Q2 2022 Thoughtworks Holding Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Yes.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Hello, everyone and welcome to thought works earnings call for the second quarter of 2022, we will be recording today's call and during the presentations all lines will be on listen only joining us today will be thought works president and CEO go Shao and CFO Aaron comments the Earth.
<unk> press release was issued earlier today and is also available on our Investor Relations page adult works Dot Com, if you want 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.
Certainties, 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 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 Thoughtworks Dot com the non-GAAP financial measures provided should not be considered.
As a substitute for or superior to the measures of financial performance prepared in accordance with GAAP.
<unk> assumes no obligation to update or revise the information presented on this conference call I will now hand over to Charles.
Thank you Shawn and welcome everyone to our second quarter earnings call.
We have a first round of investor conferences in June and it was good to meet many of you in person I.
I'd like to start by sharing an overall update on the business and then Aron will take you through our second quarter financial results in more detail.
I'll then share some of our business highlights before Aric provides guidance and we open for Q&A let.
Let me start with a recap about how it works, we're a global technology consultancy, the integrated strategy design and engineering to drive digital innovation, we never enterprises and technology Disruptors to thrive as modern digital businesses.
Now, let me turn to the financials I'm pleased to report strong results in our second quarter driven by the continued demand for our digital transformation services. We delivered revenue of 332 million U S dollars in the second quarter of 2022, reflecting year on year growth of 27, 5% and 33, 5% in constant currency.
In the quarter, we achieved adjusted EBITDA of $58 5 million U S dollars, reflecting a 14, 2% growth compared to the second quarter of 2021.
Towers has established a reputation for thought leadership and fostering a unique and cultivating culture, our diverse and global culture continues to attract and retain what we believe to be the best talent in the industry.
July Forrester recognized thought works as a leader in the 2022 modern application development wave modern application development services can help companies speed their digital transformation build modern applications and products enhanced custom development for delivering business value outcomes. Some of the thought works strengths cited by far.
Sorry include our strong vision and ability to look ahead to what's coming next and help our clients to benefit as well as our ability to attract and retain top talent at the end of second quarter. We were over 12000 Telework is strong across five continents.
I'd like to thank every thought walk around the world for the extraordinary impact they create through our technology excellence and culture.
The towers business is diversified across industries and geographies and.
And we see this as a key differentiator we continue to see strong demand our clients are still looking to digital innovation to help them thrive as modern digital business it even if inflation persists.
According to Gartner survey of 199, Cfos and senior financial leaders in May 2022, 78% of CFO planned to maintain or increase enterprise wide digital investments in the next two years with all works, we see evidence of this across all our services digital transformation.
Cloud platforms.
Data and AI customer experience.
And design.
Strong themes are prevailing let me share some examples.
We continue to see elevated demand around new digital products and services enhancing customer experience remove friction and bring customer facing services together, we're seeing higher demand from clients for thought works expertise in enterprise monetization and re imagining operations demand for our data and AI services continue.
To be strong with especially high interest from clients in data mesh. We're also excited to see client interest around developer experience platforms. According to Spotify.
Around 30% to 40% of our software developers time is spent writing code, we help our clients improve developer productivity and satisfaction through self service platforms to access cloud infrastructure security services API events and data to name a few for these reasons, we believe that all works.
<unk> is well positioned in the market now let me share the details of our growth strategies.
At the core our revenue growth is from deepening relationships with existing clients and winning new logos. We then supplement this with focused strategies around M&A partners and geographic expansion turning first to M&A in the second quarter, we continue with our strategy of undertaking targeted acquisitions.
I'm delighted to announce our second acquisition of 2022 is with handmade.
Design consultancy specializing in product strategy and design and accelerating value from innovation for their clients handmade has more than 50 employees in Brazil.
To welcome handmade to the towers family I'm looking forward to the impact they will have our business both in growing our CX and digital products and services and supporting our business in Latin America, and North America.
