Q3 2021 Thoughtworks Holding Inc Earnings Call
Recording today's call and during the presentation all lines will be on listen only joining me today will be <unk>, president and CEO <unk> <unk> and CFO Eric comments. The earnings press release was issued earlier today and also available on the Investor Relations page on <unk> Dot Com, if you want to review or download a copy some of the matters discussed on this call, including our expected business outlook.
Our forward looking and as such are subject to known and unknown risks and uncertainties, including but not limited to those factors described in today's press release and discussed in the risk factors section of our registration statement on form S. One in connection with our initial public offering and other reports we may file from time to time with the SEC, including our quarterly reports these risks and uncertainties could cause.
Cause actual results to differ materially from those expressed on this call. We caution you not to place undue reliance on these forward looking statements because they are made only as of the date when made during our call today, we will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. We also provide growth rates in constant currency as a framework for assessing how our underlying businesses.
Excluding the effect of foreign currency rate fluctuations. We include reconciliations of non-GAAP financial measures to our GAAP financial measures in our press release furnished as an exhibit to our form 8-K filed earlier today, which is also available on the Investor Relations section of our website at <unk> Dot com. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance.
<unk> prepared in accordance with GAAP Thoughtworks assumes no obligations to update or revise the information presented on this conference call I will now hand over to Joe. Thank you Michael and welcome to everyone who has joined US today. This is our first earnings announcement as a public company. After our successful IPO on September 15th 2021, which was over <unk>.
Scribed, a total of $890 million was raised with $315 million in net proceeds going to thought works given that we're new to the market I would like to start the call by giving you an overview of thought works and then Eric will take you through our Q3 financial results in more detail I will then update you on some of the business highlights in the quarter.
<unk> before <unk> changed our guidance and we open for Q&A, Let me start with introduction of <unk>.
We're a global technology consultancy, the integrated strategy design and engineering to drive digital innovation.
Enterprises and technology Disruptors to thrive as modern digital businesses and our strategy is working I am pleased to report that we have delivered revenue of $285 million in our third quarter of 2021. This is an increase of 45% year over year.
42% constant currency.
In the third quarter, we achieved adjusted EBITDA margin of 23% at the end of September we were over 10000 Telework is strong in 17 countries across five continents.
To think every thought would occur around the world, but extraordinary impact they create through our technology excellence and culture.
The towers that you see today is the result of a 28 year journey building some of the best capabilities in industry, establishing a reputation for thought leadership and fostering a unique and cultivating culture.
Our diverse and global culture has allowed us to attract and retain what we believe to be the best talent in the industry all of which has enabled us to become a premium brand with a diversified business across industry verticals and geographies, while driving rapid growth with strong margins. This.
This unique combination of best in class strategy software engineering design and organizational transformation expertise has made <unk>, a leading digital transformation partner in this large and rapidly expanding market.
Spending on digital transformation services is expected to more than double to around $1 billion by 2025 from $470 billion in 2020. According to markets end markets. This growth is driven by megatrends across cloud digital platforms, Iot AI and machine learning and digital products and <unk>.
Customer experience and we see our key growth opportunities coming from deepening our relationships with existing clients, establishing new client relationships developing new technical capabilities and client solutions, developing and growing our strategic partnerships and undertaking strategic targeted acquisitions.
Net of our expertise and the breadth of our capabilities helps attract a wide spectrum of clients from fortune 500 enterprises transforming their global businesses to up and coming Disruptors with hyper growth business models. This slide shows a snapshot of some of our existing clients through September 30 year to date around 90 per.
<unk> of our revenue was derived from existing clients. These strong metrics demonstrate the value we bring to our customers in Q3, we contracted with 44, new clients. We're very pleased to have well and telecom. So Indonesia's largest telecommunications services provider as a new client we're excited to be partnering with telkom. So on their three year digital.
Permission journey, we're seeing good client growth in financial services recently, we have one 's Apple industry, leading Fintech company Zappos partner with thought works to become a globally accessible bank offering U S. Dollar banking services with regulated access to bitcoin towers in the UK and Romania will work with sample at the cutting edge of <unk>.
Acknowledging shaping the future of important developments in finisher services that we believe will have long lasting impact another new financial services client a sexual bank Central Bank is one of the largest online investment banks in Europe are U K and Indian teams are partnering with sexual bank across data governance data platforms and data mesh architecture.
We're seeing strong revenue growth in the public sector. For example over the last six months, we have collaborated with the department of transport and main rose TMR in Queensland, Australia, and while new business at this existing client to establish a micro services and event driven architecture platform, which enables TMR to develop a customer oriented solutions fast.
There and more cost effectively and at Kroger, our existing client we have expanded our partnership within their health and wellness business around op up up up helps Kroger simplify how customers, making formed healthier foot purchases by making nutritional information core to finding and buying better for you food once is central App.
<unk> integrated the op up web experience within the Kroger online ecosystem amplifying customer region impact before sunsetting, the Standalone App and we're also collaborating with Lenovo a global technology leader in multi year engagement with their intelligent devices groups advanced innovation center to evolve the platform for their SaaS based solutions and services.
And for those keen football fans, we're working with pro football focus PFF in North America to enrich their mobile experience in support of 32 National Football League teams and defense you can find details of some of these customer successes on a new section of our website dollars dot com.
