Thoughtworks Holding, Inc.

Hello, everyone, and welcome to ThoughtWorks Earnings Call for the third quarter of 2022. We will be recording today's call, and during the presentations, all lines will be on listen only. Joining us today will be ThoughtWorks President and CEO, Goh Zhao, and CFO, Aaron Cummins. The earnings press release was issued earlier today and is also available on our investor relations page at ThoughtWorks.com if you want to review or download a copy. Some of the matters we'll discuss on this call, including our expected business outlook, are forward-looking and, as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors described in today's press release and discussed in the risk factors section below. of our annual report on Form 10-K, our quarterly reports on Form 10-Q, and other reports we may file with the SEC from time to time. These risks and uncertainties could cause actual results to differ materially from those expressed on the call. We caution you not to place undue reliance on these forward-looking statements because they are made only as of the date when they were made. During our call today, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. We also provide growth rates and constant currency as a framework for assessing how our underlying business is performed, excluding the effect of foreign currency rate fluctuations. We include reconciliations of non-GAAP financial measures to our GAAP financial measures in our press release furnished as an exhibit to our Form 8K, which is available on the investor relations section of our website at ThoughtWorks.com. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. ThoughtWorks assumes no obligation to update or revise the information presented on this conference call. I will now hand over to Zhao.

Thank you, Sean. Welcome everyone to our third quarter earnings call. I'd like to start by sharing an overall update of the business, and then Aaron will take you through our third quarter financial results in more detail. I'll then share some of our business highlights before Aaron provides guidance and we open for Q&A. Let me start with a recap about ThoughtWorks. We're a global technology consultancy that integrates strategy, design, and engineering to drive digital innovation. We enable enterprises and technology disruptors to thrive as modern digital businesses. Now let me turn to the financials. I'm pleased to report strong results in our third quarter, driven by the continued demand for our digital transformation services. We delivered revenue of $332 million in the third quarter of 2022, reflecting year-on-year growth of 16.6%. and 23.9% in constant currency. In a quarter, we achieved adjusted EBITDA of $67.2 million, reflecting an adjusted EBITDA margin of 20.2%. ThoughtWorks has established a reputation for thought leadership and fostering a unique and cultivating culture. Our diverse and global culture continues to attract and retain what we believe to be the best talent in the industry. I would like to thank every thought worker around the world for the extraordinary impact they create through our technology excellence and culture. Today, the world faces a higher level of economic uncertainty. Throughout this period, we continue to stay close to our clients, helping them to be adaptive to change and resilient in the face of unpredictability. And we're driving our business with rigor and discipline. managing supply and demand, and being proactive with our clients to help them achieve a better return from their technology budgets. The ThoughtWorks business is diversified across industries and geographies, and we see this as a key differentiator. According to the KPMG Global Technology Report published in September 2022, 67% of businesses are set to embrace emerging technologies by 2024. The report, which surveyed 2,200 technology executives across the globe, found that 44% of respondents cited the lack of talent in areas like data science and engineering. as one of the biggest challenges for the business. We believe that ThoughtWorks has the best talent in the industry and that clients continue to value our people and our services. We have seen better than expected demand in the third quarter and our clients are looking to digital innovation to help them navigate uncertainty. Strong themes are pervading. Let me share some examples. We're seeing strong interest from clients in our data services and how data can transform and scale their businesses. clients are looking for us to develop new digital products and services, enhancing customer experiences, removing friction, and bringing customer-facing services together. We're seeing solid demand from clients for ThoughtWorks' expertise in enterprise modernization and platforms. We also continue to see client interest in developer experience platforms as a key enabler for improving the return on investment of technology budgets. by boosting the productivity and retention of critical engineering talents. For these reasons, we believe that ThoughtWorks is well positioned in the market. Now let me share the details of our growth strategies. At the core, our revenue growth is from deepening relationships with existing