Now, let me turn to partners is a growth strategy.
Primary focus is developing go to market partnerships with the Hyperscale cloud providers.
Let me update you on Amazon Web services AWS I'm pleased to share that in the second quarter of 2022 towers became a Amazon AWS Premier services partner. This is the highest tier of partnership and.
In less than 3% of AWS partners achieve this status. This recognition underscores thought worth deep technical expertise with AWS cloud technologies, and our ability to demonstrate success working with a large number of clients at scale, we're partnering with AWS at our client Gilead Science Gilead Sciences.
<unk> is a biopharmaceutical company that has achieved breakthroughs in medicine with the goal of creating a healthier world for all people thought works in AWS working with Gilead Sciences to support their ambitious cloud journey Gilead has a vision to evolve to a more data driven culture and drive greater innovation, including.
Adoption of data at scale.
Now, let me share some more details on our client portfolio the depth of our expertise and breadth of our capabilities means that we can help clients address all their challenges from strategy right through to business outcomes. Our clients appreciate the value, we create with them and remain confident in our ability to sustain our premium position.
Pricing in 2021, the average tenure across our top 10 clients buy revenue was seven years and will continue to grow our relationships for example at our client Paypal one of the worlds leading payment platforms. We're.
We're working together to design architect and deliver our new Omnichannel platform and content management capability, we aim to meet regulatory requirements and set a new gold standard for customer engagement. We're selective in our approach to new clients looking to work with clients with long term ambitions for digital transformation will continue the moment.
From the first quarter and we have contracted with 26, new clients in the second quarter now let me provide some examples of new clients that we have been working with in May We announced agreement with new client CLO, a leading electronic payments company in Brazil, and Latin America, while working together to build a digital technology platform.
That improves the developer experience the platform is named Thor because of the power it will bring to delivery Thor will streamline the creation of new technology features and components streamline the process of applying architectural standards and infrastructure processes are key aspect for cielo choosing towers with our expert.
Ts in digital platform strategy, specifically, our expertise around the evolution of the developer experience, we expect to improve developer productivity by cutting the red tape and helping CLO development teams be more secure and reliable digital products and in 2022, we worked with the car auction services elite.
Operator of digital marketplaces for wholesale used vehicles enhanced vehicle condition reports and now part of cars backhaul cars platform. The new features which include engine audio recordings are aimed at strengthening the backlog cars customer experience through more accurate more consistent.
And easier to understand condition reports tower's held to combine the best features and functionality of the backhaul cars and car wave inspection frameworks.
I'll identify areas to streamline across the platforms.
The result is a single enhanced condition report framework that accelerate sales for sellers and provides buyers with comprehensive condition information that is easy to understand the new features helped ensure the consistency of information display for buyers across a wide range of vehicle conditions ages.
And my images you can find details of some of these customer successes a new section of our website thought works dot com I'm now going to hand over to Erin So that she can take you through the numbers in greater detail.
And thanks to all of you for joining US today, we were very pleased with our results in the second quarter, which demonstrate continued broad based demand across our business. Let me begin by summarizing a few of the highlights for the quarter.
In the second quarter, we saw strong revenue growth of 27, 5% compared to the prior year period constant currency growth with 33, 5%.
Our revenue growth in constant currency is four points higher compared to the midpoint of the range I guided to in May 2022. This is primarily due to strong demand and execution and better than expected attrition for the quarter.
Adjusted EBITDA for the quarter with $58 $5 million representing year on year growth of 14, 2%.
Our adjusted EBITDA margin of 17, 6% with 35 basis points higher compared to the midpoint of the range I guided to in May.
Q2, adjusted EBITDA margin decreased when compared to our prior year period, but it's in line with our full year operating plan.
As I discussed during our earnings call in May we expect that our Q2 adjusted EBITDA margin to be impacted by the seasonality of pay rises a higher level of annual leave or vacation associated with public holiday schedules and public company related expenses and several in person demand and marketing events that took place during the second quarter.