I'm not going to hand over to Erin so that she can take you through the numbers in greater detail.
Thank you Sal and thanks to all of you for joining US today, we are very pleased with our results in the third quarter, our first as a public company.
Let me begin by summarizing a few of the highlights for the quarter and the third quarter, we delivered outstanding results, reflecting strong demand for our services across all geographies and verticals.
Revenue growth was 45% year over year, and 42% on a constant currency basis third quarter growth was robust and was higher than the beauty health in the second quarter by 2% after absorbing a 1% foreign exchange headwind adjusted EBITDA margin was 23% an increase of 110 basis.
Points compared to the same quarter last year. We also generated strong free cash flow of $28 million. We delivered this margin expansion with an execution focused on results, while leveraging our scale and premium position in the market now let me share some of the details.
Turning to revenue for the third quarter revenue growth year over year with 45% and acquisitions completed in January 2021 contributed 2% revenue growth in the quarter. We are a highly diversified business from a geographic and industry perspective, we had exceptional growth across all of our regions with north.
America growing at 35% APAC growing at 53%, you're outgrowing at 49% and Latam at 47% performance across all of our industry verticals with strong with financial services growing at 61% and a good rebound in retail and consumer also growing at 61% so year to day.
September around 90% of our business came from existing clients I am pleased to share that we now have 29 clients with trailing 12 month revenues greater than $10 million eight more than the third quarter 2020, or 38% increase from the same time last year.
Moving down the income statement adjusted gross margin for the quarter was 46% compared to 43% for the same period last year. Our adjusted gross margin reflects solid execution and improved staffing leverage alongside a strong value proposition and premium services driving a higher bill rate adjusted SG&A as a percentage of <unk>.
Revenue was 22% for the quarter compared with 21% for the third quarter last year, which factored and impacts from COVID-19, adjusted EBITDA was 66 million for the third quarter, an increase of 53% compared to the prior year quarter adjusted.
Adjusted EBITDA margin was 23% up 110 basis points compared to the third quarter last year GAAP diluted loss per share with 10 cents, primarily due to noncash stock compensation charges related to our successful IPO on an adjusted basis, our adjusted diluted earnings per share was 14 cents compared.
<unk> in the third quarter of 2020 free cash flow for the quarter was 28 million compared to $24 million in the prior year quarter, driven by strong operating profitability.
We continue to have strong liquidity, our cash balance at September 30 was $453 million compared to 491 million at December 31 2020.
Further we have paid down $200 million of debt since the start of July, leaving us with a balance of approximately 511 million today.
It was a very strong quarter across all measures. We are focused on capturing the market opportunities, while investing in our business and premium position now.
Now I would like to hand back to shout to share additional updates on our business in the third quarter. Thanks, Aaron Let me start with our amazing thought workers.
As of September 30th 2021 we were 10076 thought workers.
Of which 46% are women or under represented gender minority W. E. G M. Australia employer brand continues to attract the best talent in the market. We had 192000 applicants through the end of September and 1336, new joiners in third quarter a record for <unk>.
Building on the momentum from the second quarter with 1303, new without workers joined US our overall employee value proposition continues to be highly differentiate it with a net increase in thought workers of 26, 3% over the last 12 months and we continue to focus on growing and developing our talented people let me share.
A couple of examples first thought was the University is our industry, leading six week global Onboarding and integration program.
Preparing entry level graduate hires for their first year as a consultant founded in 2005 339 graduates are into 2020, one cohort year to date was 54% W. E. G M and for future leaders around 100 dollar occurs graduated in September 2021 from our <unk>.
Our long global leadership development program. The goal of the program is to develop empower will round it leaders, who live our purpose and values and clip thought works into the future. The cohort came from 12 different countries and 53% with WGN.
<unk> to focus on reaching our unique cultivating culture has paid off based on employee feedback in third quarter. We were awarded a great place to work certified in another five countries. This means that 11 of our 17 countries now have the certification. We're proud that we have achieved industry, leading great place to work Trust index score.
With a global average of 90, our priority is the thought was to be a place for talented technologists to grow and have impact. Our overall global Glassdoor rating was 4.5 for Q3 much higher than the reading, but I T services sector of $3 87.
As I outlined at the start of the call thought leadership and revolutionizing. The tech industry is part of our DNA, Let me share with you. Some recent achievements and what we have done to drive impact in the market first let me start with a technology radar.
First published in 2010 Tober this year with published our 20 <unk> edition, that's become a de facto standard in the industry based on hundreds of real climb engagement. It lays out our guidance on the latest tools platforms techniques languages and frameworks that can help digital transformations to be successful.
Second based on our work with Lenovo, which I mentioned earlier with published articles sharing the learnings of how to build a digital platform and also Lenovo has ambitious plans to scale that platform to 75 million active users and third we launched our responsible technology playbook as technology becomes more.
Central to business and society, the ethics of technology comes into sharper focus.
The playbook covers the tools methods and frameworks to assess motto and mitigate the unintended consequences of technology.
Helping businesses navigate the ethical risks of an increasingly digital world. It's all works, we strive to revolutionize the technology industry and advanced practices to help software developers be more effective by removing roadblocks. So that dev teams can deliver more value to the business faster in a world where the battle for talent is fee.
