Thoughtworks Holding, Inc.

Hello, everyone, and welcome to ThoughtWorks' earnings call for the second quarter of 2023. 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 Guo 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 and anticipated costs and benefits of our restructuring actions, are forward-looking and, as such, are subject to known and unknown risks and uncertainties. These include, but are 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 to 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 the date when made. During our call today, we'll reference certain non-GAAP financial measures. We'll 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 over to Xiao.

Thank you, Rob. Welcome everyone to our second quarter earnings call. I would like to start by sharing the overall update on our business. And then Aaron will take you through our second quarter results in more detail. Aaron will share our guidance and then we'll open for Q&A. In the second quarter of 2023, we delivered revenue of $287 million with an adjusted EBITDA margin of 10.2%. both of which were below our guidance for the quarter. I want to first discuss the factors that impacted our Q2 results before moving on to the actions we're taking to address our performance going forward. This quarter, we experienced challenges with three of our top clients during the second half of Q2, where the scope of work being executed was reduced due to client-specific budgetary decisions or shift in the client's strategic direction. These unforeseen decisions accounted for approximately two-thirds of the revenue missed in a quarter when compared with our guidance. We attribute the remainder of the shortfall to broader macroeconomic factors. During the quarter, and in particular the latter half, we witnessed a slowing of pipeline conversion. The change in client behavior that we have highlighted in recent quarters, including incremental project ramp-ups and delayed decision-making, continued during the quarter to a greater extent than anticipated. In response to these challenges, we undertook a total review of our business, and today we're announcing a structural reorganization. As part of the program, we're reducing our employee headcount globally by approximately 5% to 6%. With this structural reorganization, we will move operational functions from a geographically dispersed to a centralized model, create a new organizational home for the majority of our professional services workforce, our digital engineering center, and evolve our regional market structure. Centralizing operations globally will reduce overall costs, better align resources to strategic priorities, right-size operations, and increase operational efficiencies. The new digital engineering center will provide supply across the regional market and allow us to respond swiftly to client requirements, including the continued shift from onshore to offshore delivery. Over our 30-year history, we have built various digital engineering centers across the world as a result of our geographic expansions. The time is right to further optimize our global delivery capabilities. the DEC will play an important role in capability building, developing talent, and driving innovation with our clients. We expect that the DEC will help improve our utilization rates and optimize resource deployment. We're pleased to share that the group will be led by Sudhir Tiwari, our Regional Managing Director of Indian and the Middle East. Finally, these changes will enable our regional markets to shift to a more client and industry-based go-to-market focus and allow the company to continue to fund investments in demand generation. And we will continue to invest in our outbound demand generating capabilities. The investments that we made over the last year are paying dividends as we continue to see an increasing share of our new TCV attributable to our outbound efforts. Driving additional business through our focused sales efforts remains a key part of our strategy. And we're pleased to announce that we have promoted Chris Murphy to the newly created role of chief revenue and client officer in order to oversee these efforts. Through these changes, we expect to emerge a stronger company in order to navigate the current difficult macro environment while best positioning ourselves for the future. We will do this while staying true to who we are, a company intensely focused on helping solve our clients' toughest challenges by harnessing our expertise with ever-evolving and cutting-edge technology. Now I'd like to move on to additional details about the quarter. I'm pleased to share that ThoughtWorks was among the leading providers in the Q2 2023 Global IOSG Index Breakthrough 15 category for the Asia-Pac region. This is based on annual contract value one over the last 12 months. We contracted with 29 new clients in the quarter, a year-on-year increase of 12% as we continue to build upon our outbound sales motion. Our voluntary tuition rate of 12.6% on a TTM basis remains well below industry norms and demonstrate the strength of our employee value proposition. In June, we published our annual social impact report. I'm very proud of the work ThoughtWorks does to amplify positive social change while advocating for equitable tech future. Now, let me share a few themes we're seeing in the market. We're focusing our demand generation programs on data and AI services. And we're seeing a lot of client interest, especially for generative AI. And ThoughtWorks is well positioned to meet this demand. we have multiple initiatives underway to enhance our service offerings, capitalize on inbound interest, and generate outbound demand. First, at the end of Q2, we have trained around 500 thought workers in AI-assisted software development. with a target to train a total of 1,800 by September 2023. We're trialing a broad array of technologies to quantify their impact within software development lifecycle. For example, we developed Team AI, a springboard to create custom tools to leverage Gen AI to accelerate software delivery tasks, including requirement analysis, code generation, and test planning. Second, we're developing new services and tools to help our clients pursue GenAI-led innovation and maximize value while upholding high standards in responsible tech. We just launched the ThoughtWorks Generative AI Product Accelerator. This is in response to client demand for GenAI-enabled product development. The