No.
Now, let me share some details.
Turning to revenue for the second quarter revenue growth year on year with 27, 5% and 33, 5% on a constant currency basis.
<unk> is a premium brand evidenced by our high average revenue per employee of 116000 annualized for the first six months of 2022, we have a diversified business across industry verticals and geographies.
In the second quarter of 2022, we continue to see clients select thought works for their digital transformations.
Over a trailing 12 month period, we had 35 clients with bookings greater than $10 million compared to 28 clients over the same period last year, an increase of 25%.
Our overall bookings in the trailing 12 months increased by 38% year on year to one 5 billion, we saw strong momentum across all our geographies.
North America grew by 35% Latam by 35, 1% Europe by 21, 9% and APAC grew by 22, 4%.
Given the strengthening of the U S. Dollar in recent months, we want to provide a deeper view into its effect on our reported results.
Our primary revenue generating currencies alongside the U S dollar or the euro great British pound and Australian dollar.
I am pleased with the underlying strength of the business. This quarter for example on a local currency basis, our revenue contracted in euros grew by 24, 6%, great British pounds by 41% and Australian dollars by 41, 7% compared to the prior year period.
Due to the diverse nature of our business on a geographic basis 62, 7% of our year to date revenues.
June 30th were contracted in non us dollar currencies.
We also continued to see good growth across our industry vertical during the quarter the strongest growth within financial services growing at 46, 1% technology.
Technology and business services grew at 36, 2%, our retail and consumer vertical grew at 31% automotive travel and transport grew at 21%.
<unk> public and health services grew at nine 1%.
The quarterly year over year growth in the energy public and health services sector was impacted by the successful completion of a major program at one of our health services clients.
Energy public and health services is a strategic focus and we expect double digit growth to return in future quarters at the end of the quarter on a TTM basis around 86, 5% of our business came from existing clients.
We have a balanced customer portfolio with relative low client concentration.
In the second quarter, our top five top 10, and top 50 clients generated 15, 3% 25, 2% and 66, 1%, respectively as a percentage of our total revenues.
We now have 33 clients with trailing 12 month revenues greater than $10 million eight more than the second quarter of 2021, representing a 32% increase moving down the income statement for the quarter adjusted gross margin was 46% compared to 43, 5% during the prior year.
Year period impacted by seasonality and the factors I previously discussed with respect to adjusted EBITDA in the second quarter, our adjusted SG&A as a percentage of revenue was 23, 7%, which is consistent with the second quarter 2021.
Adjusted EBITDA was $58 5 million for the second quarter, an increase of 14, 2% compared to prior year quarter. Adjusted EBITDA margin was 17, 6%, which is in line with our operating plan a decrease of 210 basis points compared with the second quarter last year.
GAAP diluted loss per share was <unk> impacted by noncash stock compensation charges on an adjusted basis, our adjusted diluted earnings per share was 11 <unk>.
Compared to 10 in the second quarter of 2021.
Free cash flow for the quarter was $20 2 million compared to $22 3 million in the prior year quarter.
We continue to have good liquidity, our cash balance at June 32022, with 275 million compared to $216 million at June 32021.
Further our debt is continuing to go down we paid down an additional $100 million in July which brings our current debt balance to $406 million at the end of July 2022.
Now I would like to hand back to <unk> to share additional updates on our business from the second quarter. Thanks Erin.
Let me start with our amazing with all workers.
We've grown our commitment of thought workers to over 12000.
With a long term focus on diversity and inclusion.
<unk> 41, 4% of total workers are now women and underrepresented agenda minorities.
We continue to improve our employee value proposition and we're pleased that attrition at the end of June 2022 was 12, 9% on a TTM basis significantly better than industry norms.
I am pleased that our attrition is better than our operating plan assumptions.
This demonstrates the strength of our employer brand and employee value proposition.
