Thoughtworks Holding, Inc.

Hello, everyone, and welcome to ThoughtWorks' earnings call for the third quarter of 2023. We'll 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 Factor 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'll 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 our Form 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 Zhao.

Thank you, Rob. Hello, everyone, and welcome to our third quarter earnings call. I'd like to start with the overall update on our business before Aaron takes you through our results in more detail. Aaron would then share our guidance before we move to Q&A. The quarter progressed in line with the expectations that we discussed during our last earnings call. We delivered revenue of $280 million in line with our guidance and adjusted EBITDA margin of 12%. which exceeded our guidance. The restructuring program we shared with you in August is being executed to plan. The results are $17 million in quarterly cost takeout by the end of the quarter, or $68 million on an annualized basis. Our Global Digital Engineering Center is operational and is driving innovation with our clients and improving our ability to innovate and respond to client demand. Now let me share an update on the demand environment. We're seeing stability in our sales pipeline compared with Q2 2023 with fewer client pauses. Our new logo acquisition continues to be a strength with 34 new clients in a quarter, increased from 29 in Q2 2023. We are prioritizing our investments in sales and marketing. We're seeing our efforts in outbound demand generation paying off, contributing 51% of the net new bookings in Q3. Though we're still seeing longer average sales cycles and programs of work being broken up into smaller deals, we're hearing from some of our clients that budget pressure is starting to ease. I personally met with over 70 clients in the third quarter. Based on my conversations, digital transformation remains a top priority for our clients, despite the macro environment. We're focusing on creating value for our clients through series expansion. For example, demo, innovation around Gen AI and core services, data platforms, data mesh, enterprise modernization, cloud, and FinOps. We continue to see a lot of client interest in GenAI and we're well positioned to meet this demand. We're focusing on four main areas, AI-assisted software delivery, AI-powered digital products, AI and data platforms at scale, and AI-assisted enterprise modernization, alongside some vertical opportunities, for example, drug discovery. We have a GenAI reskilling program underway at scale. We have trained over 2,300 ThoughtWorkers across 51 courses. We were excited by ThoughtWorker engagement in our AI for Software Festival. The festival is a huge success. We're supported by Microsoft and GitHub, who are helping with execution, contributing co-pilot licenses, and are now working with us on joint opportunity development. We're pleased with the innovation pipeline that is shaping up as our teams explore and experiment with new tools and technologies. Legacy Bridge is a good example of our innovation around GenAI. Legacy Bridge is a ThoughtWorks AI-assisted software delivery technology which brings a differentiated approach to legacy code modernization. According to IDC's August 2023 Worldwide CIO Survey, Legacy modernization is a top priority for CIOs. In Q3, we're working with a new client, a North America top five insurance company, using Legacy Bridge to accelerate the modernization of their legacy applications. At the end of Q3, we're working with around 30 clients on Gen AI projects. For example, we're working with a new client, MEGT, an Australian employment and training not-for-profit business. MEGT has been supporting employers, apprentices, trainees, job seekers, and students since 1982. MEGT has an ambitious strategy underpinned by a digital growth and innovation agenda. We partner to deliver AI capability assessment, to surface high-value AI use cases across MEGT value chains. Our scope included baselining, organizational, digital maturity, and readiness. We provided an actionable roadmap to help MEGT plan and execute on its high-value digital and AI-enabled strategic initiatives. ThoughtWorks is also working with new client Rightmove. Rightmove is the UK's number one property website. We're working with Rightmove to explore how AI and GenAI capabilities could support their strategic goals. Using GenAI tools and helping building AI skills in-house, we're looking into ways to increase operational efficiency, as well as bring deeper user value across a suite of Rightmove products, from B2C property search to features for estate agents. Additional new GenAI wins in the quarter include a Fortune 500 pharmaceutical, a top 10 semiconductor company, and a $10 billion turnover European e-commerce company. At the core, our growth strategy is to deepen relationships with existing clients, and win new logos. We then supplement this with focused strategies around M&A, geographic expansion, and partners. First, starting with partners. In October, we announced that ThoughtWorks has joined Stripe's partner ecosystem to provide solutions that enable modern digital commerce and financial operations. At our clients, High Pages Group. Australia's number one online trace people marketplace. We have developed a new and improved payment system on Stripe's payment processing