Q1 2022 Thoughtworks Holding Inc Earnings Call
Hello, everyone and welcome to thought works earnings call for the first quarter of 2022, we will be recording today's call and during the presentation. All lines will be on listen only joining us today will be thought works president and CEO go Shao and CFO Aaron comments. The earnings press release was issued earlier today and is available on the <unk>.
Relations page on Thoughtworks Dot Com, if you wanted to review or download a copy some of the matters, we'll discuss on this call, including our expected business outlook are 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 annual report on Form 10-K, our 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. We caution you not to place undue reliance on these forward looking statements because they are made only as of the date. When they were made during our call today, we will reference certain non-GAAP financial measures, which we believe provide.
Good useful information for investors, we also provide growth rates in constant currency as a framework for assessing how our underlying businesses performed 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, which is available on the Investor Relations section of our website at ball works Dot com.
non-GAAP financial measures provided should not be considered as a substitute or superior to the measures of financial performance prepared in accordance with GAAP vault works assumes no obligation to update or revise the information presented on this conference call I will now hand over to Geoff. Thank you Sean welcome.
Everyone to our first quarter earnings call.
I would like to start by sharing an overall update on the business.
And then Erinn would take you through our first quarter financial results in more detail.
I'll then share some of our business highlights for Erin provides guidance and we open for Q&A.
Let me start with a recap about all works, where global technology consultancy that integrates a strategy design and engineering to drive digital innovation, we enable enterprises and technology disruptors to thrive as modern digital businesses.
I am pleased to report excellent results in our first quarter driven by the continued high demand for our digital transformation services, we delivered revenue of $321 million in the first quarter of 2022, reflecting year on year growth of 35% and 38, 2% in constant currency in the quarter we had.
<unk> adjusted EBITDA of $73 million, reflecting 35, 4% growth compared to first quarter 2021.
Towers has established a reputation for thought leadership and fostering a unique and cultivating culture, the diverse and global culture continues to attract and retain what we believe to be the best talent in the industry at the end of March 2022.
We were over 11000 workers strong across five continents.
Like to thank every thought walk around the world for their extraordinary impact they create through our technology excellence and culture.
We continue to operate in the large and fast growing market with demand remaining well above pre pandemic levels.
According to industry analysts IDC global spending on the digital transformation of business practices products and organizations is forecast to reach two eight trillion dollars in 2020 five more than double the size of the market in 2020 for thought works, we see evidence of this growth across.
All our services digital transformation cloud platforms data and AI customer experience product and design strong themes are prevailing.
Let me share some examples.
We're seeing high demand from our clients for our expertise in building out platforms across a wide spectrum of their businesses.
From end to end enterprise it monetization domain specific areas like payment systems and retail platforms.
We're also seeing elevated demand around new digital products and services.
Hansen customer experiences, removing friction and bringing customer facing services together.
And demand for data and AI services continues to be strong.
Especially high interest from clients in data mesh a.
Domain oriented decentralized data architecture invented by a thought works luminary and our growth strategies are working at the core our revenue growth is from deepening relationships with existing clients and winning new logos. We then supplement this was focused strategies around partners M&A and geographic expanse.
Turning first to M&A.
In April we continued our strategy of undertaking targeted acquisitions I am pleased to share that we have acquired connected to further enhance our capabilities and customer experience design and product development connected as more than a 160 employees in Canada. They have deep expertise across entire part of life.
Cycle from strategy and research to design and engineering connected transforms businesses by beauty and better products.
To welcome connected to the <unk> family.
I'm looking forward to the impact they will have on our business both in growing our CX and digital products and services and supporting our business in North America, turning next to update on geographic expansion.
You may have seen in April we shared news of our planned expansion into Vietnam, Vietnam is a rich market for technology talent, our talent hub in Vietnam will help service nearshore demand from our clients in Australia, and Singapore further diversifying our business and now let me share more details on our claim portfolio.
The depth of our expertise and breadth of our capabilities means that we can help clients address all of their challenges from strategy right through to business outcomes I'm pleased that we continue to see larger client deals.
Many clients have ambitions to scale their digital transformations at a faster pace.
Our clients appreciate the value, we create with them and we remain confident in our ability to sustain our premium position and pricing in 2020. One the average tenure across our top 10 clients buy revenue was seven years.
And we continue to grow our relationships.
For example, at our client rush well.
We're working together on the ambitious data match initiative.
Rush is a Swiss multinational health care company.
And the largest pharmaceutical company in the world.
Our innovative work together is using the data mesh architecture and a data as a port a construct celebrities roscius vast data we're working across the various use cases in manufacturing supply chain quality and reliability and finance to deliver better outcomes for customers and patients.
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We're selective in our approach to new clients.
Looking to work with declines with a long term ambitions for digital transformation.
We continued the positive momentum from Q4 and.
And we have contracted with 52, new clients in the first quarter.
I'm pleased to share some examples of new clients that we have been working with in the first quarter.
In Asia Pacific, We're now working with a new client Siam macro.
Sigh macro it's a leading wholesale trade retailer in Thailand.
Thought works will help to define and build a infrastructure to transform sign macro into a truly data driven and customer centric organization.
