybe a signing it's on at a very encouraging gross margin level.

The year over year thinking of that call. It 100, 150 basis point improvement in gross margin. That's a good way to think about.

Our business.

Brian Kinstlinger: Okay. Thank you so much.

Operator: Your next question will come from the line of Kate Cranston with William Blair.  Please go ahead.

Kate Cranston: Hi guys. It's Kate on for Maggie Nolan today. Congrats on the quarter. My first question was, I know that you have previously mentioned you would like to be more selective with the client logos that you're taking on. So I was hoping, could you tell us anything more about the new logos that you saw in this quarter and any trends that you're seeing there?

First question was I know that you had previously mentioned you would like to be more selective with the client.

Thank you.

So I was hoping.

Could you tell us anything more about the new outcomes that you saw in this quarter and any trends that you're seeing there.

Manuel Senderos: Yes, happy to do this. So it's all in the, let's call it, Fortune 1000 type clients, really big accounts within the industry. As you know, for now, we are focusing in just a handful of industries. So we're looking for new client sales because we really believe that the intersection between industry knowledge and technology is when we do our best work. So we are focused on that. And -- but we are getting very good results of adding, let's say, at least 4 to 5 new good level engagements per week where we're having good conversations, good high-level conversation with these types of accounts and then some of them converted within the quarter or not. But it's very, very selective. And it's within the industries that we are currently working on.

Let's call. It Fortune 1000 type clients really big accounts within the industry. As you know for now we are focused in just a handful of industries. So we're looking for new clients there because we really believe that.

The intersection between industry knowledge and technologies when we do our best work. So we're focused on that and but we are getting very good results of adding let's say at least four to five new growth level engagements per week, where we are.

Having good conversations good high level conversation with this type of accounts and then some of them convert within the quarter or not.

But it's very very selective and it's within the industries that we are currently working on.

Kate Cranston: Got it. It's helpful. And then I had one follow-up question. I know that overall, you quite mentioned that you're not releasing any signs of a slowdown. But if things were to get worse in terms of the macro, is there any vertical that you would expect that weakness to show up? Or are there any verticals overall that you are seeing a slight weakness in?

And then I had one follow up question I know that overall.

You mentioned that you're not really seeing any signs of a slowdown, but if things were to get worse.

First by <unk>.

Terms of the macro is there any vertical that you would expect that weakness to show up are there any verticals overall that you are seeing a slight weakness.

Manuel Senderos: Honestly we don't -- we haven't seen any weakness and we don't -- I couldn't highlight one particular industry. I think at our size, it's more about our good execution and our good client engagement than the macro, probably at our size, macro has a less impact than our specific execution. So no, we haven't seen that. If at all, we've seen our pipeline grow over the last quarter quite significantly. And we are working on very interesting engagements going forward.

We couldnt I Couldnt highlight one particular industry I think at our size.

More about our good execution in a good.

Client engagement.

Macro.

Probably on our size macro has less impact then.

Then our specific execution. So no we haven't seen that if at all we've seen our pipeline grow over the last quarter quite significantly and we are working on very interesting engagements going forward.

Kate Cranston: Okay, great. Thank you.

Operator: Your next question will come from the line of Joseph Vafi with Canaccord. Please go ahead.

Joseph Vafi: Good afternoon, everyone and thanks for taking my questions. Maybe we will start with your new TMT vertical and what the plans are there for perhaps investment spend there. And at a high level, perhaps you could outline for us kind of where you see your focus in 2023 in terms of sales and marketing spend in TMT versus some of your existing verticals? And then I have a quick follow-up.

What the plans are there.

For perhaps investment spend there and at a high level, perhaps you could outline for us kind of.

Where you see your focus.

In 2023 in terms of sales and marketing spend in PMT versus some of your existing verticals and then I'll have a quick follow up.

Manuel Senderos: Yes. Thanks for the question, great question. So the way we set up the market units is a really comprehensive approach. It's not just putting one individual. So it has a market unit leader. I don't have technical leaders, industry leaders and then they'll have a group of account leads, hotels, as we call them. So it's a whole group that has stood up for that particular market unit.

KOL group that has stood up for for that particular market unit.

Manuel Senderos: It's based out of California. It's in the West. And the way we approach is we have -- the major is the industry, which, in this case is TMT and technology or media and technology. But they also address the West Coast for other industries where the closeness of the region also helps. So we call that the minor. So this quarter, we're adding that market unit. We do expect new market units to be added very soon and we'll announce soon. But we're going to target financial services in a more focused way for the U.S. coming forward.

California, and the West end.

The way we approach as well.

The major racing industry, which in this case as TMT and technology.

Our media and technology.

But they also address the west coast.

For other industries, where there the closeness of the region also help so we call that the Matt the miner.

So this quarter were.

Adding that market unit, we do expect new market units to be.

Added very soon and we will announce soon but we're going to target financial services.

In a more.

Our focus with the <unk>.

That's coming forward.

Manuel Senderos: We do expect significant increase in our sales capacity for 2023. We will probably show that in the next quarter. But we are investing in increasing our sales team, especially in the U.S. market very significantly. And you'll hear us opening additional market units ready for that.

We will.

Probably show that in the next quarter, but we are investing in increasing our sales team.

Especially in the U S market price significantly and you'll hear us opening additional market units.

Ready for that.

