Thoughtworks Holding, Inc. (TWKS) Q1 2024 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
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.
Key Financial Performance
Revenue $249 million, representing a year-over-year decline of 19% in both USD and constant currency.
Adjusted EBITDA Margin 2.7%, down from 36.4% during the prior year, primarily due to the timing of the ongoing supply rebalancing program.
Adjusted Gross Margin 31%, compared to 36.4% during the prior year, impacted by lower onshore utilization and high single-digit pricing declines.
Adjusted SG&A as a Percentage of Revenue 28.3%, compared to 25.1% in the prior year, with a year-over-year reduction of $7 million in adjusted SG&A.
GAAP Diluted Loss per Share $0.10, compared to $0.03 in the prior year period.
Adjusted Diluted Loss per Share $0.02, compared to adjusted diluted EPS of $0.03 during the first quarter of 2023.
Free Cash Flow Negative $20 million, compared to free cash flow of $31 million in the prior year period, impacted by timing of certain items and year-over-year revenue headwinds.
Term Loan Balance $294 million as of March 31, 2024.
Cash Balance $73 million at the end of the quarter.
Annualized Average Revenue per Employee $92,000, which remains above the industry average.
Trailing 12-Month Bookings $1.2 billion, down 20% compared to Q1 of 2023.
Voluntary Attrition Rate 12.4%, slightly up sequentially from 12% in Q4 2023, and an improvement year-over-year from 13.1% in Q1 of 2023.
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Operating Highlights
New AI Services Launched: In Q1, Thoughtworks launched eight new AI services, including AI-first software delivery and AI-powered digital products.
Acquisition of Watchful: Thoughtworks successfully acquired Watchful, a company that accelerates the creation and deployment of AI models, enhancing its AI transformation strategy.
Client Acquisition: Thoughtworks contracted with 49 new clients in Q1, compared to 46 in Q4 2023, indicating a strong client acquisition strategy.
Vertical-Based Sales Model: The company saw higher new logo acquisitions in targeted verticals such as energy, public and health services, technology, and business services.
Cost Savings from Restructuring: Thoughtworks has realized $87 million in annualized cost savings since initiating its restructuring program in August 2023, raising the targeted range of total cost savings to $100 million to $115 million.
Adjusted EBITDA Margin: The adjusted EBITDA margin for Q1 was 2.7%, with expectations to improve to 5.5% to 7.5% in Q2.
Leadership Transition: Guo Xiao announced his resignation as CEO, with Mike Sutcliff appointed as his successor effective June 17, 2024.
Focus on AI and Data Services: The company is intensifying its focus on AI and data services, with strong demand and over 50 AI-related projects underway.
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Risk or Challenges
Macroeconomic Environment: The macroeconomic environment is stable but not showing signs of improvement, leading to elongated sales cycles.
Adjusted EBITDA Margin: Fell short of guidance due to ongoing supply rebalancing, resulting in lower-than-expected gross margin.
Revenue Decline: Q1 revenue declined by 19% year-over-year, with significant declines across various regions and industry verticals.
Client Budget Pressure: No incremental client budget pressure was observed, but clients remain focused on achieving more with less.
Free Cash Flow: Negative free cash flow of $20 million in Q1, impacted by revenue headwinds and timing of certain items.
Restructuring Program: Ongoing restructuring program aims for cost savings of $100 million to $115 million, with pre-tax charges expected between $26.5 million to $33 million.
Attrition Rate: Voluntary attrition slightly increased to 12.4%, which is still below industry averages.
Supply Chain Challenges: Challenges related to supply rebalancing affecting gross margins and operational efficiency.
Competitive Pressures: The company faces competitive pressures in the technology consulting space, particularly in AI and data services.
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Guidance & Outlook
Restructuring Program: The ongoing restructuring program focuses on efficiencies, with an increased targeted range of total cost savings raised to $100 million to $115 million from the initial $75 million to $85 million.
AI Services Expansion: Thoughtworks launched eight new AI services in Q1 2024 and is working on over 50 AI-related projects, indicating a strong demand for AI and data services.