We will build the platform using data mesh principles to enable increased database ability reliability and access.
The rapidly changing landscape for consumers has brought new opportunities for those retailers, who can make data driven decisions in real time to digitally engage their customers in North America, our new client Ritchie brothers.
Global asset management and disposition company.
Has signed a multiyear agreement with all works.
Richie Brothers is working with thought works to accelerate the delivery of our modern enterprise architecture.
We're developing Ritchie brothers digital marketplace ecosystem, using software development best practices, including continuous integration continuous delivery methods and tools you can find details of some of these customer successes on the news section of our website Thoughtworks Dot com.
I'm now going to hand over to Erin so that she can take you through the numbers in greater detail.
Thank you Shao and thanks to all of you for joining US today, we were very pleased with our results in the first quarter, which demonstrate continued high demand across our geographies and verticals. Let me begin by summarizing a few of the highlights for the quarter.
In the first quarter, we saw strong revenue growth of 35% compared to the prior year period constant currency revenue growth was 38, 2%.
Our revenue growth in constant currency, and seven 2% higher compared to the guidance I shared in March 2022. This is primarily due to strong demand and execution, including a faster ramp up of new clients, a lower than expected impact from omicron and lower than expected attrition for the quarter and.
Adjusted EBITDA for the quarter was 73 million representing year on year growth of 35.4%.
Our adjusted EBITDA margin of 22, 7% with 320 basis points higher compared to the midpoint of the range I guided to in March.
Adjusted EBITDA margin when compared to last year has remained consistent mainly due to improvements in adjusted gross margin offset by the effects of foreign exchange impacts during the quarter.
Now, let me share some details.
Turning to revenue for the first quarter revenue growth year on year, with 35% and 38, 2% on a constant currency basis.
Thought works is a premium brand evidenced by our high average revenue per employee we have a diversified business across industry verticals and geographies.
In the first quarter of 2022 we continue to see clients accelerate their digital transformations with thought works over a trailing 12 month period, we had 42 clients with bookings greater than $10 million compared to 29 clients in the same period last year and our overall bookings in the trailing 12 months increased by 39.
6% year on year to one 5 billion, we saw strong momentum across all geographies and verticals.
APAC grew by 48% North America by 35, 8% Europe by 29, 3% and Latam at 24, 2%. We also continued to see good growth across our industry verticals during the quarter.
The strongest growth within financial services growing 77%.
Our retail and consumer vertical grew by 51, 8% and continued to perform well and we are very pleased with our growth from existing clients.
Technology and business services grew at 28, 9% energy public and health grew at 21, 1%.
Automotive travel and transport grew at 16%.
At the end of the quarter on a TTM basis around 88.3% of our business came from existing clients.
We now have 31 clients with TTM revenues greater than 10 million eight more than the first quarter of 2021 of 34.8% increase from the same time last year.
Moving down the income statement for the quarter adjusted gross margin was 45, 6%, a 90 basis point improvement compared to first quarter 2021.
Our adjusted gross margin performance was positively impacted by a higher bill rate due to our premium services, partially offset by utilization and.
In the first quarter, our adjusted SG&A as a percentage of revenue was 22, 6% consistent with the first quarter 2021 the impact of increased costs due to operating as a public company was offset by increased operating leverage in other areas of SG&A adjusted EBITDA was $73 million for the first quarter and.
Increase of 35, 4% compared to the prior year quarter.
I said EBITDA margin was 22, 7% consistent with the first quarter last year.
GAAP diluted loss per share with 20, <unk>, primarily due to noncash stock compensation charges on an adjusted basis. Our adjusted diluted earnings per share was 13 cents compared to 14 cents in the first quarter of 2021.
Negative free cash flow for the quarter was $11 2 million compared to positive free cash flow of $24 2 million in the prior year quarter, driven by solid operating profitability offset primarily by lower customer prepayments this quarter and compensation programs with annual payouts in Q1, and we continue to have got the.
Quiddity, our cash balance at March 31, 2022, with 340 million compared to 397 million at March 31, 2021.
Further our debt balance was approximately $508 million as of March 31, 2022.
Now I would like to hand back to shout to share additional updates on our business from the first quarter. Thanks.
Thanks Erinn let.
Let me start with our amazing thought workers.
We've grown our community of thought workers to over 11000 with a long term focus on diversity and inclusion.
48% of thought workers out now women and underrepresented gender minorities W. G M.
We're pleased to have been recognized again this quarter, winning a number of awards for increasing the participation of women in the workplace.
In March at the Diversity Award 2022.
We want in seven categories, including for women leadership development and women return knee programs with also being recognized by the workplace gender equality agency.
And Australian governments statutory agency.
This is the 11th year in thought works has been cited for award promoting gender equality in Australia and workplaces.
From inception.
Diversity and inclusion has been embedded in our values and culture and towers now ranks in the top 5% for diversity and inclusion in the technology sector.
I'm proud to share that our work in India to enable inclusivity of the LGBTQ plus community is now the subject of the Howard business case study the Indian Institute of management, Bangalore develop the case study to better equip future leaders on how to develop inclusive cultures and systems, our strong employer brand.
<unk> attract the best talent in the World, we had over 90000 applicants to thought worse during the first quarter.
