Thoughtworks Holding, Inc.

Hello, everyone, and welcome to ThoughtWorks earnings call for the fourth 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 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 Xiao. Thank you, Rob.

Hello, everyone. And thank you for joining us. And thank you to all ThoughtWorkers for the extraordinary impact they deliver every day with our clients. 2023 was a challenging year as we navigated a difficult macroeconomic environment. It was also a year of transformation and investment in our business. Last year, we embarked on the biggest change as a company in 20 years. We began the restructuring of our business to establish a new operating model. We're pleased with the resulting cost savings in 2023 of $81 million on an annualized basis. We centralized our operational functions to reduce costs and drive efficiencies. We set up a global digital engineering center. The DEC helps us respond faster to clients, support the continued shift offshore, and to manage utilization, which continues to improve quarter-on-quarter on a seasonally adjusted basis. Finally, we organize our regional sales teams around an industry-based go-to-market so that we can build expertise and specialization in specific industry verticals. We began this restructuring during the third quarter of 2023, and we will continue the transition in 2024. Alongside the transformation of our operations, we continue to invest in our business. Our investments in sales and marketing, partners, new services, and capabilities position us as a stronger company as we head into 2024. We undertook this change while staying true to who we are, a company of brilliant technologists, intensely focused on helping solve our clients' toughest challenges by harnessing our expertise with cutting-edge technology. Now let me share our fourth quarter and 2023 four-year results. We generated revenue of $252 million during the fourth quarter with an adjusted EBITDA margin of 5.5%. We recognize that the fourth quarter was short of what we originally guided to in November. Our results were primarily impacted in two ways. Around two-thirds of revenue shortfall was due to specific supply-side limitations. This was primarily due to the scale of the structure change in our operating model, which caused some disruption to our operations in the fourth quarter. We have taken steps to address this going forward. Around one-third of the shortfall was demand side. Continued client caution resulted in smaller project ramp-ups, more project delays, and we had slightly higher pricing pressure than we anticipated. We expect this cautious behavior to continue into 2024. Now turning to the full year 2023. We delivered revenue of $1.1 billion for the full year and an adjusted EBITDA margin of 9.9%. While 2023 was a year of transformation, our foundation is strengthening. supported by a strong client base and long-term client relationships. Our deep and trusted client relationships are again reflected in the 54 clients with bookings over $5 million at year-end. New client acquisition remains a strength, and we continue to gain momentum. We contracted with 156 new clients in 2023, 46 of those in the fourth quarter. Bookings from new logos in 2023 was around $120 million. We have seen traction from our vertical focus sales model with higher new logo acquisition in energy, public, and health services and financial services and insurance verticals. These are the verticals that we have intentionally focused on. Our demo managed services are getting good uptake with 30% of our top 50 clients now benefiting from the cost savings and quality improvements. Demo-managed services are valued by clients because it is both a cosplay and an enabler of faster digitization. It's strategic for ThoughtWorks for both service expansion and as a shift to longer-term contracts. We're taking an early lead in AI-first software delivery, and we're pleased by client interest in Jan and I with over 50 client projects at year-end. Janina is acting as a catalyst for companies to modernize their legacy systems, capitalize on the cloud, and make better use of their data assets. We have observed that client spending priorities have changed. We're seeing a reduction of growth-oriented consultancy work, which has historically been a high percentage of our business. While we believe discretionary spending will return, we have been diversifying our business to address more of our clients' urgent needs where we have the right to win. For example, enterprise application modernization, third-party software implementation, and demo. We have outstanding technologies and a reputation for innovation and thought leadership. We are well positioned to help our clients evolve their operations to harness the power of cloud, data, and AI to adapt for future success. Now let me hand it over to Aaron.

Thanks, Xiao. And thank you to everybody who has joined our call today. We remain close with our clients and we continue to invest in building those relationships. We're pleased with the progress we've made as we've built out our sales and marketing capabilities. In the fourth quarter, 58% of bookings were from outbound sales and marketing to complement our historically strong inbound interest. Investments in our partnership channel have resulted in our current sales pipeline having double the partner participation compared to a year ago. We have embedded partners in our standard sales processes, further expanded our certification programs, and are leveraging the capabilities of ITOC. We believe we have the best technologists in the industry. Our attrition rate, which remains below industry averages, reflects a strong sense of belonging among our employees. In Q4, voluntary attrition on a TTM basis was 12%, an improvement sequentially from 12.2% in Q3 2023, and stable year over year from 12% in Q4 of 2022. At the end of 2023, our headcount was around 11,000. We continue to selectively hire with a focus on specific skill sets, such as data and infrastructure. Now let's look at the fourth quarter in more detail. Revenues were $252 million, representing a year-over-year decline of 19%. In constant currency, revenue declined 20%. Acquisitions contributed approximately one percentage point to the revenue growth rate in Q4. For the quarter, we saw year-over-year declines of 10% in APAC, 20% in Europe, 23% in North America, and 38% in LATAM. Among our industry verticals, revenue declined by 5% year-over-year in automotive travel and transportation, 11% in financial services and insurance, 21% in energy, public, and health services, 24% in technology and business services, and 26% in retail and consumer. During Q4, as a percentage of total revenue, our top 5, top 10, and top 50 clients generated 19%, 29%, and 65% respectively. We had 31 clients with revenues greater than $10 million during 2023. Adjusted gross margin was 33.6% for Q4 compared to 39.7% during the prior year period. Our Q4 adjusted gross margin saw year-over-year headwinds due to the temporary cost of shifting mix offshore, as well as high single-digit pricing declines on a like-for-like basis. In the fourth quarter, our adjusted SG&A as a percentage of revenue was 28% compared to 22.1% in the prior year period. Adjusted EBITDA was $14 million for the fourth quarter for an adjusted EBITDA margin of 5.5%. Q4 GAAP diluted loss per share was $0.07 compared to earnings per share of $0.05 in the prior year period. Our adjusted diluted EPS was $0.02 compared to $0.10 for the fourth quarter of 2022. We recorded free cash flow of $10 million during Q4 compared to free cash flow of $28 million in the prior year period. We have good liquidity with a cash balance of $100 million, and our outstanding term loan balance stood at $295 million as of December 31, 2023. Additionally, our revolving credit facility of $300 million remains undrawn. Turning to our full year 2023 results, we recorded revenue of $1.1 billion, down 13% versus 2022 in both US dollar and constant currency. Acquisitions contributed two percentage points to the full year revenue growth rate. For 2023, our average revenue per employee was $98,000, which continues to reflect the strategic importance of the work that we deliver. Our revenue per employee remains above the industry average. During 2023, around 93% of our business came from existing clients. For 2023, we recorded bookings of $1.2 billion, down 14% compared to 2022, as cautious client behavior throughout the year pressured contract length and sizing. New bookings compared to revenue realization remain resilient. Adjusted gross margin was 36.1% for the full year 2023 compared to 41.6% in 2022. Full-year adjusted SG&A margin as a percentage of revenue was 26.3% in 2023 compared to 22.4% in 2022. Adjusted EBITDA totaled $112 million during 2023 with an adjusted EBITDA margin of 9.9% compared to an adjusted EBITDA margin of 19.8% in 2022. For the full year 2023, we recorded gap diluted loss per share of 22 cents compared to a loss per share of 34 cents in 2022. Full year adjusted diluted EPS was 11 cents compared to 43 cents in 2022. We recorded free cash flow of $40 million for the full year in 2023 compared to $65 million in 2022. Now let me hand the call back to Xiao to share a broader update on the business.