platform. ThoughtWorks financial modernization solution powered by Stripe has made the payment experience even simpler and smoother for high pages, trace people and their customers. I'm proud that in Q3, ThoughtWorks was recognized as the Google Cloud Global Partner of the Year for diversity and inclusion. Striving to be a company that truly reflects the diverse societies we're working has been a priority of ours. We passionately believe that technology must be created by diverse teams that reflect society to better serve society. Now, let me share some details of recent successes with existing clients. Pexa Group. one of Australia's leading property tech organizations, has been working with ThoughtWorks since 2021. In August 2023, PEXA signed a further three-year partnership with ThoughtWorks, ensuring work continues on PEXA's most important digital initiatives. At BMW, we have been working together on the BMW Connected AI platform, which we have built on top of a microservices platform based on Kubernetes clusters in AWS cloud. The connected AI platform supports multi-region compliance regulations and provides a standardized, scalable way to support all current and future connected AI use cases to ensure cost-efficient AI deployments. Multi-tenancy and portability between cloud providers were also key design considerations. BMW's data scientists now don't have to worry about infrastructure aspects like persistent storage, identity, access, and infrastructure security. Everything's built into the platform. We're now live with the first use case around proactive vehicle maintenance management. We're facilitating many more AI use cases, including the BMW Intelligent Personal Assistant. We're pleased that in Q3, our client Falabella won the Forrester 2023 Technology Strategy Impact Award for the Americas. Falabella. the $14 billion retail and financial services company that operates across Latin America, has been a ThoughtWorks client since 2018. Falabella partnered with ThoughtWorks to define the company's business agility model and develop an e-commerce product blueprint that evolved into its cloud-native digital retail backbone. This acts as the company's core technology platform across its channels, segments, and countries. Google Cloud hosts the multi-tenant DRB, It enables Falabella's store modernization and digital point of sale system that unifies its digital search, catalog, cart, and checkout experiences. Falabella expects the DRB's modern architecture to substantially reduce time to market for new features and increase resilience. Now, let me share a couple of examples of our successes with new clients. With Air Canada, Canada's largest airline. We're partnering to consolidate their disparate design systems into one best-in-class globally aligned design system, iteratively demonstrate its use via rapid prototyping and create a roadmap for its development and evolution. In the UK, we're working with a manufacturing company, Axel Nobel, who delivers sustainable and innovative solutions to their customers, communities, and the environment to protect future generations. We're partnering with Axel Nobel on their e-commerce platform to improve their scalability and maintainability in order to support future growth and strategy. Now, in my discussions with clients, they often tell me that two of the things that really differentiate ThoughtWorks are our brilliant technologists and our thought leadership. I'm proud to share that we issued volume 29 of the ThoughtWorks Technology Radar in October. our bi-annual report informed by real ThoughtWorker experience solving our clients' most complex business challenges. The CTO of MoneySupermarket.com posted what many of our clients tell me. He posted, in an ever-expanding technology landscape, it's resources like the technology radar that help guide us through the maze of options. The research, insights, and recommendations truly stand out. And in Q3, ThoughtWorks was ranked by Forbes as one of the world's best management consulting firms. This recognition was based on feedback from clients and we're delighted to be ranked for the first time in 2023. Now let me share an update on our people. As we've restructured our business during the quarter, taking care of thought workers has been a top priority. We're pleased that voluntary attrition remains low at 12.2% on a TTM basis in Q3 compared with 12.6% on a TTM basis in Q2. Our headcount at the end of Q3 was around 11,000. We continue to selectively hire with a focus on specific skill sets, such as data, infrastructure, in addition to expanding our sales force. Our Glassdoor rating is 3.93 in Q3. We exceeded industry benchmarks in five of the workplace attributes categories, including career opportunity, culture and values, and senior management. In Q3, we continue to lead the industry in responsible and ethical technology practices, for example, with our work alongside the United Nations. We're providing guidance on ensuring awareness of bias, transparency, and the mitigation of negative unintended consequences in examining emerging technologies. ThoughtWorks and the UN team have developed a framework and set of approaches for the responsible creation and management of technology systems and products. I would like to acknowledge the continued support of our ThoughtWorkers and thank them for the extraordinary impact they deliver every day. Now let me hand over to Erin.