clients and winning new logos. We then supplement this with focused strategies around M&A, partners, and geographic expansion. Turning first to our client portfolio. The depth of our expertise and breadth of our capabilities means that we can help clients address all their challenges from strategy right through to business outcomes. Our clients appreciate the value we create with them and remain confident in our ability to sustain our premium position and pricing. For example, at Atlassian, one of Australia's most successful technology companies. ThoughtWorks has worked on a mammoth challenge to migrate one of Atlassian's flagship products, Bitbucket, to the public cloud. Bitbucket enables Atlassian's customers to build software at scale and processes on average 1 billion transactions per day. Atlassian was managing this data through its own data center, which posed a challenge in terms of scale and security. ThoughtWorks enabled the migration of 50 million customer code repositories to Atlassian's platform as a service, which is built on AWS. What would previously have taken years was completed by ThoughtWorks in just three months. Atlassian saw a 93% reduction in support requests due to outage and a 55% improvement in Bitbucket's web response time performance. At our long-term client, the United States Department of Veteran Affairs, VA, we have been working together to transform their organization through data mesh and data platforms. VA is a federal cabinet-level agency providing healthcare services to eligible military veterans in order to improve health outcomes. For example, VA uses the Medication Possession Ratio Calculation, NPR, to provide clinicians with a view on how well a patient is adhering to a medication regime. NPR is critical for veterans who are taking control medication. Flowers introduced data-as-a-product, a core principle of data mesh, which enables data to be managed by VA's domain teams. We paired with the Office of Mental Health and Suicide Prevention to enhance NPR to a fully managed data platform and delivered an 88% reduction in processing time. Additionally, ThoughtWorks implemented a data catalog for the health data and analytics platform, HDAP. The new NPR data product became the first data product inside the HDAP Microsoft Azure platform. providing a scalable inventory of enterprise data assets. Now turning to new clients, we have a focused approach to new clients, helping the organizations we work with to deliver rapid business value from digital transformation. We continue the momentum from the first half of the year, and we have contracted with 32 new clients in the third quarter. Now let me provide an example of a new client that we have been working with recently. We have signed a multi-year agreement with PCI Pharma Services, a leading global contract development and manufacturing organization. ThoughtWorks will help PCI in its journey to digitize its supply chain, with the goal of accelerating the time it takes to bring life-changing therapies to market for patients. The agreement includes expanding and adapting PCI Bridge. an industry-first-of-its-kind data platform that provides real-time status of projects, automatically identifies risks, spots trends, and provides business analytics. With this modern application programming interface, clients have the ability to seamlessly integrate their systems with PCIs, creating greater transparency and a more simplified process for decision-making. We're also pleased to share that last month, ThoughtWorks Federal LLC, a wholly owned subsidiary of ThoughtWorks Inc., was awarded a multiple award schedule prime contract by the U.S. General Services Administration. This is a government-wide, indefinite delivery, indefinite quantity contract that grants ThoughtWorks Federal an awarded base period of five years and additional 15 years of optional periods. This is a big step forward and will allow us to sell to federal agencies directly. Now, let me share an update on partners as a growth strategy. Our primary focus is to develop go-to-market partnerships with hyperscale cloud providers, including AWS, GCP, and Azure. For example, as Amazon AWS Premier Services Partner, we have the highest tier of partnership, which less than 3% of AWS partners achieve. In the third quarter, we also achieved a new AWS financial services competency. ThoughtWorks has deep technical expertise with AWS cloud technologies, and we're successfully working with a large number of clients at scale. We're also working on a new data platform together with AWS and the Natural History Museum. The Natural History Museum is a world-leading science research center and was the most visited indoor attraction in the UK in 2021. The new data platform, which is called the Data Ecosystem, is designed to help the museum scientists to bring together a huge breadth of UK biodiversity and environmental data types in one place to help build scientific understanding of the UK's biodiversity and environment. You can find details of some of these customer successes on a new section of our website, thoughtworks.com. I'm now going to hand over to Erin so that she can take you through the numbers in greater detail.