Generative AI Product Accelerator combines ThoughtWorks' proven approach to developing products with our expertise in data and AI. This helps rapidly embed generative AI into ambitious digital products. We're already working with the top 50 clients and seeing value creation in just a matter of weeks. We have had many questions from clients about how to build gen AI applications. And so we recently published an article to share insights, lessons and practices in building an LLM powered generative application. And third, actively engaging with clients. We're currently working with 12 clients on generative AI projects and a further 20 clients where the work we're doing involves coding assistance with GenAI. A number of these are top 50 clients. The work we're doing with clients is across a diverse set of use cases. For example, software development, search, knowledge management, data analysis, and product development. While working with a new client, Bolt works. a Finnish technology company specializing in staff recruitment. Bolt works employee recruiters to scheme unstructured texts to find potential matches for candidates, interviews, and final recruiting decisions. This manual process is a bottleneck for scalable growth. ThoughtWorks built a large language model-based matching engine for jobs and workers to enhance scale and speed up the capabilities of their platform and business. Our solution is based on ChatGPT coupled with an open-source large language model for the more sensitive data operations. Other service offerings that drive productivity and cost efficiencies are getting traction in the market. For example, FinOps. Clients are looking to achieve efficiencies from their cloud estates. We recently worked with a global top 10 pharmaceutical client by applying our differentiated approach to FinOps, which combines FinOps platforms with continuous automated remediation. We were able to identify $30 million of cost savings across a cloud estate, which had an expected spend profile of $100 million over five years. And we're seeing good progress in our digital application management and operations services, Daemo. Daemo helps our clients achieve zero maintenance of their software by leveraging our strength in digital application management and operations. 11 of our top 50 clients are Daemo clients at the end of Q2. Our demo team is working with Thoughty Brands, a US-leading home service franchise group, to evolve their Successware product and continuously improve and ensure its long-term reliability, stability, and success. We continue to invest in our capabilities, and we believe we have the best digital talent in the industry. For these reasons, we believe that ThoughtWars is well-positioned in the market. At the core, our strategy is to deepen relationships with existing clients and renew logos. We then supplement this with focused strategies around M&A, partners, and geographic expansion. We continue to focus on the shape of our portfolio to more resilient verticals while investing in our service offerings, for example, demo. First, starting with partners. I'm pleased to share that ThoughtWorks recently became an official premier Google Cloud partner in North America. We have an exciting program planned at Google Next in San Francisco later this month. Our client Global, Latin America's largest media company, will be speaking. Global will share how by working with ThoughtWorks, they successfully migrated a petabyte-scale data pipeline from a legacy platform solution to Google Cloud. Turning now to client portfolio. The depth of our expertise and breadth of our capabilities means that we can help clients address a broad range of challenges. We assist from strategy right through to business outcomes. We're focused on improving the resilience of a vertical client portfolio. For example, in public sector, a new client in the US federal sector is the US Consumer Financial Protection Bureau. ThoughtWorks, along with its partners, have been awarded a five-year design development blanket purchase agreement to provide IT and digital services, including web security, DevOps design, and product development. And our existing public sector client, the National Payments Corporation of India, our architects are working closely with MPCI to scale the unified payments interface ecosystem as its protocols are entering new countries, including the ones in North America and the Middle East. We also work with the NCPI on enhancing and upgrading BHIM. BHIM is a payment app that facilitates easy and fast financial transactions using a unified payments interface. ThoughtWorks redesigned BHIM's customer onboarding and lifecycle. We migrated the app from a legacy framework to highly scalable React Native framework using a strangler approach. You can find details of some of these client successes on our 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 thank you to everybody for joining us on today's call. Earlier this morning, we released our second quarter results. As Xiao already mentioned, unexpected ramp downs by three significant clients in the second half of the quarter drove approximately two thirds of the quarterly revenue miss compared to the guidance we provided in May. In addition, our performance was impacted by slower pipeline conversion and incremental project startups. While these trends were previously witnessed during recent quarters, the degree to which they impacted client behavior and therefore our results was greater than we anticipated. Moving to our results, revenues declined 14% year-over-year during Q2 to $287 million. In constant currency, revenue declined 13% compared to the prior year period. acquisitions contributed one percentage point to the revenue growth rate in Q2. We remain close to our clients while macro uncertainty disrupts near-term budget spending. We are ready and committed to assist our clients with the toughest challenges of their multi-year digital transformation journeys. Our thought leadership and expertise allows us to solve these difficult problems, and our annualized average revenue per employee of $100,000 for the second quarter, which remains above the industry average, reflects the highly strategic work that we deliver for our clients. Now let's move to additional details about the quarter. We had another stable quarter with respect to bookings, and we are pleased to report that our overall bookings at the end of Q2 on a TTM basis stood at $1.5 billion. Our