We're proud of our recruiting engine, we continue to see around a third of our hires coming from Thoughtworks referrals.
A third from sourcing and a third from Inbounds now, let me share update our people and capability initiatives technology is advancing very fast with high demand for top talent in areas like data and cloud.
Our scaled program to train all workers and a new technologies around data and cloud is progressing well. We're now on track to train an additional 1000 workers during 2022.
I'm also pleased to share that towers is now a industry partner for the data analytics careers accelerator program being developed by the London School of Economics, and political science and online Education company fourth arrest. The six months' accelerator with train students from different backgrounds to develop holistic data skills thought works with.
Projects designed to simulate real world situations that support the hours approaches and values.
Our priority is with ours to be a place for talented technologists to grow and have impact.
Our global Glassdoor rating is a measure of the progress we're making in the first quarter. Our overall rating was 4.49, which is again higher than the rating for the I T services sector of three point 95.
We're known as thought leaders, who revolutionized the technology industry.
And that's how we build our brand and our reputation from early days as a company.
Let me share some recent thought leadership that is being well received in the market.
In March we published our 26th edition of the towers technology radar.
It is a de facto standard in the industry.
It lays out our guidance based on hundreds of real climb engagements.
It's always technology read our provides our insights on the latest tools platforms techniques languages and frameworks.
That can help digital transformations be successful one.
One concept, we export and the latest edition is securing the software supply chain.
Many organizations focus on security for systems in production.
But it is just as critical to have robust controls on testing sandbox and cloud environments.
Standards, such as the supply chain levels for software artifact S. L. S. A a new entries to this addition off the radar.
Demonstrating that they are now pragmatic tools to address these issues and I'm delighted that the much anticipated book data mesh delivering data driven value at scale written by a thought worth luminary is now available.
With more than 100 books published sharing knowledge through authorship is something unique and a very special aspect of our cultivating culture data mesh first coined by its all worth luminary in 2019 applies the principles of modern software engineering to unlock the potential of enterprise data data mesh is.
The data architecture, where data is treated as a product and owned by domain teams to understand and consume the data.
We're seeing a lot of interest from industry and clients around our leadership in data mesh.
And finally, I'd like to share update O'neill.
The hours in house self service developer portal.
The vision behind new is to create an environment, where thoughtworks developers can use their valuable time effectively with a highly engaged engineering teams.
Neil has just been recognized as a winner of the 2022 CIO award for innovation that impact on operational efficiency improving.
Developer effectiveness by around 20% to 30% now let me hand back to Erin Thanks Shao.
I'd like to update you on some areas of focus within our ESG priorities, let me start with our approach to the environment. We have two areas of focus first our own carbon reduction strategy.
We have ambitious targets to reduce our greenhouse gas emissions in line with the science based target initiative, we expect to reduce scope, one and scope two GHT emissions by 50% by 'twenty 30 from a 2019 baseline and reduce scope three G. H G emissions by 85% per employee also by.
2030.
Additionally, we expect to increase our sourcing of renewable electricity to 100% by 'twenty 30, our targets are currently with the science based targets initiative for validation.
Second we are committed to helping the technology industry and our clients reduce their carbon footprint. Let me share. An example of some work that we have been doing in Spain with all of these are Green energy Technology Company, whose mission is to enable our planet powered by 100% Green energy working with thought works, although it does use.
The open source cloud carbon footprint tool that thought works belt, leveraging the AWS compute optimize their service all of these is now able to closely monitor its carbon footprint and act fast one outcome has been a 3% reduction in its cloud infrastructure costs.
Now moving to social within our ESG strategy, social change is deeply ingrained in our culture and our business thought workers continue to do transformational social impact projects around the world I'm proud to share that power. He says now an official member of the digital public goods Alliance digital public goods are open source and help achieve.
The United Nations Sustainable development goal thought very strongly supports these goals. For example, we believe that health care is a human right thought works has developed by routes and in collaboration with a Shocker University and the Gates Foundation <unk> is an open source agent based simulation framework for disease modeling using synthetic.
Like population Barrettes them aims to provide insights to public health experts and policymakers to calibrate and formulate health policies now, let me turn to our business outlook. Our pipeline remains robust for the second quarter of 2022, we expect revenues to be in the range of 328 million to three <unk>.
Hundred and $29 million, reflecting year on year growth at the midpoint of 26, 2% or 29, 5% on a constant currency basis, we expect.
Acquisitions will contribute approximately 2% to reported revenues.
We expect adjusted EBITA margin for the second quarter to be in the range of 17% to 17, 5%. This is in line with our operating plan and reflects the impact of costs that are seasonal in nature, including the impact of annual pay raises and some of our larger countries or.
For the second quarter, we expect adjusted diluted earnings per share to be in the range of 11 cents to 12 defense, assuming a weighted average share count of approximately 333 million diluted shares outstanding.
For the full year 2022, we expect revenue growth to be in the range of 29, 5% to 35% year on year on a constant currency basis, we expect revenue growth on a reported basis in the range of 27, 5% to 28, 5%, which includes a negative foreign currency translation and.
<unk> of approximately 2%, we expect acquisitions will contribute approximately 2% to reported revenues.