Client Acquisition: In Q1, Thoughtworks contracted with 49 new clients, reflecting a focus on growing client relationships and a vertical-based sales model.
DAMO Managed Services: Thoughtworks’ AI-powered DAMO managed services are gaining traction, with 16 new deals in Q1, aimed at shifting to longer-term contracts.
Q2 2024 Revenue Guidance: Expected revenues in the range of $250 million to $255 million, reflecting a year-over-year decline of 13% to 11%.
Q2 2024 Adjusted EBITDA Margin Guidance: Expected adjusted EBITDA margin for Q2 to be in the range of 5.5% to 7.5%.
Full Year 2024 Revenue Guidance: Expected revenues in the range of $995 million to $1.02 billion, reflecting a year-over-year decline of 12% to 9%.
Full Year 2024 Adjusted EBITDA Margin Guidance: Expected adjusted EBITDA margin of 8% to 10% for the full year.
Full Year 2024 Adjusted EPS Guidance: Expected adjusted diluted EPS of $0.02 to $0.08, assuming a weighted average share count of approximately 330 million diluted shares outstanding.
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Shareholder Return Plan
Shareholder Return Plan: For the full year, we expect adjusted diluted EPS of $0.02 to $0.08, assuming a weighted average share count of approximately 330 million diluted shares outstanding.
Cost Savings Target: We are raising our targeted range of total cost savings to $100 million to $115 million from our initial targeted range of $75 million to $85 million.
Share-Based Compensation: For the full year, we expect share-based compensation will total $42 million.
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Key Q&A
Q:Can you discuss the balance of bringing in an outsider to lead Thoughtworks and the importance of the Thoughtworks culture?
A:We believe it's time to combine our existing culture with new external expertise. We are committed to maintaining our unique culture while expanding our capabilities.
Q:Can we expect a continuation of verticalization and more systems integration work?
A:Yes, we are committed to our restructuring, vertical focus, and expanding into system integration and package software implementation.
Q:Do you have visibility around the pricing environment and switching projects forward?
A:We expect pricing declines to stabilize, with new logos starting at higher rates than larger deals.
Q:Is there any factor in terms of offshore mix driving pricing pressure?
A:The pricing drop was mostly due to like-for-like comparisons, but the offshore/onshore mix does impact average pricing.
Q:Can you provide updates on APAC markets?
A:APAC has shown resilience, with growth in Singapore and India, while Australia is stabilizing. Local work in China is growing, but offshore work is constrained.
Q:What gives you confidence in the implied sequential growth view for 2Q?
A:We see longer sales cycles but also an opening of discretionary spending and strong bookings in Q1.
Q:Can you elaborate on the internal supply constraints?
A:Internal frictions have been addressed, but margin impacts are due to offshore/onshore mix adjustments.
Q:What types of projects are you working on and how does that affect demand?
A:We are focusing more on delivery work rather than high-bill rate consulting, with a consistent win rate.
Q:What are the margin dynamics facing the business?
A:We expect margin improvement from increased utilization and rebalancing of onshore/offshore supply.
Q:Why wasn't the margin guide raised in line with restructuring savings?
A:Timing differences in realizing savings are the main reason for not updating the margin guidance.
Q:Can you discuss the dynamics in your top client buckets?
A:We are focusing on retaining top clients and expanding service offerings, which has led to increased revenue concentration.
Q:What are you seeing on the hiring front?
A:We are seeing good demand for data and infrastructure skills, and hiring is going well, especially offshore.
Q:Is there a large-scale GenAI project you’ve seen?
A:We have a few large GenAI projects, but most work is still in the proof-of-concept stage.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer regarding the specific details of the share count guide changes, stating they would follow up later.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
China
DAMO service
Foxtel Group
GenAI project
Hi
Tien Tsin
Wine
adjustment
client AI
client service
complaint
confidence
constraint
control
couple quarter
culture
customer
difference
domain
excellence
integration package
language model
momentum booking
platform language
pleasure
pricing drop
proof concept
rebalancing
sale marketing
service client
set skill
stability
system integration
technology service
timing
win rate
work lot
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
Neutral8-13
TWKS Report
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