Thoughtworks Holding (TWKS) Q4 2023 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call presents a mixed picture. Financial performance shows growth potential with large deals and expected revenue growth, but pricing pressure and cautious client behavior are concerns. Product updates and restructuring indicate long-term benefits, but supply constraints and headcount issues persist. Market strategy is balanced with growth in some sectors but pullbacks in others. Financial health shows improvement, yet margin recovery remains uncertain. The Q&A section highlights uncertainties in revenue growth and pricing stabilization. Without a clear market cap, the overall sentiment is neutral, reflecting both positive and negative factors.
Key Financial Performance
Q4 2023 Revenue $252 million, a year-over-year decline of 19%. The decline was primarily due to supply-side limitations from restructuring and client caution leading to smaller project ramp-ups and delays.
Full Year 2023 Revenue $1.1 billion, down 13% versus 2022. The decline was attributed to cautious client behavior affecting contract length and sizing.
Q4 2023 Adjusted EBITDA Margin 5.5%, compared to 10% in Q4 2022. The decrease was due to operational disruptions from restructuring and pricing pressures.
Full Year 2023 Adjusted EBITDA Margin 9.9%, down from 19.8% in 2022. The decline was driven by increased SG&A expenses and operational challenges.
Q4 2023 GAAP Diluted Loss Per Share $0.07, compared to earnings of $0.05 in Q4 2022.
Full Year 2023 GAAP Diluted Loss Per Share $0.22, compared to a loss of $0.34 in 2022.
Q4 2023 Adjusted Diluted EPS $0.02, down from $0.10 in Q4 2022.
Full Year 2023 Adjusted Diluted EPS $0.11, compared to $0.43 in 2022.
Q4 2023 Free Cash Flow $10 million, down from $28 million in Q4 2022.
Full Year 2023 Free Cash Flow $40 million, compared to $65 million in 2022.
Q4 2023 Adjusted Gross Margin 33.6%, down from 39.7% in Q4 2022. The decline was due to costs associated with shifting operations offshore and pricing declines.
Full Year 2023 Adjusted Gross Margin 36.1%, down from 41.6% in 2022. The decrease was attributed to operational challenges and cost structure changes.
Q4 2023 Adjusted SG&A as a Percentage of Revenue 28%, compared to 22.1% in Q4 2022.
Full Year 2023 Bookings $1.2 billion, down 14% compared to 2022 due to cautious client behavior.
Average Revenue Per Employee (2023) $98,000, reflecting the strategic importance of the work delivered.
Annualized Cost Savings from Restructuring (2023) $81 million, achieved through operational efficiencies.
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Operating Highlights
New Services and Capabilities: Investments in sales and marketing, partners, new services and capabilities positioned us as a stronger company as we head into 2024.
AI-first Software Delivery: We’re taking an early lead in AI-first software delivery with over 50 client projects at year end.
DAMO Managed Services: 30% of our top 50 clients now benefiting from the cost savings and quality improvements from DAMO managed services.
Market Positioning: Thoughtworks has been included for the first time in the Gartner Magic Quadrant, positioned in the visionary quadrant for custom software development services.
Client Acquisition: Contracted with 156 new clients in 2023, with bookings from new logos around $120 million.
Cost Savings: Achieved cost savings of $81 million on an annualized basis through restructuring.
Operational Efficiencies: Centralized operational functions to reduce costs and drive efficiencies.
Restructuring Actions: Restructuring began in Q3 2023 to establish a new operating model, with continued transition into 2024.
Focus on Industry Verticals: Organized regional sales teams around an industry-based go-to-market strategy.
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Risk or Challenges
Supply Side Limitations: Two-thirds of the revenue shortfall in Q4 was due to specific supply side limitations caused by the scale of the restructuring, which disrupted operations.
Demand Side Challenges: One-third of the revenue shortfall was attributed to client caution, resulting in smaller project ramp-ups, project delays, and higher pricing pressure than anticipated.
Macroeconomic Environment: The company navigated a difficult macroeconomic environment in 2023, which continues to impact client spending and project sizes.
Cautious Client Behavior: Continued client caution is expected to persist into 2024, affecting sales cycles and project sizes.
Pricing Pressure: There is an expectation of lower pricing on a like-for-like basis due to market conditions and a shift in work being done offshore.
Restructuring Costs: The restructuring program is expected to incur total pre-tax charges of $20 million to $25 million, with $19 million already recorded.
Revenue Decline: For Q1 2024, revenues are expected to decline by 20% to 21% year-over-year, reflecting ongoing challenges.
Adjusted EBITDA Margin: The adjusted EBITDA margin is expected to be between 3% to 4% for Q1 2024, indicating ongoing financial pressures.
Operational Efficiency: The company is focused on driving operational efficiencies in 2024 to improve margins and address supply side challenges.
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Guidance & Outlook
Restructuring Actions: Thoughtworks began restructuring its business to establish a new operating model, resulting in annualized cost savings of $81 million in 2023.
Global Digital Engineering Center: A global digital engineering center was established to respond faster to clients and support the shift to offshore operations.
Industry-based Go-to-Market Strategy: Regional sales teams were organized around industry verticals to build expertise and specialization.
AI-first Software Delivery: Thoughtworks is focusing on AI-first software delivery, with over 50 client projects related to generative AI.
DAMO Managed Services: 30% of top 50 clients are benefiting from DAMO managed services, which provide cost savings and quality improvements.