For adjusted EBITDA margin, we expect full year 2022 to be 19% to 20%. We expect full year adjusted diluted earnings per share for 2022 to be in the range of 51 to 53 fence, assuming a weighted average share count of approximately 332 million diluted shares.
Outstanding for 2022, we believe our employee brand is strong and that the demand environment will continue to support our growth ambitions now let me hand back to Sean. Thanks, Erin you can find our investor presentation on the thought works Investor Relations website, we now move onto Q&A I would ask that each of you 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.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Tien Tsin Huang from JP Morgan. Your line is now open.
Thank you so much really nice quarter here I wanted to ask about gross margin overall margin. If you don't mind be clearly the gross margin was really strong in the quarter. So just wanted to ask about your margin outlook here implies some step down.
Sequentially. So just wanted to better understand what's driving that I know theres. Some seasonality is there some conservatism.
Something going on with with utilization, perhaps any color there would be great.
Thanks, Tien tsin, I'll start with that and margin as you pointed out we had a really strong first quarter, we saw strong execution.
We performed well across the board and at the heart of it was a broad based growth across our geographies and sectors.
We did drive a higher margin in Q1 than what my guide reflected there's a number of reasons for that the first is we were able to ramp up certain engagement more quickly than we expected this to its imported by lower than expected attrition for the first quarter.
We also had a lower impact from omicron than we were expecting in the quarter and then we had the benefit which affected our gross margin and overall adjusted EBITDA margin.
On milestone billing with respect to some of our fixed price engagements.
There was a lot of positive working in Q1, it was a strong quarter.
The final piece that I would add with respect to SG&A is that there was a bad debt recovery in Q1 and that also benefited our margin in the first quarter.
Paragon has summarized that I'm looking at Q1 strong performance there was approximately two to three points.
Flipped that is specific to Q1.
And then Tien Tsin, you mentioned seasonality, which is a key.
Key point.
We've discussed before there is seasonality within our quarterly margin profile.
So that just is a close last year in the Q3 Q4 margin.
And so if we think about Q2 seasonality is at play again, there's approximately two to three points of margin impact.
That are items that I would describe related to seasonality or items that are specific to Q2 of this year.
First the pay rises we have pay rises and several countries in Q2 I mentioned that in my prepared comments.
The pay raises I always have the highest impact in the quarter when the REIT is given.
Compared to Q1, there was also a higher level of expected annual leave or vacation, that's associated with a public holiday schedule.
And then addition to that there are several demand and marketing events, taking place in the second quarter, which is a really great actually because a lot of these are events that are happening in person for the first time in a long time, so it's definitely something for us to celebrate.
In General I would just point out and we have a very strong margin profile and if we look at the margin using the midpoint of the guidance for the first half of the year that would put us just under 20% which of course is in line with our guidance for the year as well so all in all our seasonality is.
Only a factor and then the Q1 to Q2 transition is just a really strong Q1, which is also affecting the comparability, but importantly in line with plan as we were expecting I'm feeling very good about the first quarter and second quarter.
Good good.
No. Thank you Erinn, it's very complete answer I appreciate that so my quick follow up maybe pushed out just on the connected.
Acquisition, Canada base, I heard 160 or so.
Please anything unique here that you think from a amplifications to pinpoint if you bring it onto the thought works platform.
Its unique or special here.
China I'm trying to think about how that might layer in and.
Bring in some incremental growth.
Thanks.
Sure Hi, pinching.
So connected is.
Actually well well known in the.
In area that's about.
About new product development services. It has its own methodology unique mythology about park development.
We are very excited about.
Are you able to work with them together.
They have.
<unk> developed some really deep expertise across entire part of life cycle.
So it's not just engineering is from pork strategy.
Research and product design as well as engineering.
And then we have seen very strong demand in this customer experience Park development and design.
Area.
Around the world, but also specifically in North America.
A majority of our collective.
I think the customers he's based in the U S. So it has a lot of synergy with our U S footprint also he's got.
You mentioned 160 people in Canada.
He was a great.
Right.
Chance just to further scale, our our talent pool in Canada.
So we're generally very excited about connected.
Okay and so your question it does Paul good very good. Thank you guys.
Alright, Thank you Tien tsin.
Thank you. Our next question comes from the line of Ashwin Schumacher from Citi. Your line is now open.
Thank you and congratulations from me as well on the on the really solid quarter.
As I look at the outlook.
That you provided it seems as though you're only really putting in the impact of the acquisition.
Are there.
Sort of countervailing factors that we should consider maybe seasonality or.
Cadence of some kind that that perhaps offsets it particularly for two Q, but if you could broadly.
Talk about that.
For the full year that would be great.
Sure Hi, Ashwin.
So our our guidance for Q2 as Erin mentioned earlier even.
Just from a revenue perspective.
Is definitely impacted by some seasonality and then theres a little bit of a COVID-19 impact as.
As well on utilization.
So compare with last year, we're seeing more people that's not just their public holiday, we're seeing more people taking holidays in the spring and around Easter now that the Kobe constraints uplifted and most of the countries.
And then there's also a bit of a utilization drop due to the current lockdown in China as we have seen in the news.
