Thoughtworks Holding, Inc.

Hello, everyone, and welcome to ThoughtWorks' earnings call for the first quarter of 2024. 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 factor section of our annual report on Form 10-K, 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 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. Earlier today, we announced that I will be stepping down from my role and the board has selected Mike Sutcliffe as my successor, effective June 17th. I have spent 25 years at ThoughtWorks, starting as a software developer in 1999, before taking on various leadership roles around the world. And I'm grateful for the many opportunities I've had. It has been a privilege to be a ThoughtWorker and to be able to learn from the best and brightest in our industry. I'm proud of what we have accomplished together, growing this business and delivering extraordinary impact for our clients around the world. And now it's right time to pass the baton. We're expecting to return to sequential growth in Q2, and I know I'm leaving this business in very capable hands. I'll continue to support as an advisor to ensure a smooth transition. In Q1, we exceeded our revenue expectations we delivered in the context of a macroeconomic environment that, though stable, isn't yet showing signs of improvement. Our sales cycles are still elongated, but our client portfolio remains steady. we're having more client conversations around growth-oriented work and seeing strong demand for AI and data services, enterprise modernization, and demo-managed services. However, in Q1, we fell short of our adjusted EBITDA margin guidance. This is primarily due to the timing of our ongoing supply rebalancing program, which includes adjustments to our offshore-onshore mix. This has resulted in a lower-than-expected growth margin. Our ongoing restructuring program focuses on efficiencies and we're committed to improving our margin profile and we're executing our plan to achieve it. Our client strategies are centered around technology. Our investments in sales and marketing, partners and new services are paying off and we continue to focus on delivering extraordinary impact for our clients. Now let me share our first quarter results. We generated revenue of $249 million during the first quarter with adjusted EBITDA margin of 2.7%. Our industry-based golden market is gaining momentum. We delivered strong bookings in the quarter and expect to return to sequential quarter-over-quarter growth in Q2 2024. We remain focused on growing our client relationships, as reflected in the 57 clients with trailing 12-month bookings of over $5 million at quarter end. New client acquisition remains a strength. We contracted with 49 new clients in the first quarter, compared to 46 in the fourth quarter of 2023. We have seen traction from our vertical-based sales model, with higher new logo acquisitions in our energy, public, and health services, technology, and business services. These are verticals that we have intentionally focused on. We have outstanding technologies and a reputation for innovation and thought leadership. We're well positioned to help our clients evolve their operations and harness the power of cloud, data, and AI to adapt for future success. Now let me hand over to Aaron.

Thanks Xiao and thank you to everyone for joining our call today. We continue to invest in strengthening our client relationships and we are driving engagement with clients across all verticals. Our focused approach to building demand continues to provide ongoing returns with 62% of quarterly bookings in Q1 coming from outbound efforts. Our teams are converting pipeline opportunities helping us achieve top line results ahead of our expectations in Q1. Our team's execution comes against the backdrop of a still challenged macro environment. That said, the macro remains steady and we have not seen the development of incremental client budget pressure since last quarter. Their digital needs remain intact, and we are partnering with our clients as they put their plans into action. Now let's turn to more detail about the first quarter. Revenues were $249 million, representing a year-over-year decline of 19% in both USD and constant currency. Acquisitions completed in the last 12 months were immaterial to the revenue growth rate in Q1. During the quarter, we saw year-over-year declines of 11% in APAC, 21% in Europe, 23% in North America, and 31% in LATAM. Among our industry verticals, revenue declined by 8% year-over-year in automotive travel and transportation, 12% in technology and business services, 19% in retail and consumer, 25% in energy public and health services, and 29% in financial services and insurance. Compared to Q4 of 2023, we saw sequential growth in automotive travel and transportation, energy public and health, and technology and business services. During Q1, as a percentage of total revenue, our top 5, top 10, and top 50 clients generated 18%, 29%, and 68%, respectively. As of the end of Q1, we had 27 clients with TTM revenues greater than $10 million. On a TTM basis, around 95% of our business came from existing clients. As of Q1 of 2024, our annualized average revenue per employee was $92,000. We continue to believe that this metric, which remains above the industry average, reflects the strategic importance of our work. On a trailing 12-month basis, we finished Q1 with bookings of $1.2 billion, down 20% compared to Q1 of 2023. Our year-over-year TTM bookings reflect the change in client behavior that developed over the prior year, which pressured contract length and sizing. However, we continued to see relative stability among our clients, and TTM bookings were unchained sequentially from Q4 of 2023. As Xiao mentioned, our Q1 bookings were strong. Adjusted gross margin was 31% for Q1 compared to 36.4% during the prior year. Our Q1 adjusted gross margin continued to be impacted by lower onshore utilization and high single-digit pricing declines on a like-for-like basis. In the first quarter, our adjusted SG&A as a percentage of revenue was 28.3% compared to 25.1% in the prior year. We've seen a year-over-year reduction of $7 million in adjusted SG&A through proactive cost management while still investing in demand generation. Adjusted EBITDA was $7 million for the first quarter for an adjusted EBITDA margin of 2.7%. Q1 GAAP diluted loss per share was $0.10 compared to $0.03 in the prior year period. Our adjusted diluted loss per share was $0.02 compared to adjusted diluted EPS of $0.03 during the first quarter of 2023. Free cash flow was negative $20 million during Q1 compared to free cash flow of $31 million in the prior year period. The timing of certain items, in addition to year-over-year revenue headwinds, impacted cash flow in the quarter. We expect positive cash flow in Q2. As of March 31, 2024, our term loan balance stood at $294 million. We continue to have good liquidity, ending the quarter with a cash balance of $73 million and an undrawn $300 million revolving credit facility. Our outstanding employees make our achievements possible and we continue to believe that we have the best technologists in the industry. Our attrition rate remains below industry averages. In Q1, voluntary attrition on a TTM basis was 12.4%, slightly up sequentially from 12% in Q4 2023, and an improvement year-over-year from 13.1% in Q1 of 2023. At the end of Q1 2024, our headcount was around 11,000. We are hiring selectively, focusing on specific skill sets such as data and infrastructure. Now let me hand the call back to Xiao to share a broader update on the business.