Thoughtworks Holding, Inc.

Hello, everyone, and welcome to ThoughtWorks Earnings Call for the fourth quarter of 2022. We will be recording today's call, and during the presentations, all lines will be in listen-only mode. Joining us today will be ThoughtWorks President and CEO, Go 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. 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 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 this call. These forward-looking statements are made only as of the date when made. During our call today, we will reference certain non-GAAP financial measures. We will also provide growth rates and constant currency as a framework for assessing how our underlying business performed, excluding the effect of foreign currency rate fluctuations. We include non-GAAP to GAAP reconciliations in our press release furnished as an exhibit to reform 8K. 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 the call over to Zhao.

Thank you, Rob. For those not aware, Rob Mueller joined us from Salesforce in November as our new global head of investor relations. Rob is based out of Boston. We're delighted to have him join our team. Welcome everyone to our fourth quarter earnings call. I'd like to start by sharing an overall update on the business, and then Aaron will take you through our fourth quarter and full year financial results in more detail. I will 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 solid results in our fourth quarter, driven by the continued demand for our digital transformation services. We delivered revenue of $310.7 million in the fourth quarter of 2022, reflecting year-over-year growth of 8.3% and 14.7% in constant currency. In the quarter, we achieved adjusted EBITDA of $58.2 million, reflecting adjusted EBITDA margin of 18.7%. And coming to the full year, I'm pleased to share that our revenues grew 21.1% year-on-year and 26.8% in constant currency, resulting in 2022 reported revenue of $1.3 billion. And our adjusted 2022 EBITDA was $256.8 million, representing 15% year-over-year growth. 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. Forrester, the leading global research and advisory firm, last quarter recognized ThoughtWorks as a leader in two reports – the Forester Wave Cloud Migration and Managed Service Partners in China Q4 2022, and the Forester Wave Cloud Migration and Managed Service Partners Asia Pacific Q4 2022. In the Asia Pacific report, ThoughtWorks received the highest possible scores across eight criteria, including vision, organizational structure, and cloud modernization service capabilities. In the China report, we also received the highest possible scores in eight criteria, including service development and innovation. The Forrester report on Asia Pacific stated that ThoughtWorks' software engineering expertise, created by hiring technical specialists and talented developers, gives it some of the market's strongest monetization capabilities. At the end of December 2022, we had over 12,500 ThoughtWorkers in 18 countries across five continents. This represents a net headcount increase of 17.9% year-on-year. I would like to thank every ThoughtWorker 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. We continue to drive our business with rigor and discipline, managing supply and demand, and being proactive with clients to help them achieve a better return from their technology budgets. The Towers business is diversified across industries and geographies, and we see this as a long-term differentiator. We believe that ThoughtWorks has the best talent in the industry and that clients continue to value our people and our services. Our clients are looking to digital innovation to help them navigate uncertainty. We're seeing continued interest from clients in our data services, especially data mesh, data governance, and how data can transform and scale their businesses. We're seeing solid demand from our clients for ThoughtWorks expertise in enterprise modernization and platforms. We also continue to see client interest in our proper positions that drive productivity and cost efficiencies. For example, developer experience platforms, which boost the productivity and retention of critical engineering talent. Also, our digital application management and operations offerings, which aim to make customer software zero maintenance. Within digital application management and operations, we apply ahead-of-the-curve engineering practices like extreme programming and continuous integration, continuous delivery, CICD, to the post-build phase of the software. In this way, ThoughtWorks aims to revolutionize digital operations by evolving the software run phase to be further automated and intelligence-driven. This will reduce client total cost of ownership of target software over a fixed timeframe with predictable costs. And our clients continue to look to ThoughtWorks to enhance their customer experiences and develop new digital products and services. removing friction, and bringing customer-facing services together. In January, we published research in association with Harvard Business Review Analytic Services, showing that while 94% of business leaders say industry-leading customer experience is crucial to their business, only 10% of customer experience professionals say that their organization's strategy is effective. The acquisitions of Connected and Handmade that we made in 2022 have expanded our customer experience and digital product services to further address this opportunity. We're pleased with both the pace of integration and the leverage we're getting by working together with clients. And you may recall, two years ago, ThoughtWorks acquired 4Kind to boost our AI capabilities. We believe AI is a significant opportunity, and we have been investing for some years to build capabilities. It has been interesting to see the renewed interest from clients in generative AI, created in part by the recent launch of OpenAI's ChatGPT. Our Thought Leadership article, ChatGPT, a useful tool buried beneath the hype, has been well received by clients. Enabled by our Looking Glass lens partnering with AI, ThoughtWorks is helping clients navigate the risks and seize the opportunities of generative AI technologies in areas like AI-augmented product development. A client where we're achieving scale business benefits is Mondelez International, one of the world's largest snack companies. We have worked in close collaboration with them since 2019. helping their product developers create snacks in tandem with generative AI. We have designed and built an AI-augmented product development platform that enables product developers in model-based R&D to interact with machine learning models independently without data science expertise. This amplified creativity has yielded amazing results, including faster experimentation and iteration capabilities that lead to better products with reduced time to market. For all these reasons, we believe that ThoughtWorks is well positioned in the market. Now let me share some more 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 expansions. Turning first to M&A, earlier this month, we announced our acquisition of iTalk, a leading Amazon Web Services AWS Advanced Consulting Partner and Cloud Managed Services provider in Australia. They have deep expertise with AWS services and have over 100 AWS certifications, including security and SaaS. italk's 70-strong team has helped accelerate hundreds of clients' digital transformations through the creative and optimal use of their IT infrastructure on a highly flexible AWS cloud platform. 