So for US Q2 revenue forecast.
It's on plan is exactly where we expect it to be at the beginning of the year.
But theres definitely a bit of seasonality that's impacting.
Compared to what how the Q1 it looks but as you mentioned nationally in the full year looks very strong in fact, I would raise our full year guidance or.
Not just the.
Acquisition, I think it would raise it by about four five points.
Then the Q1 guidance.
So half of that about half of that come from acquisition. The other half just from organic growth and we see it.
The strong bookings at this point.
It's about $1 5 billion in the trailing 12 months.
And then we also have about 42 clients with more than 10 million in bookings, so a pretty robust pipeline as well for the rest of the year. So still feel very positive and strong about the full year.
Right no. That's good thank you for the underlying details there.
The other question and this is a relatively frequent point of discussion with investors is just the broad topic of.
Wage inflation of reagent cheeses horses, when you can get pricing offsets for that.
The timing of it and things like that.
Could you I mean should we assume that just given the nature of how it works this business.
And in the premium net debt.
Net you command.
That.
Getting appropriate.
Pricing offset should not be a problem for you to offset the levels of wage inflation.
Yes, I would say that it's.
It's not a problem for us all works in this environment even.
The combination of talent is driving up the wages across the countries the premium value preposition do it does allow us to.
Two can command a premium pricing and we do this in a mostly by adding higher value added services through our innovation for example data management mentioned earlier and it allow us to drive higher.
Rate structure.
And then the pricing for the services we offer on average.
We have had high single digit price increases over the last 12 months.
And then that is offset.
<unk>.
Only to a certain extent by wage.
<unk>, but he is also offset by moving work to offshore regions in terms of the just the average billing rate where the offshore regions where.
Charging at a lower.
Lower rate so you put all that together our.
Revenue per employee for Q1.
2022 remains similar to last year and then.
That help us and then because of the distribution offshore as well that really help us too.
So just to manage the wage.
Wage inflation and then keep gross margin at a sustainable level for us in the long run.
Got it. Thank you for that mix you all the best.
Thank you Ashwin.
Thank you. Our next question comes from the line of Maggie Nolan from William Blair. Your line is now open.
Thank you if I could just build on that last question can you talk a little bit more explicitly about wage inflation and also attrition by deliberate geography, and how that may vary for you.
Okay.
Thanks, Maggie I'll start so you can add in.
So wage inflation as you pointed out by your question Maggie It definitely differs by country.
What I would say generally is that wage inflation for the last year or so it's been a couple of points higher than what we historically have experienced and that's pretty consistent across the geographies.
We would expect the levels are higher in countries, such as India or Brazil.
And then what we see in say the U S. A U K or Germany, and again that that pattern is historically consistent.
On the whole shall it's talked about though the ways, we've been able to mitigate that so it has not affected our margin. The first is definitely.
Driving price increases with our clients.
The other piece of that is really just the operational improvements and efficiencies that we're able to drive looking at leverage as well as looking how we are delivering work across countries. So all in all we've been able to manage our margins really well through this higher inflationary period, and we feel good about our.
To continue to do that.
With respect to attrition.
The attrition trends have been good for this quarter. So there's definitely.
Demand for talent.
That talent competitive environment remains strong as we've seen.
So if we compare to last year, our trailing 12 month attrition is a couple of points higher its 14 around right around 14% for Q1 of 'twenty two.
If we compare that to Q1 of 'twenty one it was around 12%, but we do think that is a reflection of the strong competitive environment for talent, but positively that is a reduction from where we ended 2021, where the trailing 12 month attrition was around 15%.
We've seen some positive trends and attrition, we continue to invest in our talent and our retention programs.
And we expect to see attrition staying at similar levels.
Thanks, So much Aaron and then can you talk a little bit about how the value proposition and revenue and margin.
Would perform in a weaker economic environment, perhaps drawing on how the company may be performed during the great recession, and what may be different in terms of how the company is structured today.
I can start I mean feel free to add.
So in a generally in a weaker.
Economic environment, we see clients tends.
It tends to.
The more careful with their.
With their spending.
They want to focus on more higher value added services.
And reduced discretionary spending but most of the firms we have been working with.
Especially the ones with stronger cash flow.
Have taken the opportunity of a downturn to invest to double down in.
In digital technology, one of the key strategic initiatives.
And then we've seen this pattern so.
What have been doing over the years, there's always been trying to focus on building long term relationships with key customers working with them on their most strategic digital assets.
And then that tends to be proved to be a probably the best way for us to remain relevant.
You too.
Work with our clients during the hard times of a potential economic downturn. So we're definitely doing well have done that in the previous.
Recessions from 2021 to 2008.
We definitely feel comfortable about our value proposition our approach when it comes to a weaker U can.
And I'll be your environment.
Yeah.
Hi.
I'd add just that one or two points to that I think Sal explained that well I'm just to your question Maggie about what is different versus.
The great recession about thought works well.
One thing for us that's different is definitely our demand capability.
Invested a lot over the last few years at not only improving how we qualify inbound clients, but also in terms of outbound clients and building that outbound sales engine, which we did not have during the last recession and so that that we do see is the strength of our business.