Joseph Vafi: Great. And then just one quick follow-up. As you continue to wind down the kind of noncore revenue projects, are any of those with other -- with customers where you're doing more high-value work and is it at all kind of a strain or damaging on that customer relationship to wind down part of it while trying to maintain or grow the other piece of the business? Thanks very much. 

If you as you as you.

You continue to wind down the kind of non core revenue projects.

Are any of those with other with with customers, where youre doing more high value work and is it at all to kind of.

A strain or damaging on that customer relationship to wind down part of it.

While trying to maintain or grow the other piece of the business. Thanks very much.

Okay.

Amit Singh: Thanks, Joe, that's a great question. It's actually a mix of both. Yes, there are certain customers where -- which are not strategic for us and where the work is, call it, noncore -- it could be at high margin. But it's just the work might be noncore and we are exiting that. But then there are certain clients. And some of those clients are even in the U.S. I think a one client in the professional services industry, where we're doing work, which is high end. But we're also doing work over there, which could, in our terms, that's also noncore. So our focus there is we exit that noncore work and increase our exposure to more digital work in that client. So you see that sort of, call it, rotation for our company happening in several clients as well, where we are giving away or moving outside of that but increasing our exposure more to the higher-end digital work. So you're seeing both of those trends play out for us.

Alright, Thanks, Jeff that's a great question, it's actually.

A mix of both but yes, there are certain customers, there, which are not strategic for us and where the work is kind of like non core it could be at high margin, but it is just the work might be noncore and we are exiting that.

Then there are certain clients and some of those clients are even in the U S. I think of one client in the professional services industry, where we were doing work, which is high end, but we're also doing work over there which is good. Our terms and that's also that's noncore so our focus there as we exit that noncore work and increase our exposure to more digital work in that client. So you see that sort of call. It rotation for our company happening in several clients as well, where we are giving away. Moving outside of that but increasing our exposure more to that to the higher end digital work. In both of those trends play out.

I think of one client in the professional services industry, where we were doing work, which is high end, but we're also doing work over there which is good.

Our terms and that's also that's noncore so our focus there as we exit that noncore work and increase our exposure to more digital work in that client. So you see that sort of call. It rotation for our company happening in several clients as well, where we are giving away.

Moving outside of that but increasing our exposure more to that to the higher end digital work.

In both of those trends play out.

Great. Thanks.

Joseph Vafi: Great. Thanks, Amit. Thanks very much guys. I appreciate it.

Thank you for joining us very much.

Operator: Our next question will come from the line of Zack Ajzenman with Cowen. Please go ahead.

Zack Ajzenman: Hi. Thanks. One question from us just on partnerships. Can you refresh us on your relationships with hyperscalers and other SaaS ecosystem partners? It sounds like a potentially attractive channel that you can leverage to drive more opportunities.

Partnerships can you refresh us on your relationships with the Hyperscale and other SaaS ecosystem partners. It sounds like a potentially attractive channel that you can leverage to drive more opportunities.

Manuel Senderos: Yes. I mean, we have good relationships with all the SaaS channels or even the cloud providers. But we try to be agnostic in the way we take our services to the market. And most of the time, our clients are pretty large accounts that have already selected their technology stack and they have their partnerships in place, depending on their industry, there's different players.

The SaaS channels or even the cloud providers, but we try to be agnostic in the way we take.

Our services to the market and most of the time our clients are pretty large accounts that have already selected their technology stack and they have their part.

Ships in place depending on the industry there is different players so.

Manuel Senderos: So we try to be technology agnostic. We try to bring new ideas, especially the way we work, which is the Agile format and we can adopt in different technologies. We also like to add more in the industry knowledge in order to really help them address the specific pains within their industries and give them ideas on how to use technology in a better way in that industry. So in that sense, we are pretty open to playing with different partners. But we try to be agnostic because our clients see in more of a neutral way on their side.

New ideas, especially the way, we work, which is the agile format and we can adopt and different technologies.

We also like to add more in the industry.

Knowledge in order to really help them address their specific paints within their industries and giving them ideas on how to.

No use technology in a better way in that industry. So in that sense, we are pretty open to playing with different partners, but we try to be agnostic because our clients see.

And more of a neutral way on their site.

Zack Ajzenman: That's helpful. I'm actually just going to squeeze one more in, sorry. On Ukraine, with the war unfortunately dragging on, are you seeing incremental opportunities from clients looking to derisk delivery exposure from the region just given the ongoing uncertainty?

Manuel Senderos: I mean, honestly, not specifically for that reason. No, we haven't seen that. I mean, at the beginning, there was a lot of noise. And I've seen our peers that work in the region also kind of being able to reorganize quite quickly, which was really good for them. But no, we haven't seen an opportunity because of that specifically.

<unk> seen that I mean at the beginning there was a lot of noise and.

I've seen our peers that work in the region also kind of.

Being able to reorganize quite quickly which was really good for them.

No we haven't seen opportunity because of that specifically.

Zack Ajzenman: Got it. Thank you.

Operator: We have no further questions at this time. I'll hand the conference back over to Manuel for any closing remarks.

Manuel Senderos: Well, we want to appreciate everybody that joined and asked those questions. They're all very helpful. We're very happy to have additional conversations and go deep with anyone that likes to do it. So thanks very much and enjoy your afternoon.

Everybody that joined and ask those questions. They are all very helpful.

Very happy to have additional conversations to go deep.

With any one that I'd like to do it so.

So thanks, very much and enjoy your afternoon.

Operator: Ladies and gentlemen, that does conclude today's meeting. Thank you all for joining. You may now disconnect.

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