Years, it's essential to make developers' jobs easier and more productive first in Q3, we went live with a full version of our own internal developer platform called <unk>.
It makes it easier for the orcs software engineers to build better internal products faster.
Saving time costs and improving the security of applications being developed.
We're passionate about developer effectiveness and.
And so far one in 300 teams have used Neil for their application development needs.
Next we have announced a collaboration with Spotify to.
To deliver better developer effectiveness was backstage I open source platform for building developer portals. This was built with Spotify and donate it to the cloud Native Computing Foundation I'm also excited to share that world, leading Canadian communication and media companies tell us and thought works have already worked together to deliver backstage developer portal.
Cost simplify that is improving the developer experience for their 8000 engineers.
Now let me update you on the progress we have made with our ESG strategy with a focus on social impact, which has being a core aspect of our unique and cultivating culture for over a decade flowers or global strategy is led by our office of diversity equity inclusion sustainability and social change also called D. E. S. S C.
Disc it supports that many projects our people are working on around the world and shares best practices within our own social impact framework. The disc office works to align thought works with external bodies. For example, the United Nations Sustainable development goals, where we have prioritized. The five stg's you can see on the chart.
<unk>.
As well as of our alignment to S. A S b sustain.
The sustainability accounting standards Board.
In the third quarter, we published our 2021 social impact report, which captures the impact of how we are using technology to directly resolve deep rooted problems and inequalities to create social impact in service of local communities.
You can find the report on our Investor Relations site.
Thought workers continue to do the transformation of social impact projects around the world.
Let me share two examples the first is in Houston, Texas.
<unk> begun work with per unit to us and the Kinder Foundation to expand purpose says to web based platform purpose and integrates school based systems to help students many of whom carry the burden of poverty to thrive to date purpose sensors enable students across a 440 schools access services for food assistance.
Mental health counseling and after school clubs with 90% improvement in response time, and a 60% reduction in atmosphere that work. Our work will help per unit does make their offerings accessible to any size school moving ever closer to their goal of serving 1 million students over the next 10 years.
Second we have also launched two new thought works artist residencies.
Rolling the themes of network, the improvisation and serve it as economies powers Arts is our global Technology Research lab, which works with artists to explore emerging technologies and their impact on industry culture and society.
S works from towers ours have featured at the New York Moma in the London tape museums.
Thank you Sam moving on to our guidance, we expect demand to remain strong and we are confident in our ability to hire the best talent in the market.
Starting with the fourth quarter, we expect fourth quarter revenues to be in the range of 285 million to $287 million, reflecting year over year growth at the midpoint of 39% or 38% on a constant currency basis. This also includes the impact of 200 basis points of revenue contribution from our two acquisitions this year.
We expect adjusted EBITDA margin for Q4 to be between 17% and 18% our fourth quarter. Adjusted EBITDA margin is informed by a lower number of billable days due to the year end holiday season for example, Diwali and Christmas. This is reflective of the seasonal trends normal for our business and timing of second half investments that.
Are now being executed in Q4 for the fourth quarter, we expect adjusted diluted earnings per share to be in the range of eight to nine.
Assuming a weighted average share count of approximately 331 million diluted shares outstanding.
Finally, a key assumption that supports our recorded two adjusted measurements in the fourth quarter stock based compensation expense is expected to be approximately 81 million as a result of our successful IPO.
Now for the full year 2021, we expect revenues to be in the range of $1 billion and $68 million to 1.070 billion, reflecting year over year growth at the midpoint of 33%, which includes an expected favorable impact of foreign exchange on revenue growth of 4%.
On a constant currency basis.
Full year revenue growth for 2021 is expected to be 29% at the midpoint of the range, which includes circa 200 basis points of revenue contribution from two acquisitions, we closed in January 2021.
We are very pleased with our expected full year revenue growth of 33%, which is higher than the view, we held in the second quarter of 32% for full year revenue growth.
We expect full year adjusted EBITDA margin for 2021 to be between 26% and 29% which is higher than the view we held in the second quarter of 19, 5% for full year adjusted EBITDA margin.
We expect full year adjusted diluted earnings per share to be in the range of 45 to <unk> 46 cents, assuming a weighted average share count of approximately 274 million diluted shares outstanding.
For 2022, we believe the demand environment will continue to support strong annual growth rates. Our bookings are very robust and we are seeing increases in the value of the average client contract size from a year ago.
We plan to provide a detailed view of 2022 guidance in February on our fourth quarter earnings call and.
Now, let me hand back to Michael Thanks, Darren you can find our investor presentation on the THAAD works Investor Relations website, we now move on to Q&A I would ask that you each keep to one question and a follow up to allow as many participants as possible to ask a question. Operator would you. Please provide instructions for those on the call.
Hello.
Okay.
Okay.
Operator could you please give instructions for those on the call.
Ladies and gentlemen, if you'd like to ask a question. Please press Star then one.
If your question has been answered you liked to lose yourself in the queue. Please press the pound key.
Our first question comes from Dan Perlin Your line is open.
Thanks, Good morning, everyone and congratulations on a great first quarter out of the box makes.
It makes it easy for US I wanted to just start at kind of a higher level and talk maybe about what you're seeing in terms of the scope and nature of the work that came in this quarter.