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, in the fourth quarter, we published a case study about our previous work with Etsy, a global marketplace for unique and creative goods with over 90 million buyers as of the end of 2021. With similar ideologies of agile software development, technology sustainability, employee care, diversity, and open source, Etsy chose ThoughtWorks as their strategic partner to assist scaling efforts and migration to Google Cloud Platform. NTC relied on physical hardware in two data centers, presenting several scaling challenges. With their expected growth, it was apparent that the costs would ramp up quickly. The migration was eventually completed in nine months, less time than the full year originally planned, with the monolith then tweaked and tuned to situate better in the cloud, adding features like auto-scaling and auto-fixing bad nodes. The observability stack was the last to move over due to its complex nature. It required a rebuild rather than a lift and shift. Observability is the ability to determine the internal states of systems from their outputs, provides a means to evaluate data in real time and build better software. With Etsy's commitment to hyper-observability, the amount of data being analyzed isn't small. Our observability is self-service. Each team gets to decide what it wants to measure, creating 20 terabytes of logs a day. To help you visualize the sheer daily volume, 20 terabytes is equivalent to about 340,000 hours of digitally stored music. Large parts of the observability stack were moved into managed services and third-party SaaS products. And after the cloud migration, the optimization for the cloud didn't stop. Each team continued to look for opportunities to utilize the cloud to its full extent. For example, the move to the cloud enables Etsy to build a new machine learning platform. Etsy leverages machine learning to create personalized experiences for their millions of buyers around the world with state-of-the-art search ads and recommendations. Now let me share three of the benefits Etsy has seen. First, seemingly small inefficiencies such as non-vectorized code can result in a massive performance degradation. And in some cases, Etsy has seen that optimizing a single TensorFlow transform function can reduce the model runtime from 200 milliseconds to 4 milliseconds. In numeric terms, that's improvement of two orders of magnitude. But in business terms, this is a change in performance easily perceived by the customer. Second, a key metric is time to productive. The time it takes for a new engineer to set up their environments and make their first change. What exactly that means changes by domain. For example, it might be the first website push or the first data pipeline working in the big data platform. Something that used to take two hours now takes 20 minutes. Third, another interesting stat is that the infrastructure has extended to use 10 times the number of nodes, but only requires two times the number of people to manage them. And I'm also pleased to share that in the fourth quarter, we achieved AWS machine learning competency, a validation of our differentiated expertise in AI and ML ops. ThoughtWorks has strong capabilities in putting machine learning products into production to help our clients navigate the challenges ML and AI raise in production environments, challenges that few operation teams will have faced before. Now to our geographic expansions. In October, we opened our new office in Ho Chi Minh City, Vietnam. This reflects ThoughtWorks' wider effort to geographically diversify our business and meet demand from clients in Southeast Asia and Australia, and to enable ThoughtWorks to leverage the skills, diverse talent base in Vietnam. Turning now 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 increasingly look to ThoughtWorks as a strategic digital transformation partner, able to scale new technology across the enterprise. For example, you may be aware that in 2022, Ford and ADT formed a JV called Canopy, whose aim is to fortify vehicle security using breakthrough technology. The FBI estimates that theft of equipment from inside vehicles in the U.S. cost more than $7.4 billion in 2020. What you may not know is that we partnered with Ford early in this process to take what was an experimental project that Ford had built on Raspberry Pi to something that could be launched to millions of vehicles. To evaluate how to scale the experiment, we developed a series of high-fidelity prototypes, running two end-to-end pilots with real users in the US and UK. These evaluated four areas. Manufacturing. What does it take to create this physical product? Installation. What steps are required to install the device on vehicles? Performance. How does this perform on actual commercial vehicles? And usability. Is it easy to use and does it provide the intended peace of mind? Canopy is in the product pre-launch phase and expects to launch its first smart vehicle security system offering this year. And at our client, Authority Brands, we have been deploying our digital application management and operations offerings. ThoughtWorks partnered with Authority Brands, the parent company of leading home service franchise brands, to deliver a brand new state-of-the-art field service mobile application. ThoughtWorks focuses on the proactive management of software to reduce cost of ownership, maintain business resilience, ensure that the application's software is cloud and future-ready. We work with authority brands to cost-effectively maintain and further develop the application, which enables authority brands' portfolio brands to provide enhanced service and gain market share. 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 see continued momentum in new logo acquisition, and we have contracted with 33 new clients in the fourth quarter. For example, we're working with our new client Experian UK&I. Experian is a world-leading global information services company. Experian UK&I has chosen ThoughtWorks to assist with its technology transformation program. You can find details of some of these customer successes on the news section of our website thoughtworks.com. I'm not going to hand over to Erin so that she can take you through the numbers in greater detail.