We believe that all works has the best digital talent in the industry and this positions us well to create extraordinary impact for our clients.
Investing in thought workers is a long standing business priority.
One recent example is grew seafood.
Gucci food is a modern age virtual coding coach built vitol workers to help upskill entry level developers using Socratic learning methodology grew.
<unk> analyzed this coat submissions and provide feedback to the trainees.
Not only on correctness, but also design aspects like for example test driven development and refractory results. So far across over 500 learners have resulted in around 10% of the learning experience of being automated we're pleased to have been recognized again as a great place to work.
Thought works has been great place to work certified and regionally ranked so far in 2022 in Australia, Brazil, Ecuador, India, Romania, Spain, Thailand, the United Kingdom, and the United States.
We're proud that in the United States, we increased our ranking by Fortune best workplaces in Chicago from 18th to 11th place with all works, what's right at one of the best workplaces for women in the U K and Ecuador of Forbes Top 75, Best places to work in Spain, and the top 50 best companies.
To work for in India, Our strong employer brand continues to attract what we believe to be the best talent in the market we had over 61000 applicants.
During the second quarter I'm very proud of our recruitment capability and we continue to see over 50% of our hires coming from thought workers referrals and sourcing.
Our priorities for thought works to be a place for talented technologists to grow and have an impact our global Glassdoor ratings is a measure of the progress we're making in the second quarter. Our overall rating was 455, which is again higher than the rating for the I T services sector of 394 hour.
Core for diversity and inclusion was 477% higher than the score for the ICT services sector. Overall at 4.01 I'm also very pleased that 97% of thought workers would recommend the company to a friend, especially given employee referrals are important source for new hires we're known as <unk>.
Leaders, who revolutionize the technology industry.
And that's how we've built our brand and our reputation from early days as a company.
In April of this year.
Business leaders from around the world convene with Us in New York for paradigm shift founded in 2014 paradigm shift it thought works customary executive program, which brings together our community of client executives to exchange new ideas about the ways emerging technology can enable business transformation.
And improve human interactions. This year's theme the power of togetherness saw industry and client speakers from ITV Mercedes Benz.
Delays and Spotify among others.
We shared ideas around ways to succeed in a much changed the world over the course of two days together.
We explored how organizations are blending technologies part us capabilities and talent to create new opportunities for value creation, we were delighted to be back in person with our clients and to received incredibly positive feedback.
100% rated experience excellent 100% right at the program thought provoking and inspiring.
And 95% said they would absolutely recommend paradigm shift to a colleague.
I've spoken before about our unique and very special aspect of our cultivating culture.
Tal workers are passionate about sharing their knowledge to revolutionize the technology industry and all workers have published over 100 books, a recent book full stack testing.
Written by a thought works luminary provides a new perspective answering the question how to test the software across the full stack testing across coat performance user interface unit testing accessibility and security to name a few.
Testing is a critical discipline for any organization looking to deliver high quality software and software is eating the world software quality has become a nonnegotiable criterion in today's competitive market now, let me hand back to Aaron.
Shall I would like to update you on some areas of focus within our ESG priorities.
Workers continue to do transformational social impact projects around the world.
In June <unk> published our second social impact report as a public company and we are really proud to share the work that salt workers are undertaking to address the stomach social change.
In the last 12 months, we invested in more than 140 projects and our 17 countries tackling issues ranging from the rights of domestic workers reforestation and thoughtworks support to the refugee crisis emerging from Ukraine with movements like leave no one behind you.
You can find our social impact report on <unk> Investor Relations website.
Now, let me turn to our business outlook, while there is uncertainty in the macro environment. Our customers are continuing to come to <unk> to transform their businesses for the third quarter of 2022, we expect revenues to be in the range of 327 million to $329 million, we expect year on year.
<unk> revenue growth at the midpoint of 15, 1% or 21, 8% on a constant currency basis.