Are you still finding that the business.
And the clients are just really accelerating their transformation plan and how does that.
Translate as you think about your pipeline heading into FY 'twenty two.
Thanks, Dan.
We do continue to see this customer while consumer expectation and then this nextgen technology continue the ball and then this definitely requires company too.
Continue to reevaluate their business models and then go through this digital transformation constantly.
We do expect to see increased spending and budget probably across all verticals and geographies.
In the coming years.
I mean growth might eventually and gradually slow down at some point to more a normal level, but look normal level.
Like those.
A couple of years, but we don't expect any quick slowdown.
In the next three years.
And from a pipeline perspective for thought works we.
We definitely see strong growth coming from all countries or geographies.
And we also believe that most of the industry are doing well from a growth perspective.
We're seeing really fast growth in the financial service sector.
The public sector.
And then we've seen a big rebound in retail in consumer sector.
So we feel very positive about the pipeline.
In the future.
And also we see strong growth coming, especially from a service perspective.
Data.
And in cloud and infrastructure.
Yeah, that's great. It looked like it was pretty broad based in the quarter Aaron I just had a quick <unk>.
Follow up for you in relation to investments you called out as you were.
Providing kind of the guidance your plans for investments into into <unk>, what I'm sure spillover a little bit into next year. So I wonder if you could maybe elaborate on what those plans are specifically areas of focus.
And then maybe how tangible they might be thank you.
Sure so the.
Investments.
That I touched on earlier for the fourth quarter is largely related to our overall growth strategy.
So of course, we continue to invest in our talent and our capability and on what I should say is that the investments are pretty broad and so we've got some talent and capability investments. We are continuing to upscale our talent and I have a lot of focus sessions for example.
Around data.
We are running in Q4.
And then we're also investing in our client portfolio.
You mentioned about the 44, new clients that we won in Q3. So we continue to focus on bringing great new clients on board, while deepening our relationships with our existing clients. So we're investing in our growth we do see strong growth continuing in 'twenty two it Sharon mentioned and so certainly as we think about before.
Quarter, we're ramping up for a good 22.
And then finally, we're also investing in our partnership programs.
And then we continue to look for opportunities for our complementary strategic acquisition, though so really it's a broad range of investment, but really the investment activities that we're focused on is supporting our overall growth strategy.
Great. Thank you very much congrats.
Thanks, Dan.
Our next question comes from Maggie Nolan with William Blair. Your line is open.
Yeah.
Thanks, so much and congrats.
I'm curious about the 44, new clients can you give us a little bit of additional detail on.
Where these relationships first start in terms of site and service offering and then how you expect them to developed overtime kind of contributing to that high growth you're expecting.
Sure.
The 44 new clients.
Starting point from a service offering perspective.
<unk>.
It is not.
Always saying in fact that we have four main service offerings the digital transformation operation.
Enterprise monetization platform and cloud.
Data and AI.
Customer experience and product.
Most of the work we do with these clients tend to start with one service offering.
But then we kind of.
More of a land and expand and expand into other savory offerings over time.
And then for these 44 clients.
Now that we have.
<unk> acquired in Q4, we cant.
Name a referenced all over their names and then the size of the game of the COO.
Contracts with these clients.
But we have done a much better job over qualification process so that we.
Look to acquire declines that we believe will have the potential to build long term strategic relationships.
Or they're happy to apply cutting edge technology to help us innovate and build thought leadership. So we fully expect.
A number of them to become a top 10 clients in 2022.
Thanks for that detail and then on the headcount side of things I mean, you've had.
Good additions here and you talk to your some of the things that you do to keep that value proposition not for your employees how is.
Is your utilization and attrition trending and are you comfortable with where its at at current levels and this kind of competitive talent environment.
So we are comfortable with both the trends in utilization and attrition.
Our utilization in Q3 is what we would consider a healthy range and for US a healthy zone for utilization means we don't have too many thought workers on the beach, which some people Navy referred to us at the bank.
But it also means that we have the bandwidth to start new work out of the 44 clients that we talked about and also continue to invest in our talent with training and capability development, which I touched on a little bit earlier. So generally for this year, we've seen our utilization will be in a very healthy zone for us in.
In the first quarter it was towards the top end of that band, but has normalized and stagnant and certainly is operating within a healthy range.
And then for attrition.
And I think we're all aware that the digital transformation market is very strong and certainly that's leading to a highly competitive talent market and great opportunities for top talent and particularly this year as COVID-19 restrictions ease certainly earlier in the year. So if we're looking at the trends.
We're seeing an attrition we are seeing slightly elevated numbers from what we would consider the thoughtworks normal based on our historical attrition.
Got several programs and initiatives that are focused on retention and we're confident it will return to normal level. In fact, we've seen it reduce every month for the past three months. So we do expect that trend to continue.
And in General we are comfortable also with the level of attrition and we've executed really well I think the attrition is just.
Something that comes with the strong demand environment.
But the employee trends are really strong Sal mentioned a few of them are we did hire at record levels in Q3, and we received more than 190000 applications in Q3 alone. So there's a really good hiring momentum.
Mentum in Q3 and in general, we're very comfortable with the utilization and attrition.
Okay. Thanks for that detail Erin Thanks, Joe.