Today, and then in general from a margin perspective, what we've seen is while it doesn't impact topline growth with what we've seen historically from a recessionary perspective.
And from a margin point of view, it's been margin neutral or slightly margin positive.
Thanks for all the information and congrats on a great quarter.
Thank you. Our next question comes from the line of Brian Essex from Goldman Sachs. Your line is now open.
Hi, This is Charlotte on for Brian Congrats on a great quarter I guess now that you have been a public company for a couple of quarters now have you seen or.
Have you seen your pipeline benefit of being a public company status and can you talk about the breadth of your pipeline going forward.
Thanks.
Hi, Charlotte.
Yeah, we can certainly talk about that.
The.
So first of all the pipeline.
Strengths, we have seen.
Yeah.
Our steady growth of our pipeline over the last certainly over the last 12 months.
The booking has remained very strong like I mentioned, the $1 5 billion TTM, that's about 40% higher.
Than the previous quarter.
Quarter to the same time last year.
And then the pipeline is very robust across verticals and geographies.
We.
We have definitely seen what Brent recognition.
As a public company both on the demand side on the supply side.
From a pipeline perspective.
<unk>.
We definitely see benefits in terms of inbound leads theres more.
I won't say, there's more there's more quoting of us being a public company.
Being reference during the conversations, but I wouldn't say that being a public company has significantly changed the brand recognition because majority of the strength of our brand comes from a thought leadership from the technical innovations.
The last I've been working on is in the last 29 years.
So.
It's in the technical community the Brent recognition.
<unk> has always been strong and that's where the majority of the inbound leads.
Comes from.
The public company status as a nice to have.
For sure, but it's not as significant.
A paradigm shift for us on the supply side has definitely helped a lot, especially with the ability to now be known as a public company with the ability to.
To provide.
Stock based compensation for example, more broadly.
That helps with the recruiting side as well.
I hope that helps with the question.
Definitely very helpful. Thank you so much for your time.
Thank you Sharon.
Thank you. Our next question comes from the line of Darrin Peller from Wolfe Research. Your line is now open.
Thanks, guys.
Look you're obviously handling the wage environment in the labor environment very well.
But a couple of questions on that number one is.
Have you seen anything change in the environment, whether the geopolitical environment has caused us more.
More and more tighter market on labor.
And then second part of that would be you tend to charge a higher revenue per head to begin with.
So passing through this wage inflation is there anything we need to worry about in terms of the ability to sustain that over the next medium term.
Thank you Dan.
So I'll start with the impact.
On labor.
We have first of all we have very little exposure in eastern Europe , and no exposure in Ukraine, Belarus, Russia.
So it really hasnt impact our pipeline from a supply perspective.
We have.
They are diversified talent pool around the world.
From.
India in Asia to Latin America to Europe .
And then what we have seen is.
<unk>.
Certainly some of our clients asking to pivot some of their work from.
Capacity that used to eastern Europe to other continents to diversify a bit more than they ever have done before does it definitely fits our strength do we see higher demand for people in India in Latin America.
Hum, but we haven't seen from a recruiting perspective that has created.
A big impact.
As Aaron mentioned earlier.
We have.
I'm trying to have a strong recruiting pipeline and then similar to the demand side because of the technical Brent we attract a lot of people as at inbound we have been working very hard to build the sourcing capability internally and it would have a very strong referral program almost a third of the people we hire comfort.
Feroz. So overall, we haven't really seen much impact on the supply side.
From the geopolitical tension.
And then on the pricing side on the how do we I mean wage inflation.
We feel strongly about our ability to.
To continue to increase our our pricing, we actually do more value based outcome based value based pricing.
Rather than cost base pricing.
Pricing, so that allow us to as long as we continue to innovate at new value, we're able to charge a higher rate.
And that's why I think we feel comfortable that we have been and will be a continued to maintain our gross margin by.
By adding.
The price changes, so we feel comfortable with that single digit sometimes high single digit price increase year on year.
Is sustainable for us at least in the next few years.
Allows gives us a lot of leeway and wiggle room to manage the wage inflation.
Alright, Thats great to hear just one quick follow up as it would be on on the demand side. I mean is there any change to where youre seeing the most demand come in now I mean is it.
So very broad based or is there something that you guys have been doing that.
[noise] differentiating more and more and as the quarters go by since our since even since the short time since you've gone public.
Sure.
It's definitely brought based but also with some highlights.
Broad based because we think from all the service offerings.
Across geographies and verticals, we continue to see strong demand coming from all directions.
Highlights would be on the service line to highlight would be.
Enterprise modernization platform and cloud.
We continue to see increasing demand for that as more and more companies.
<unk> doubled down digging deeper into the digital transformation after the low hanging fruit.
The customer facing applications many of them realize that they have to modernize their legacy systems, not just moving them to the cloud, but also modernize the architecture. The same time, so we're definitely seeing.
Even higher demand coming from that area.
And also from a vertical perspective.
Financial services and retail are the highlights.
We have been.
You're investing a lot in both of the areas.
And then.
So with financial services, there's the.
Neo bank crypto currency.
The fintech continue to disrupt the landscape.
So we're working with both the incumbents, the bigger banks and as well as the new scale ups.