We expect acquisitions completed during the year will contribute approximately 3% to third quarter reported revenue growth.
We expect adjusted EBITDA margin for the third quarter to be in the range of 17% to 18%.
For the third quarter, we expect adjusted diluted earnings per share to be in the range of 10 to 11 cents, assuming a weighted average share count of approximately 332 million diluted shares outstanding.
Third quarter guidance includes the anticipated impact from onetime events in the quarter impacting both revenue and profitability.
First funding constraints facing technology scale ups and the possible effects on a few of our clients.
A number of engagements for new and existing clients are now ramping up in Q4, rather than Q3 due to client related constraints.
Third and impact on Thoughtworks utilization due to COVID-19 related impact in countries such as China.
Our third quarter guidance is prudent we have taken a realistic view, we expect that managing the impact of the challenges I've just shared with most likely negate any over performance on our third quarter guidance. We remain positive regarding the near term demand environment, which is broad based across our geographies, we have a healthy pipeline for the.
Fourth quarter, and we have the talent and demand engine to address future chefs.
We believe we are well positioned for long term growth and value creation.
Now turning to full year guidance for the full year 2022, we expect a revenue growth year on year on a reported basis in the range of 24, 2% to 25, 2%, which includes a negative foreign currency impact of approximately five 3%.
We expect year on year revenue growth on a constant currency basis to be in the range of 29, 5% to 35%, which is consistent with my guidance in may.
We expect acquisitions completed in the year to contribute approximately 2% to full year 2022 reported revenue growth.
Since we last provided our full year 2022 outlook in May the U S. Dollar has continued to strengthen as such I am providing a deeper view into the impact of foreign exchange on our guidance.
The full year 2022 expected revenue includes a negative impact of $57 million due to foreign exchange.
This negative FX impact comprises 23 million FX impact to the midyear plus an expectation of 19 million negative FX and third quarter and 15 million negative FX for fourth quarter 2022.
For adjusted EBITDA margin, we expect full year 2022 to be 19% to 20% consistent with my guidance in May.
With respect to foreign exchange, because our regional revenue and expenses are to a large extent in the same currencies. There is normally a natural hedge in our operating margin. However, the heightened strengthening of the U S. Dollar in recent months has led to around a 50 basis points compression on our operating margins.
We believe full year adjusted diluted earnings per share for 2022 to be in the range of 47 to 50.
Assuming a weighted average share count of approximately 332 million diluted shares outstanding.
Our full year EPS guidance is negatively impacted by foreign exchange and a lower than previously assumed tax benefit from stock based compensation for.
For 2022, we believe our employer brand and customer value proposition are strong and we continue to stay close to our clients and remain highly vigilant of any potential impact of external factors or emerging global developments. So let me hand back to Sean.
Thanks, Darren 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.
If you'd like to ask a question at this time. Please press star one one on your telephone that star one one to ask a question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Tien Tsin Huang with Jpmorgan. Your line is now open.
Yeah.
Thank you so much good morning, everyone I want to.
If it's okay, just check on your thinking with the third quarter.
The new guidance, which appears to be flattish sequentially on a FX neutral organic based incentive history.
It looks like it would be up sequentially. So is the difference just the three factors that you called out is there a way to maybe quantify those.
Those three items for us I'm, especially interested in the first one I think you mentioned that the funding constraints.
So maybe tech clients there could be some I guess possible effects as what I broke down so is that something you're anticipating or.
Are you seeing that already just again checking your conservatism given your pattern.
<unk> in the last couple of quarters. Thank you.
Thanks for the question Tien Tsin.
As you indicated.
The factors are what is driving the relative flat Q3 compared to Q2 in terms of revenue growth.
To understand how much each one.
Approximately one third I would account for them.
There are about equal in size and so you mentioned the.
Some of the tech funding and the funding constraints, we've seen the impact of that come through we think it's largely settled.
We don't see much potential for upside I don't want to say there is no potential for upside, but not a lot that is lying included in my prepared remarks that we would.