Our next question comes from Brian Essex with Goldman Sachs. Your line is open.
Hi, This is Michelle on for Brian Essex, Thanks for taking the question.
How should we think about demand for onshore services compared to nearshore and offshore considering shortage of talent attrition wage inflation in local markets and are you seeing them moving more work towards offshore or are they and if so are you able to maintain premium revenue per head.
Thanks.
Thanks for the question.
So from a.
Onshore to retro ratio perspective.
We have seen reasonably stable trends.
And maybe just a little bit more offshore than we used to do.
Mostly because now remote working is kind of the new norm.
Clients, who are a little bit hesitant to go near shore offshore now are more open to the conversation and actually doing that.
From a value proposition perspective first of all those are onshore and offshore offerings.
Premium services that we provide to our customer.
Relatively to others in the market.
This is really demonstrate by the revenue per person per revenue per employee per year.
We have.
And then at the same time.
People onside, they've got to work closer with our clients.
Building, a deeper relationship understanding of contacts.
The most important helping them to transform that.
It is and will continue to be a critical component of our service offering.
So while we are glad that we're moving we're able to do more work distributed to.
To leverage the global talent pool would only expect the onshore component of our portfolio to decrease dramatically.
We do believe we can and are going to continue to maintain a significant portion of work onshore.
From a pilot perspective.
It is.
I think.
Challenging for any region to recruit top talent at the moment not just onshore, but also offer as well so aldo.
The investment Aaron mentioned no intention.
Building.
A better culture with our Sofia at home.
As ever we put in across all the countries, both onshore and offshore. So we're not really worried about attrition or competition for talent our onshore teams over offer teams.
Hope that helps.
Great, Yes, definitely very helpful. I guess, a follow up and I'll, maybe for Aaron with the mix, maybe slightly changing are you seeing impacts affecting gross margins and do you expect any changes going forward.
We are so the mix is slightly changing but we are not seeing any significant shifts to our gross margin. So we focus on maintaining a healthy gross margin certainly we saw that in Q3 and expect to see that in Q4.
So on the whole no it's not shipping much for us and we're able to maintain the strong margins that we have.
The one thing that I would also say because I think as we were talking about hiring and talent and how we think about that onshore and I'm, sorry, I think I I may be stated that we had.
Had 190 more than 190000 applications in Q3, and I'm, sorry, I mean to say year to date Q3, and still a very strong number of applications and certainly reflecting the great employer brand that sour tests.
Thanks Charlotte.
Great. Thanks for thanks for the question and congrats on your first.
First public earnings Inc.
Our next question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Thanks, so much congrats as well on the first public call and listing I also wanted to ask on gross margin. If you don't mind just.
It was it came in a little bit ahead of where.
We had modeled I'm curious just how do you grade your contract execution delivery cost pricing those kind of areas any any surprises.
No surprises.
Go ahead Eric.
Okay, well I'll start and then certainly you can add in but I do just want to say that the third quarter was a great quarter I think and then as the airplane thing how we we thought.
<unk> adjusted gross margin and in Q3 and that was about three points higher than same time last year.
And what we would say is that it really was driven by solid execution you you've heard us talk about the record number of thought workers that we hired in Q3.
And we also drove improvements to our leverage in the quarter and so so overall very good performance from that point of view and then we also increased the percentage of revenues from our new clients. So about 90% of our revenue year to date are coming from our existing clients. If we look at Q3 that number is just a little of that.
Higher around 85% and Tianjin and the one thing that did happen in Q3 was we had lower travel costs than we were expecting we did expect to have a little bit more travel and some of our countries and ultimately that was a benefit excuse me that that we saw to gross margin.
But what happened is that some countries tightened up on COVID-19 related restrictions of travel costs were definitely lower in the third quarter.
But on the whole it was a really strong quarter for US. We had continued to have strong client delivery and premium services of course, and you know with our client contracts are executing really well and have been able to drive growth at our existing clients as well as bringing those new clients on board.
So how do you want to jump in.
I think you've covered it well, there's probably one thing tension since you've mentioned that on pricing and I just wanted to add that we do continue to see.
Year over year increase in our average bill rate.
And this is just it's part of the reason that contributed to the higher gross margin.
I think this is just a good reflection of the strong demand for our premium digital services.
Okay.
Makes sense, that's all good stuff my follow up I just wanted to ask you know now with the IPO behind you and I'm going to turn the page on the calendar year.
Is M&A going to be a bigger focus do you think is there an appetite and is the pipeline there that maybe we would expect to an acquisition sooner rather than later.
Yeah.
So acquisitions definitely going to be part of the strategy, but I wouldn't say that we're rushing to get it done.
Sooner than later in the near term we will.
We expect acquisitions.
To be complementary.
Small tuck ins to our core business.
More than those transformation no bigger deals.
And then we do look for companies, who can further strengthen our ability to service clients through new capabilities new markets.
We evaluated more than 100 opportunities year to date.
Even though we made two acquisitions earlier this year, we haven't made any soon.
<unk>.
Because the fit and the cultural alignment.
And then the capability.
Liam.
Competition are all important factors, we want to consider before we we decided to acquire anyone. So we'll continue to explore this area in the coming years, but it's more important for us to look for the right fit than trying to target a number or dollar amount for acquisition.