Thank you, Xiao, and thanks to everyone for joining us on today's call. Earlier this morning, we announced our results for the third quarter of 2023. The quarter progressed in line with the expectations we provided in August. Our teams are working closely with our clients on their most strategic initiatives, and our overall pipeline remains robust. Our outbound engine is delivering well, contributing 51% of net new contracts in the quarter. New client acquisition continues to be a strength with 34 new clients in the quarter. Our restructuring program is progressing according to plan. I'm pleased to report that our fast execution has resulted in $68 million of cost savings on an annualized basis. Our global digital engineering center is operational and is optimizing our delivery capabilities. The DEC is driving efficiencies and improving utilization, which in Q3 was within our target range. Now let's move on to our results in more detail. Revenues in Q3 were $280 million, representing a year-over-year decline of 16%. In constant currency, revenue declined 17%. Acquisitions contributed one percentage point to the revenue growth rate in Q3. For the quarter, we saw year-over-year declines of 10% in APAC, 17% in Europe, 18% in North America, and 25% in LATAM. Moving to our industry verticals, automotive travel and transportation remains our fastest growing vertical, rising 12% year over year. We saw year over year declines of 14% within energy, public and health services, 16% in financial services, 23% in retail and consumer, and 25% in technology and business services. For the third quarter on a TTM basis, around 93% of our business came from existing clients. We currently have 34 clients with revenues greater than $10 million on a TTM basis. In the third quarter, as a percentage of total revenue, our top 5, top 10, and top 50 clients generated 19%, 29%, and 67% respectively. In the third quarter, our annualized average revenue per employee was $99,000, which is above the industry average and is reflective of the highly strategic work that we provide to our clients. On a trailing 12-month basis, we ended Q3 with bookings of $1.4 billion. This is a 6.7% decline versus Q3 2022. As we have discussed previously, this is primarily due to smaller contract sizes and shorter contract terms. Adjusted gross margin was 37.4% for Q3 compared to 40.7% during the prior year period. Q3 2023 adjusted gross margin included some temporary headwinds related to onshore-offshore mix shift as well as mid-single-digit pricing declines on a like-for-like basis. In the third quarter, our adjusted SG&A as a percentage of revenue was 26% compared to 21.2% in the prior year period and 26.5% in Q2 2023. Adjusted EBITDA was $34 million for the third quarter and adjusted EBITDA margin was 12%. Q3 gap diluted loss per share was $0.08 compared to a loss of $0.12 in the prior year period. Our adjusted diluted EPS was $0.04 compared to $0.08 for the third quarter of 2022. We had free cash flow of $4 million during Q3 compared to free cash flow of $28 million in the prior year period. This figure is inclusive of $11 million in restructuring-related cash payments. We continue to have good liquidity. Our cash balance stood at $87 million as of September 30, 2023, alongside an undrawn revolving credit facility. Our outstanding term loan balance was $297 million as of September 30, 2023. Now let's turn to our business outlook for Q4. For the fourth quarter of 2023, we expect revenues to be in the range of $265 million to $270 million, reflecting a year-over-year decline of negative 15% to negative 13%, or negative 16% to negative 14% in constant currency. Our Q4 guidance is informed by sales cycles remaining elongated and programs of work being broken up into smaller deals. However, we are seeing stability in the pipeline compared to earlier quarters, especially among our larger clients. We expect utilization adjusted for seasonality to continue to trend upwards and billable hours adjusted for seasonality to be consistent into Q4. For the full year, we now expect revenues in the range of $1.139 billion to $1.144 billion, reflecting a year-over-year decline of negative 12% or negative 12% to negative 11% in constant currency. This includes an incremental $4 million of FX headwinds compared to the guidance we provided last quarter. We expect acquisitions will contribute approximately 1 percentage point to the revenue growth rate in Q4 and 2 percentage points to the revenue growth rate for the full year. We expect adjusted EBITDA margin for the fourth quarter to be in the range of 10.5% to 12.5%. For the full year, we now expect adjusted EBITDA margin of 11% to 11.5%. With respect to our restructuring program, we continue to expect total pre-tax charges of $20 million to $25 million, of which we have already recorded $16 million through the end of Q3. We continue to expect annualized cost savings of $75 million to $85 million resulting from our restructuring actions. For the fourth quarter, we expect adjusted diluted EPS to be in the range of $0.02 to $0.04, assuming a weighted average share count of approximately 328 million diluted shares outstanding. For the full year, we now expect adjusted diluted EPS of $0.12 to $0.14, assuming a weighted average share count of approximately 331 million diluted shares outstanding. Our Q4 guidance incorporates share-based compensation of $17 million. For the full year, we expect share-based compensation will total $65 million. By the end of 2023, we will have fully recognized all share-based compensation related to our IPO. As mentioned earlier, we are seeing signs of stability across our client base. We intend to provide our guidance for 2024 during our Q4 earnings call next year. But our early expectation is that we will see revenue stability from Q4 into Q1 of 2024, followed by modest sequential growth throughout the remainder of 2024. In closing, we remain focused on driving digital transformation with our clients. These are long-term strategic initiatives for our clients, and we continue to foster multi-year relationships. With that, I'll turn the call back over to Rob.