Thank you, Xiao, and thanks everyone for joining us today. We were pleased with our performance this quarter with continued solid execution across our geographies and industry verticals. Our team continues to perform well while navigating a cautious macro landscape. Let me begin with a few of the highlights for the quarter and the full year. Revenue growth for Q4 was 8.3% compared to the prior year period. Constant currency revenue growth was 14.7%. Adjusted EBITDA for the quarter was 58.2 million, and our adjusted EBITDA margin of 18.7% was approximately 120 basis points higher compared to the midpoint of the range I guided to in November. Q4 adjusted EBITDA margin expanded approximately 70 basis points when compared to the prior year period. For the full year, 2022 reported revenue was $1.3 billion, representing 21.1% year-over-year revenue growth and 26.8% in constant currency. For the full year, acquisitions contributed approximately two percentage points to revenue growth. Adjusted EBITDA for the full year was $256.8 million, representing year-over-year growth of 15%. Now let me share some details. Our clients remain committed to large digital transformation programs. However, we continue to see changed client behavior. Some clients are contracting in smaller phases to allow themselves flexibility, and sales cycles are normalizing from the accelerated post-pandemic levels. Despite near-term caution across our client base, the medium-term demand environment remains healthy and clients value working with ThoughtWorks. This is evidenced by our average revenue per employee of $108,000 for 2022, which remains higher than the industry average. Our overall bookings at the end of 2022 on a TTM basis stood at $1.4 billion. Our revenue base remains well diversified across geographies and industry verticals. In the fourth quarter, North America grew by 14.7%, Europe by 8.2%, LATAM by 4.2%, and APAC grew by 2.1%. Our growth in APAC continues to be impacted by the COVID situation in China. Thank you so much for having me. On a local currency basis during Q4, our revenue contracted in euros grew by 19.3%, Australian dollars by 6.9%, and GBP by 5.4% compared to the prior year period. For the full year, our revenues contracted in Australian dollars grew by 31.4%, euros grew by 25.6%, GBP by 24.3%. We also continued to see growth across our industry verticals during the quarter. The strongest growth during Q4 was in automotive travel and transportation, growing at 27.4%. Energy, public, and health services grew at 13.7%. Technology and business services grew at 10.1%. Financial services was flat in the face of FX headwinds, and our retail and consumer vertical decreased by 4.9%. As we shared previously, in the retail and consumer vertical, we are seeing normalizing spend after the post-pandemic boom, with essential retail continuing to outperform discretionary retail. For the full year 2022, around 87.2% of our business came from existing clients. We now have 35 clients with 2022 revenues greater than $10 million, five more compared to 2021, a 16.7% increase year on year. We have a balanced customer portfolio with relatively low client concentration. In 2022, our top five, top 10, and top 50 clients generated 15.4%, 24.7%, and 64.1% respectively as a percentage of total revenues. Moving down the income statement. For the quarter, adjusted gross margin was 39.7% compared to 42.9% during the prior year period. For the full year 2022, adjusted gross margin was 41.6% compared to 44.2% for the full year 2021. Utilization impacted both our quarterly and annual adjusted gross margin. In the fourth quarter, our adjusted SG&A as a percentage of revenue was 22.1%, which is better than the fourth quarter 2021 by 250 basis points on improved operational efficiencies. For the full year 2022, adjusted SG&A as a percentage of revenue was 22.4%, down approximately 90 basis points compared to 2021. Adjusted EBITDA was $58.2 million for the fourth quarter, and adjusted EBITDA margin was 18.7%, an increase of 70 basis points compared to the fourth quarter last year. This was due to improved SG&A leverage and a recovery of prior bad debt expense, partially offset by lower utilization. For the full year, adjusted EBITDA was 256.8 million, up 15% from 223.2 million in 2021. 2022 adjusted EBITDA margin of 19.8% was down approximately 110 basis points from 2021. Gap diluted earnings per share was $0.05, impacted by non-cash stock compensation charges. On an adjusted basis, our adjusted diluted EPS was $0.10 compared to $0.09 in the fourth quarter of 2021. For the full year, 2022 gap diluted loss per share was $0.34. On an adjusted basis, 2022 adjusted diluted EPS was $0.43 compared to $0.46 in 2021. Free cash flow for the quarter was $27.3 million compared to $18.2 million in the prior year quarter. For the full year 2022, free cash flow was $64.9 million compared to $92.2 million in 2021. And we continue to have good liquidity. Our cash balance at December 31, 2022 was $194.3 million. Our debt continues to go down and stood at $402.5 million as of December 31, 2022, and we further reduced the balance by $100 million in February. In addition, during Q4, we upsized our revolving credit facility by $135 million to $300 million of total borrowing capacity. There is currently no outstanding balance on the revolver. Now I would like to hand back to Xiao to share additional updates on our business from the fourth quarter.