Hope that helps.
It does well done thank you.
Thank you Tien tsin.
Our next question comes from Ryan Bergan with Cowen Your line is open.
Yes.
Hi, Thank you I wanted to ask if you could talk about how you feel about the headroom to grow within some of your larger clients. So I heard the commentary about new client additions in your view that they can become quite next year, how would the current top 10 client base.
Expansion plans there.
Okay.
Sure so.
The the.
Current top clients if I understand it. The question is for top clients. We have what's the expansion strategy is as part of the portfolio a lot of our pub.
Top 10 clients were top 20 clients.
Foreign companies, who are trying to transform their business into a modern vision business into and so this this.
This is a cross vertical crop jumped phenomena hour.
So called successful share of wallet.
With these clients continued to increase year over year.
And we believe that we're only scratching the surface of many of the addressable spendings.
With our largest enterprise clients. So we are far from saturated.
We will continue to increase revenue from our top clients, it's just that.
In some cases.
Sure.
Because of the urgency our clients put on this digital transformation.
Mission, we see a higher revenue growth from some of the public declines.
So some of them right to the very tall sooner, but faster than the others. We have for example, we have grown 29 clients with.
TTM revenue of over 10 minutes.
And this is a bit more.
Then Q3 2020, so from 21% to 29 in the within the year.
Kind of reason why the better top shuffled Toledo.
Okay makes sense and then just a follow up on supply can you comment on where you're adding a head count the most aggressively and we're as you know which countries are you seeing the strongest or the highest competition for talent.
Okay.
Sure. So we are definitely seeing broad based growth. So we are hiring in all of our countries, but where we will probably add the most in terms of head count numbers is some of our onshore and offshore or excuse me in some of our offshore and nearshore.
Locations, though India, Brazil, a lots of great demands that we're seeing in eastern Europe, as a where we're hiring in Romania.
Really it is across the board, it's true, Spain, Australia, China, and so we can really go through how our geos and say that we're hiring.
In terms of increased or competition for talent and what I would say is there is always a competition for talent for.
Great talent that thought works has so I don't know that we see that increasing so much than what we've experienced in the past, but it's definitely a hot market out there and buy where we get back to is our employer brand is as strong as ever. So we're feeling really confident about our ability to recruit and and bringing great new thought workers.
Okay. Thank you very much.
Our next question comes from Moshe Katherine with Wedbush Securities. Your line is open.
Hey, Thanks, Good morning, and let me add my congrats here for a very strong quarter a couple of follow ups here.
Any thoughts on hiring plans for calendar 'twenty two that's number one.
Maybe you can also remind us.
Looking at the your typical year when do you get when do we see some of the comp increases during the year any specific quarter and then maybe also talk a bit about pricing increases we kind of heard from some of your peers that youre seeing some catch up.
Two pricing from pre pandemic levels.
So it was actually we're able to put through pricing increases a couple of times already.
This year, thanks, a lot.
Yeah.
Okay. So I will get all of that most of that so firstly, starting with the hiring plans for 2022.
So already talked about this but we are definitely seeing strong growth for 2022 and as I mentioned in my comments earlier, we're gearing up for a strong year end. So just like we've done. This year, we will are higher across the board in 2022, and certainly expect to have a strong rate of hiring and all of our cut.
Trees onshore and offshore so.
So that is a great to look forward to and then in terms of what do we see in terms of compensation increases.
Our compensation increases happen across the year. So there isn't one single quarter, where everything happens unbalanced theres, probably a little bit more in terms of compensation increases just where we have lots of head count in in Q1 and Q2, but we have it shows that it is.
Is spread out across the year.
And then from a pricing perspective, we are seeing price increases and again shower shower touched on this.
We've seen a good increase in our average revenue per employee and part of that is just coming back from <unk>.
Last year, which was impacted from the pandemic and then part of those price increases is just the normal price increases that we get are in and in.
And the whole years really and so it's just.
It's reflecting the price increases we're able to get in the market and would expect from the premium services. So some good trends there.
Thanks.
Our next question comes from Darrin Peller with Wolfe Research Your line is open.
Hey, guys nice job and it's great to see the demand side.
Guys delivering on that.
One question I do have is the balance and I remember, even just pre IPO talking to you guys about.
High demand, but you wanted a piece yourselves at a certain rate.
So really you can make sure the machine doesn't run too hot and so when we think about that and you know wage inflation potential and what you're seeing right now on that front and the ability to continue to source talent the way you've been doing so, albeit it's still a big number, albeit smaller than some of your competitors can.
Can you just touch through that in terms of what you see is the right run rate and if there's something we should think about in terms of a normalized rate for the company longer term or medium term.
Thanks, Terence for the question I'll take that so you're absolutely right. We have always wanted to be careful with our growth rate.
And then mostly to make sure that we protect the premium value proposition the talent base with quality of the talent base.
<unk>.
And then the culture of top works.
And we have been.
Growing up.
20% plus rate for many years as you mentioned.
And then we're able to maintain an elderly evolve of culture, possibly now we are out of.
Phase, where we're seeing faster growth it's not.
We haven't seen faster growth before we have seen faster growth over time through our 28 plus year history.
This is definitely a what we would say a high growth phase thanks to the strong demand post COVID-19.