The fintech sector.
That's where a lot of the strong growth come from and retail customers has been benefiting from the post COVID-19 surge of online shopping.
It'll channels.
Also.
Recovering pretty while post COVID-19.
So we're seeing.
Strong demand coming from that as well and then those are highlights, but also I think that the broad based nature of the growth Hasnt changed.
Alright, Thanks, a lot guys.
Thank you Dan.
Thank you. Our next question comes from the line of Dan Perlin from RBC capital markets. Your line is now open.
Thanks, Good morning, and let me add my congratulations as well really strong results here.
I wanted to just ask a question around visibility.
Bedded in guidance for the rest of the year, there's just clear uncertainty at a macro level you talked about.
Kind of some utilization rates around China locked down.
And I'm thinking here, specifically I thought you said, 88% or so of growth is coming from existing clients. So maybe can you just outlined.
How that cohort is growing.
I think in the current environment and then what are some of the other factors that give you so much confidence in.
And then the remainder of the year.
Sure so that.
Eight 8% existing client growth.
This is what we have seen.
In this quarter normally this cohort of existing customers the long running relationships would generate about half of the growth of our business and then the pattern remains pretty consistent over time, we have been.
Focusing on building long term relationships, especially with our top 25 top 50 clients.
And then we've seen that especially the top 50 growing.
In the very robust away I mentioned earlier at 42 clients have billings that's more than.
Have bookings more than 10 million.
Total revenue and about 31 of them have a TTM.
Revenue more than 10 million as well. So so we expect more of the top 50 clients to become a 10 million plus clients and what else do we expect more of.
These relationships continue over the years, so that that kind of.
The pattern of growing existing customers.
Something we've been focusing on for a long time that gave us a lot of visibility.
So new customers.
We are feeding.
Uh huh.
The momentum is continuing we contract it was 52, new logos this quarter and in the previous quarter I think we contracted 36, new logos. So most of these new logos will continue to as we've seen before to ramp up.
As we continue to develop a relationship. So that's another foundation. We've built now we'll continue to give us this.
Revenue for the rest of the year. So all of this adds up to that $1 5 billion of.
Of our total billings through the last 12 months and also we see the pipeline.
For the rest of the year continue to trend.
<unk>.
Way ahead of what we have seen in the previous years.
Although the pipeline.
Is there some economic concerns about.
About some some economy in the original economies and different different parts of the world because all our.
Revenue is our demand is highly diversified across the world.
<unk>.
North America for sure Europe , but also APAC.
So that give us confidence that we have this the broad geography diversification to mitigate any risk of some of the regional economic slowdowns.
So I hope that helps to address the question.
Yeah, that's great.
My quick follow up is as you think about the free cash flow I know it was negative in the quarter. It sounds like there was some I think you'd called out lower customer prepayments and in our compensation programs.
Are there any dynamics that you want to call out as you think about the cadence for that improving throughout the remainder of the year. Thank you.
Thanks, Dan you pointed out the key elements. So Q1 free cash flow was impacted definitely by strong growth and that ramp up and that we had particularly in the end of Q1.
Overall, if we look at our D S L or percentage of a R and Unbilled revenue is too high.
Our overall revenue for the quarter, it's right in line with what we would expect and in line with what we target.
So there's nothing significant to point out in terms of cadence beyond Q1, where we do see a bit of seasonality with respect to free cash flow that is in that first quarter again, particularly.
Because of the annual compensation program as we compare it to last year that was less evident because we had the deferred revenue where that that client significant client prepayment in Q1, So there's nothing more to add than that on the whole our our accounts receivable at our client payments.
And invoices.
Are behaving as we would expect.
That's great. Thank you.
Thank you. Our next question comes from the line of Bryan Bergman from Cowen. Your line is now.
Hey, good morning, good afternoon. Thank you hope.
And if you dig in a little bit more around talent can you talk about where your comfort level stand around the pace of hiring and maybe the quarterly and our net new head count potential and I think you mentioned you're on track to add a train an additional 1000 professionals in 2022 was that or was that a reference to new professionals that are joining or was that something within the existing base.
Yes.
Hi, Hi, Brian I'll start with your question and Shout can add in.
So in general we're feeling very strong about our talent our ability to develop as well as retaining our talent.
Start with your last question just around the training that we're doing we are seeing very strong demand in data and cloud infrastructure. So we have started a training program to address that I dress that client need them and the 1000 professionals. Some of them are new some of them are existing.
All workers, so some will be new hires but a lot of it is training programs that we are making available to our employee population generally so it is a new skill set development development.
Development of technical skills that would be across the board not just incoming thought workers were really excited about those programs.
And then with respect to the pace of talent.
Last year in 2020, one how are we we've really challenged ourselves and have proved to ourselves that we are capable of bringing in talent at higher rates than we have done historically and we expect to see that continue for 2022.
We saw strong hiring in Q1, as we look out across the year and you'll probably recall from our prior comments Q3 tends to be B E.
The highest number of hires that we have in terms of talent that also has to do with the timing of our graduate program in University hires but on the whole we continue to invest in our talent, we're feeling very strong about our talent proposition. We're excited about these new programs and what it means to our clients.