Q1 2024 Revenue Guidance: Expected revenues in the range of $241 million to $246 million, reflecting a year-over-year decline of 20% to 21%.
Full Year 2024 Revenue Outlook: Expected revenues in the range of $980 million to $1.01 billion, reflecting a year-over-year decline of 10% to 13%.
Q1 2024 Adjusted EBITDA Margin: Expected adjusted EBITDA margin for Q1 2024 in the range of 3% to 4%.
Full Year 2024 Adjusted EBITDA Margin: Expected adjusted EBITDA margin of 8% to 10% for the full year 2024.
Adjusted Diluted EPS Guidance: Expected adjusted diluted EPS for the full year 2024 in the range of $0.01 to $0.06.
Restructuring Charges: Total pre-tax charges expected to be between $20 million to $25 million, with $19 million already recorded.
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Shareholder Return Plan
Share-based compensation for 2024: $46 million
Expected adjusted diluted EPS for 2024: $0.01 to $0.06
Total pre-tax charges for restructuring program: $20 million to $25 million
Annualized cost savings realized from restructuring: $81 million
Targeted range for annualized cost savings: $75 million to $85 million
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Key Q&A
Q:Can you just dig in more on what has changed in client behavior over the last three months?
A:The client behavior is stabilizing with respect to project turn, but we continue to see pricing headwinds, project delays, and slower ramp-ups. Clients are cautious about budgets, leading to flat year-on-year budgets and a need to do more with the same budget.
Q:Can you dig in a bit more specifically on what caused the challenges in 4Q, what you’ve done that gives you the confidence that you’ve remedied the issues, and is there any risk of a client loss due to these constraints?
A:About two-thirds of the revenue miss was related to internal factors, which are seen as temporary limits to supply. We have remedied these issues through a restructuring program, and we are not concerned about client relationships.
Q:Is the pricing pressure a function of renewals, and can you quantify the overall pricing pressure?
A:The pricing dynamic is mostly driven by contract renewals and extensions. We are seeing high single-digit year-on-year pricing declines, but we expect stabilization moving forward.
Q:Can you discuss the dynamics you’ve seen among your top clients? Are those revenue declines due to pricing or ramp downs in projects?
A:The revenue decline among top clients is more driven by shifting to offshore work and pricing pressure rather than volume.
Q:What are the demand trends you’re seeing across end markets?
A:Performance across industry verticals was down in Q4, with energy and public healthcare being more resilient. Financial services are stable, while tech retail is seeing a pullback.
Q:How are you thinking about headcount this year?
A:Voluntary attrition is outpacing hiring, but we continue to hire in select areas. We are confident in our ability to hire when demand rebounds.
Q:How should we think about free cash flow in ’24?
A:Restructuring charges will impact 2024 but less than in 2023. We expect increased free cash flow in ’24 compared to 2023.
Q:What percentage of clients can actually implement gen-AI programs now?
A:Less than 15% of clients have the necessary data platforms ready for large-scale gen-AI applications. Most are still in the proof of concept stage.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer regarding the specific quantification of overall pricing pressure and the exact timeline for revenue growth inflection. Their responses lacked clarity on the potential impact of ongoing pricing pressure and the specifics of client engagement dynamics.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI client
AI ecosystem
AI platform
AI technology
auto
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caution
charge cash
client cost
client relationship
client technology
commitment
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concept
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direction
disruption
edge technology
excellence
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gen AI
headcount
health service
implementation
issue
language model
line Hi
majority
pocket
potential
power
pricing pressure
ramp ups
restructuring charge
sale marketing
student
supply side
technologist
top
track
trend
tuning
TWKS Transcript
Thoughtworks Holding, Inc. (TWKS) Q1 2024 Earnings Call Transcript
Unknown5-7
The earnings call summary reflects a negative sentiment due to several factors: declining revenue and EBITDA margins, weak guidance with expected revenue declines, and restructuring charges impacting financial health. Despite some positive elements like strategic restructuring and cost savings, the Q&A reveals concerns about pricing dynamics, shortfall in EBITDA margins, and unclear management responses. Furthermore, the negative guidance for Q1 and full-year 2024, combined with the lack of strong positive catalysts, suggests a likely negative stock price reaction over the next two weeks.
Thoughtworks Holding (TWKS) Q4 2023 Earnings Call Transcript
Unknown2-27
The earnings call presents a mixed picture. Financial performance shows growth potential with large deals and expected revenue growth, but pricing pressure and cautious client behavior are concerns. Product updates and restructuring indicate long-term benefits, but supply constraints and headcount issues persist. Market strategy is balanced with growth in some sectors but pullbacks in others. Financial health shows improvement, yet margin recovery remains uncertain. The Q&A section highlights uncertainties in revenue growth and pricing stabilization. Without a clear market cap, the overall sentiment is neutral, reflecting both positive and negative factors.
Thoughtworks Holding, Inc. (TWKS) Q3 2023 Earnings Call Transcript
Unknown11-7
The earnings call reflects mixed sentiments. Financial performance shows a decline in bookings and debt concerns, but stable utilization and reduced attrition are positives. Product development and market strategy highlight restructuring benefits, though facing pricing pressures and cautious client budgets. The Q&A adds insights on temporary headwinds and cautious optimism for 2024, but lack of precise guidance and ongoing challenges temper expectations. Overall, the stock price is likely to remain stable with potential for slight fluctuations, resulting in a neutral outlook.
Thoughtworks Holding, Inc. (TWKS) Q2 2023 Earnings Call Transcript
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TWKS Report
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