What we're trying to do at this moment is experimenting with.
Some new techniques and processes for Onboarding training and integration of new hires. This is the area probably compared to all the other functions of the business, where most of the careful about because.
As a premium service provider all the new hires we have to invest to help them to understand the powers way helped the number.
Board.
Great into our business.
But this is definitely something that we have done in different countries in different.
Part of the organization to have it to be able to have a faster growth pace.
And then without feeling that we're diluting our culture or the premium value proposition now.
Can we sustain a higher pace, we believe we can given all the things we're working on.
Now would this go back to where this has to with this have to come down because of the.
The concern about culture, we don't think so but we're also very careful to.
To make sure that we're going to monitor this so that we don't drive engine to hard over a long period of time and lose sight of the.
The stress to the core business. So we'll continue to watch it we're not concerned right now with current growth pace.
All right that's really helpful and just one follow up when we think about the.
Actual use of capital going forward versus sort of the just the trade off you guys wanted to think about in terms of.
M&A and investments that organically.
You've really I think felt works has been known among others, probably among the best in the industry as having been an innovator organic innovator, just really leading the way with certain ideas.
But it seems to me like that's generally been done in house and so just strategically when we think about M&A going forward can you just remind us what your vision is and what you expect to even in the near term and the long term.
Yeah.
For sure.
Take that.
But definitely we plan to use the proceeds and then the cash flow that we generate to to invest more into M&A.
Again to date, we feel that.
The premium service firm.
We're leading in many areas in terms of capability technology thought leadership, a service provider for our clients.
But as a premium service provider. We also have high expectation from our clients want us to do more and do better.
Historically organic organic growth has been the main driver for us probably the only driver for us for many years, but we also are feeling the pressure that there's just a lot more new tax.
Emerging and evolving.
They then say 10 20 years ago, and so we have to we will rely a lot more.
Acquisitions in the future to build that capability.
Our client is asking from us and this is not just limited data machine learning.
Infrastructure cloud, many other areas and technical areas, where folks now.
From a.
I mentioned earlier from a fit perspective, we're really looking for alignment on culture on this premium value proposition on the alignment on business strategy.
But in the short term, we do strongly believe that it will continue to be small tuck ins, we feel pretty comfortable where our core business is from a capability perspective. So we don't really believe that we need a transformational acquisition near term in the long term.
As we continue to grow our muscle or M&A muscle, we think definitely.
Look for a potentially even bigger deals that help us too.
To build capabilities faster.
Okay.
That's really helpful. Congrats guys. Thank you.
Thank you.
Our next question comes from Arvin Ramani with Piper Sandler Your line is open.
Oh, hi, Thanks for taking my question and congrats so congrats on a great quarter.
I just had a question on the.
Sort of operational impact you're seeing from them.
Folks getting back to work.
You are seeing.
Increased.
This activity from some folks getting back to work.
And is that changing how you are.
So southern Europe.
<unk> offerings are even how youre structuring your delivery teams.
Thanks Alan.
A good question so for us every country EBIT.
But in every city is kind of on a different timetable based on.
The local response to the Covid situation.
Our office is open now.
Even though many with limited capacity.
And then I think from a delivery perspective, we have adapted so well I mean, it's not just us the industry.
To a remote working model that working out of our office is really optional at this moment for a lot of our people. So we continue to have a lot of people, who who prefers to work remotely in the countries, where we're operating now from a client perspective.
We do see requests from some of our clients to four people for our people to go onside back to their office and works together.
And we definitely are.
Be able to cope with that in most of the countries again it depends on our original situations.
And then moving forward.
We do strongly believe that this hybrid delivery hybrid mode of working will continue but with the COVID-19 situation are.
Getting better overtime, we do also expect more work to return to.
To the client to onsite and more people returning to our offices, especially this is important for building. This.
The in person relationship between our own people and with our clients also for hosting a key meetings and social events.
Hope that helps.
Definitely.
A quick follow up on here.
It doesn't mean the last.
18 months has been quite fluid.
Things are changing.
In.
Real time.
But given that they are.
Okay.
I mean, what it is localized.
Yeah as stable and the environment as we have been in the last 18 months.
So with that backdrop as you look at them.
Next year or year, and a handful of <unk>.
Yeah.
Do you have greater visibility now.
Then before and if you have good visibility can you share can you shed a little bit more about.
You know how would you characterize the demand environment and I'm not looking for guidance into 'twenty two by just more sort of.
Kind of qualitatively.
Looking at the demand environment now.
Versus the past 18 months.
I'm happy to put some color around it.
So we.
We.
Looking forward first of all as I mentioned, we'll continue to see strong growth from both existing clients and new clients throughout this year, obviously with 90% of revenue coming from existing clients that give us great visibility.
Into the future we're also seeing more.
Urgent and investment from clients, who are looking to accelerate their digital transformation process.
As a result, generally bigger and more ambitious projects now how does this translate to a forward looking.
Pipeline, we're definitely seeing some indicators I used the word early indicators that we can see.
As positive signs one of them is that we're seeing a shorter sales cycle from from initial pursuant to contract signing.
There was we have seen before.
Our bookings are also very robust.
So seeing a increase in the value of average client.
Contract.
<unk> size and also the average length of this at the Ws that we're seeing today.