So for US it's definitely a continued area of strength.
Okay and then my follow up on your Vietnam development here can you just talk about your expansion plans there or is that something we should expect you pursue both organic and inorganic means.
Sure. We're we're definitely looking at both but as a starting point, we're looking at mostly organic growth.
We feel very comfortable with the brand, we have and our ability to attract.
Top digital talent.
We have seen strong demand coming from.
Singapore, Australia customers, who wants to further diversify their data centers into Vietnam would you look at inorganic opportunities as well.
So far we haven't seen anyone who is a good fit from a premium, especially on the premium side the premium value proposition perspective, and then from a cultural fit perspective.
It is generally harder to find.
Smaller companies in the near shore offshore region.
Occupy the premium space, it's easier to find them.
Onshore.
In in North America, and Europe , but less so in offshore. So so we have taken the organic approach.
We'll continue to look at you know like any if we find good candidates to help us scale.
Alright, great. Thank you.
Yeah.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from the line of Dave Koning from Baird. Your line is now open.
Yeah, Hey, guys, great job and I guess my first question I was just looking at the filing and you gave top 50 clients I think that might have been the first time you gave that but what's interesting is if we look at non top 50 clients. It's about a third of revenue growing 84%.
You'd keep that up you wouldn't have to grow the top 50 at all and you could still hit high Twenty's growth, maybe just wondering Ken those non top 50 clients continue to grow at such a hyper hyper growth pace.
It's a great question, we are we definitely see higher growth from smaller clients because of just the.
The number of new logos, we acquire as well as given the size of their starting point it tends to get a higher percentage, but with the with the long term sustained growth we would definitely rely more on the top 50 than the than the rest of us.
The portfolio because the top 50 are the ones who will.
We will continue to.
To allow us to build longer term relationships and then instead of to increase the rent.
Our revenue portfolio with the if we just rely on the.
The non non top 50, I think our portfolio is gonna Franklin too much and there will be too much fluctuation in our business operation in the long run.
So that's something we have been focusing on the last few years, so that we intentionally to to double down and focus more on larger clients as opposed to just rely on.
New logos and smaller clients, which you would call out but it is a choice we.
Based on the what we have seen in the previous 20 years in terms of the pattern of growth.
Got you. Thanks, and then and then one just one thing on stock comp how do you expect I know that had a big kind of nonrecurring in Q1, but how do you expect that to go through the year and maybe longer term.
Yeah.
Yes, Dave as he pointed out our stock based compensation, but impacted in our first quarter and part of the D 121 million expense that we saw in Q1 why are related to the approval of China's safe and I talked about that briefly last quarter and that was 48.
8 million.
121.
Our stock compensation for Q2 is estimated to be approximately $54 million and then as we think about the mechanics as time goes on it will remain elevated.
Through the rest of this year as well as a little bit into next year it'll start to come down.
But that really has to do with the timing and the vesting of the.
Are you related to the IPO and so that won't go through full cycle until next year.
Alright, thank you.
Thank you. Our next question comes the line of Mark She countries from Wedbush. Your line is now open.
Hey, Thanks, Good morning, and let me add my congrats on very solid results and the fact that you are able to bring down the first one.
Sequentially maybe.
Maybe some housekeeping kind of questions do you have any number in terms of planned headcount additions for this calendar year and then as a follow up maybe on can you talk about utilization rates during the quarter and I am assuming.
Maybe that's one of the reasons why our gross margins.
Great.
Again, this is a function of hiring and recruiting.
Sorry.
So I will start with a utilization point.
Already talked about that when I talked about the seasonality that we see at Q1 versus Q2.
So utilization from Q1 to Q2, well I will definitely be down at the.
The reason for that is and certainly the holiday period that we already talked about as well as a little bit more than our operating plan would reflect because of the one micron impact in some of the lockdowns that we're seeing in China, it's not significant but it's a it doesn't make a difference Q1 to Q2.
That does impact the margins in Macquarie quarterly seasonality.
In terms of the hiring numbers I know that there's not much more to add than what we already talked about.
We expect to have strong hires a we did a record number of hires last year, we have to do the same in 2022 to support our strong demand and that's the biggest hiring is expected to be in Q3, along with the graduate and to give you a sense of where that is we added around 950 people in Q1, we will continue to see.
Our strong hiring throughout the year.
Just.
A reminder, that did you mention on the FX headwinds.
For the year in your guidance.
And I did not but that is also a good thing to mentioned Moshe. Thanks for that there is a little bit.
FX headwinds, if we compare the guidance from last quarter to this quarter.
We knew that there was going to be an FX headwind and that was already embedded in our initial guidance for the year that does also affect a little bit of the transition from Q1 to Q2 and then on the whole for the year, there's an FX headwind on growth, it's around 200 basis points.
Estimate that I should say.
Excellent Thanks, a lot.
Thank you at this time I'm showing no further questions I would like to turn the call back over to goes Yao for closing remarks.
Just wanted to thank you everyone for joining us today.
I'd like to acknowledge the continued support of our board and our shareholders and in closing I would like to thank all thought workers clients and partners for the extraordinary impact we're delivering everyday together so.
So stay well and then we look forward to catching up with you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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