Thank you, Xiao, and thanks to all of you for joining us today. We were very pleased with our results in the third quarter, which demonstrate continued solid demand across our business. Let me begin by summarizing a few of the highlights for the quarter. In the third quarter, we saw revenue growth of 16.6% compared to the prior year period. Constant currency revenue growth was 23.9%. Our revenue growth in constant currency is 2.1 percentage points higher compared to the midpoint of the range I guided to in August. This is primarily due to strong execution and better than expected demand. Adjusted EBITDA for the quarter was $67.2 million and our adjusted EBITDA margin of 20.2% was 270 basis points higher compared to the midpoint of the range I guided to in August. Q3 adjusted EBITDA margin decreased when compared to the prior year period due to the impact from lower utilization. Now let me share some details. Turning to revenue. For the third quarter, revenue growth year-on-year was 16.6% and 23.9% on a constant currency basis. Our clients remain committed to large digital transformation programs. However, we are starting to see a change in client behavior. Some clients are contracting in smaller phases to allow themselves flexibility, and sales cycles are normalizing from the accelerated post-pandemic levels. Our demand environment, however, remains healthy, and clients value working with ThoughtWorks. This is evidenced by our average revenue per employee of $112,000, annualized for the first nine months of 2022, which remains higher than the industry average. In the third quarter of 2022, we continued to see clients select ThoughtWorks for their digital transformations. Over a trailing 12-month period, we had 41 clients with bookings greater than $10 million compared to 33 clients over the same period last year, an increase of 24.2%. Our overall bookings in the trailing 12 months increased by 19.1% year-on-year to $1.5 billion. We have a diversified business across industry verticals and geographies. North America grew by 24.7%, Europe by 15%, LATAM by 13.3%, and APAC grew by 9.7%. Our growth in APAC continues to be impacted by the COVID situation in China. Given the continued strengthening of the U.S. dollar in recent months, we want to provide a deeper view into its effect on our reported results. Our primary revenue-generating currencies alongside the U.S. dollar are the euro, Great British pound, and Australian dollar. Great British Pounds by 20% and Australian Dollars by 15.9% compared to the prior year period. Due to the diverse nature of our business on a geographic basis, 62.6% of our year-to-date revenues as of September 30th were contracted in non-USD currencies. We also continued to see good growth across our industry verticals during the quarter. The strongest growth was in technology and business services, growing at 25.5%. Automotive travel and transport grew at 23.5%. Financial services grew at 17.7%. Energy, public, and health services grew at 16.5%. And our retail and consumer vertical was in line with last year. As we shared with you in May, energy, public and health services is a strategic focus and this industry vertical has returned to double digit growth as expected in the third quarter. In the retail and consumer vertical, we are seeing normalizing spend after the post pandemic boom. At the end of the quarter, on a TTM basis, 88.6% of our business came from existing clients. We have a balanced customer portfolio with relatively low client concentration. In the third quarter, our top 5, top 10, and top 50 clients generated 16.1%, 25.4%, and 65.4% respectively as a percentage of total revenues. We now have 36 clients with trailing 12-month revenues greater than $10 million, seven more than the third quarter of 2021, representing a 24% increase. Moving down the income statement, for the quarter, adjusted gross margin was 40.7% compared to 45.7% during the prior year period, impacted by utilization, as previously discussed with respect to adjusted EBITDA. In the third quarter, our adjusted SG&A as a percentage of revenue was 21.2%, which is better than the third quarter 2021 by 100 basis points due to efficiencies from scaling and strong execution. Adjusted EBITDA was $67.2 million for the third quarter and adjusted EBITDA margin was 20.2%, a decrease of 310 basis points compared with the third quarter last year due to lower utilization. GAAP diluted loss per share was $0.10, impacted by non-cash stock compensation charges. On an adjusted basis, our adjusted diluted earnings per share was $0.08, compared to $0.14 in the third quarter of 2021, primarily due to effects from income taxes. Free cash flow for the quarter was $27.7 million compared to $27.5 million in the prior year quarter. And we continue to have good liquidity. Our cash balance at September 30, 2022 was $185 million compared to $453 million at September 30, 2021. Our cash balance reflects debt repayments of $100 million in October 2021 and $100 million in July 2022. Our debt is continuing to go down and is $404 million as of September 30th, 2022. Now I would like to hand back to Xiao to share additional updates on our business from the third quarter.