revenue base remains diversified, and we continue to focus on increasing the participation from more resilient verticals. For the quarter, we saw year-over-year declines of 8% in both Europe and APAC, 20% in North America, and 25% in LATAM. Moving to our industry verticals. Automotive travel and transportation continues to be our fastest growing vertical, rising 18% year over year. Energy public and health services declined 2%. Financial services declined by 12%. Technology and business services declined by 27%. And our retail and consumer vertical decreased by 29%. For the second quarter on a TTM basis, around 92% of our business came from existing clients. We currently have 35 clients with revenues greater than $10 million on a TTM basis, two more than the second quarter of 2022. In the second quarter, as a percentage of total revenue, our top five, top 10, and top 50 clients generated 18%, 28%, and 67% respectively. Adjusted gross margin was 36.6% for Q2 compared to 40.6% during the prior year period. Average bill rate and utilization were primarily responsible for the year-over-year decline. We saw modest low single-digit pricing declines on a like-for-like basis while also performing certain exploratory work for clients. In the second quarter, our adjusted SG&A as a percentage of revenue was 26.5% compared to 23.7% in the prior year period. Adjusted EBITDA was $29 million for the second quarter, and adjusted EBITDA margin was 10.2%, below our guidance mostly due to lower than expected revenue. Q2 GAAP diluted loss per share was $0.04 compared to a loss of $0.13 in the prior year period. Our adjusted diluted EPS was $0.03 compared to $0.11 for the second quarter of 2022. We had negative free cash flow for the quarter of $19 million compared to free cash flow of $20 million in the prior year quarter, mostly due to the payment of Connected Labs' earnout and quarterly income tax payments in the U.S., Our cash balance stood at $88 million as of June 30, 2023, alongside an undrawn revolving credit facility. We've made continued progress on repaying our debt this year, and our outstanding term loan balance was $299 million as of June 30, 2023. Now let me move to our business outlook for Q3 and for the full year 2023. We remain focused on expanding our pipeline as new and existing clients come to ThoughtWorks to not only help solve their toughest challenges today, but also to prepare for future technology opportunities such as AI. For the third quarter of 2023, we expect revenues to be in the range of $275 million to $285 million, reflecting a year-over-year decline of negative 17% to negative 14%, or negative 19% to negative 16% in constant currency. For the full year, we now expect revenues in the range of $1.137 billion to $1.157 billion, reflecting a year-over-year decline in the range of negative 12% to negative 11% for both reported and constant currency revenues. We expect acquisitions will contribute approximately one point to the revenue growth rate in Q3 and two points to the revenue growth rate for the full year. We expect adjusted EBITDA margin for the third quarter to be in the range of 9% to 11%. For the full year, we now expect adjusted EBITDA margin of 11% to 12%. We expect that the actions we are taking with respect to restructuring and the realignment of our cost base will remove $75 million to $85 million of costs from the business on an annualized basis. This initiative will begin in the third quarter and is expected to be completed within the next 12 months. We expect total pre-tax charges of $20 million to $25 million. We expect to incur the majority of the pre-tax charges in 2023. We expect that the charges will be offset by pre-tax savings. For the third quarter, we expect adjusted diluted EPS to be in the range of 2 cents to 3 cents, assuming a weighted average share count of approximately 332 million diluted shares outstanding. For the full year, we now expect adjusted diluted EPS of 11 cents to 13 cents, assuming a weighted average share count of approximately 332 million diluted shares outstanding. Our Q3 guidance incorporates share-based compensation of $18 million. For the full year, we expect share-based compensation will total $74 million. As a reminder, beginning in 2024, we anticipate annual stock-based compensation to range between 2% to 4% of revenue, and we would like to provide some context that is shaping our guidance for Q3 and the remainder of the year. First, the general contracting environment grew more difficult as we progressed through the second half of Q2, and we are factoring a continuation of recent trends into our guidance for the remainder of 2023. Specifically, we have moderated our expectations for the pace of pipeline conversion as we continue to seek caution with client budgets. Second, we have factored in specific project ramp downs that occurred in Q2 and will impact the rest of the year. Third, our guidance incorporates a higher mix of offshore delivery compared to our previous forecast. We have previously discussed the ongoing shift of work from onshore to offshore delivery, but we have observed a faster than expected pace of change. While this dynamic is generally margin accretive, it does present a headwind to the top line and is impacting margins in the short term as we rebalance supply and demand in onshore versus offshore locations. Overall, while Q2 results did not meet our expectations, we are confident that we are taking the appropriate steps to build a more durable business. In addition to the actions we are taking to centralize our operations and reduce costs, there will also be some reductions in a professional services headcount where individual skill sets or experience levels no longer align with client requirements and to enable us to make geographic adjustments to better align with client needs. The majority of the annualized cost savings will come from reductions in operating spend, particularly in non-client back office functions. We are focused on driving efficiency while also providing the appropriate investments for the long term, such as continuing to build our outbound demand generation and fortifying our technology leadership. Our clients' needs for digital transformation remain intact. Our pipeline is building, and we remain close with our clients. And we are partnering with our clients as they look to capitalize upon the various technological innovations of both today and of the future. Now let me hand back to Rob.