Longer than before so these are the kind of early indicators will say give us more confidence about the visibility of our pipeline.
Putting a number around it.
Hope that answers your question.
Yes, it does.
Thank you very much and good luck for any of the year.
Thank you.
Our next question comes from Jason Kupferberg with Bank of America. Your line is open.
Hey, guys. This is kelsey on for Jason just echoing congratulations as well.
Follow up on some of the previous question kind of about longer term vision and normalized growth maybe on the margin side, you know it looks like youre going to exit the year at about you know for the.
For your 20% plus adjusted EBITDA margins can you just help us think through some of that back or is affecting the margin dynamics in fiscal 'twenty, two and longer term you know maybe some of the full year IPO costs are coming in you mentioned lower travel expenses unexpected. So maybe some of that comes back in as well.
How should we kind of think about it godley for now thank you.
Yeah.
Thanks for the question Kathy and so as you mentioned, we delivered strong margin performance this year and we expect that to continue.
Our value proposition and our premium services are definitely resonating in the market and we've talked already about how we are investing in our talent as well as expanding our offerings in our capabilities and we also focus a lot on the fundamentals of our operations and we can see that certainly in the year to date gross margin.
<unk> of <unk> 45 per cent.
But you mentioned travel cost and definitely travel costs have been very low in 2021, and we do anticipate increases in travel in the coming year.
So we expect higher travel costs and we also expect higher costs associated with operating as a public company and both those are the things you alluded to so that'll put some pressure on our cost base in the coming year, but at the same time there are opportunities to continue to drive scale efficiencies in our business.
Especially we have opportunities to use our great tech capabilities to our advantage. So we'll give more specific guidance in February but I'd also say, we definitely anticipate our profit margins to continue to be strong in the coming year.
Okay. That's helpful and I guess, that's a quick follow up.
About real vertical trend expectations, obviously financial services that can be a consumer you guys called out the outperformance can you just touch a little bit more about maybe what contributed to that I don't know if M&A was maybe a little bit of a boost and sort of do you expect these verticals to continue to drive outsized growth for the business. Thanks.
We don't.
Have kind of a.
Specific we don't have a look at <unk>.
M&A boost in those sectors from our perspective.
Previously the two acquisitions only contribute 2% of <unk>.
Organic growth and when we look at these.
Three sectors in particular financial services retail consumer and public energy public health care services, which were grouped together we do believe this.
This this fast growth trend will continue and then we also feel strongly that our ability to capture them organically is is very strong.
And particularly I want to call out.
Retail consumer sector. This was the one that was a hit.
Significantly by Covid, and we definitely expect it to rebound to sustain and perhaps probably even grow faster post COVID-19 given that these digital needs from the consumers.
Okay. Thanks, guys very helpful.
Thank you Charlotte.
Our last question comes from Dave Koning with Baird. Your line is open.
Yeah, Hey, guys. Congrats thanks, and I guess my question Q3, when we just look at organic constant currency sequential was one of the strongest or about August we can find across the year. So we have I.
I just I'm wondering about when we kind of look at that and then we look at Q4 guidance, which is kind of flat to just up very slightly was there anything in Q3 that really boosted Q3, but then you know creates a little pressure on Q4 that maybe some one time type type item or maybe not.
So we touched on in Q3, being a great quarter and you've heard from us and how we're feeling about the demand pipeline and the general growth growth growth momentum. So we definitely expect strong growth to continue.
Dave to your question for.
For Salt works is it typical to observe some quarterly seasonality in our business. So Q3 is often higher from a margin perspective than the yearly average in Q4 is sometimes a lower and the seasonality is just a function of our available days the public holidays and vacation time taken around them. So this is really normal for Hudson.
Back then.
So our guidance reflects that seasonality, but we are seeing continued growth in the business and we're certainly seeing growth on a revenue per day basis. If we look at the year over year growth rate I guided that to be 39% at the midpoint of the range. So you know you can clearly get a sense for the strong growth that we're seeing and as I mentioned.
Earlier, you know we are investing in our business and our growth in Q4 are we do have some one time investments in Q4, but we're also continuing to hire and add capacity to our teams. Because we are seeing continued strong growth for 2022. So so on the whole feeling really good about Q4 and are in the year as a whole.
Thanks, and maybe just one quick follow up the the numbers you gave us or super clean and easy to drop bandwidth, which is great, especially in the first quarter getting your press release are you going to have any add backs other than stock comp going forward I mean, certainly a lot of companies add back IPO costs, Here's where super small I think a couple of million dollars in Q2 or in Q3 or are those going to be.
Even in there anymore.
Are those going to be kind of past.
So we will have add backs going forward, what we expect to have is to and the continued stock based compensation of course, and then intangibles amortization, so so clean addax and good numbers.
Sounds great. Thank you.
Thank you.
There are no further questions I'd like to turn the call back over to shelf for any closing remarks.
Just want to thank everyone for joining us today for our first earnings call.
I would like to end by thanking all of our shareholders and NASDAQ in particular for helping us.
Becoming a public company.
And then finally in closing I want to thank all thought workers clients and partners.
Extraordinary impact we are delivering everyday together I look forward to catch up with you all next quarter.
This does conclude today's program and you may now disconnect everyone have a great day.
[music].
Yeah.