Not be in the same position that we typically are in terms of the strong strong beat certainly that we saw in Q1 and Q2. So some of these one time impacts including the funding challenge means that the funding challenge for technology scale ups I mean that it is a little bit harder for us to have the beat in Q3 that we would expect.
And what we are seeing for the quarter is that it has impacted utilization and that's why we have the lower growth.
But I do want to know.
That we do expect to see stronger growth in the fourth quarter, we are still seeing a very strong pipeline.
And.
If we look at some of the clients, where there are delays from the ramp ups in Q3 ramping up more in Q4. These are important clients. We were doing the right thing to support our client portfolio.
And we do expect some of these to be top 20 clients in 2023.
Got you that's very clear and just my quick follow up then given what you just stated that Aaron just on the gross margin.
Outlook for the second half for the third quarter into the fourth quarter any considerations there given.
The delay of utilization comment that you made.
Sure so.
Typically Q3 for us is a stronger quarter in terms of margin I talked about that before in terms of seasonality.
However for the onetime items that I mentioned that are impacting Q3 that is impacting the quarterly growth as we just discussed is also impacting the margin in Q3.
We're seeing about I would say around three points of lower utilization than what we would target that impacts our gross margin and adjusted EBITDA by a similar amount.
But we do expect to see utilization normalize in the fourth quarter and so while I'm not giving specific guidance for the fourth quarter. It is worth noting that we would expect to see some uplift in fourth quarter margin compared to guidance for third quarter.
Got it.
Very clear thank you Aaron and thank you Sir.
Okay.
Yeah.
Our next question comes from the line of Ashwin <unk> with Citi Ashwin. Your line is now open.
Yeah.
Thank you.
Good morning.
I wanted to.
Follow up on.
Our attendance question asking about visibility.
So I guess two parts to that one is.
When Mike when would you find out about the <unk>.
Client specific.
Q.
Potential outcome and what's the visibility than looking at it for Q, what's the confidence level of that.
Hey, Mike.
Not get pushed out some of these.
Starts in the ramp starts might not get pushed out to next year.
Okay.
Thanks for the question Ashwin.
So.
The onetime factors and impact and we mentioned earlier, we believe is mostly limited to Q3.
From a client buying behavior perspective, we haven't seen a clear change in the sales cycle when you ratios yet.
We have similar amount of inbound leads coming in the doses do flowing through the pipeline of similar pace.
So we feel that we have.
Similar visibility to Q4, as we probably had previous quarters looking at the following quarter, we still have a very high windshield our win ratio both in terms of new logos extensions. So that's why we feel.
Very good about Q4 the.
The factors mentioned earlier.
I think we have tweaked, our portfolio's a little bit rotate out of some of the exposures. We had earlier at this moment, we don't see those impacts continue into Q4 in terms of the larger programs work the delays as I mentioned.
Earlier were due to some of daves is due to our clients' internal resources not available.
Some of the teams are not ready from an organizational structure perspective.
And we have factored that into our our our planning process, we feel comfortable that the ramp ups we are.
That was delayed to Q4.
It will ramp up in due time.
Understood.
And.
Is the nature of the work that Youre getting changing other companies have mentioned the change in focus.
To incorporate more cost related projects, rather than what used to be a lot of our growth focus project and I'm asking because you had a premium provider.
You've mentioned evident in at higher Bill rates.
At that premium part of the market.
What are you seeing.
We definitely were hurt also talks about business changing their focus from growth to cost reduction and then.
We were not seeing that reflected in the work we do yet.
I think mostly because the work we do in terms of the digital transformation. The premium part of it is addressing Mosley is addressing both the growth of the business and also the efficiency of that growth.
So very often in growth and productivity at the same time.
It's a new way of doing business that is transforming the outweighs the kind of work. We do is is.
Often important to both.
Growth and cost efficiency sometime.
Sometimes it's called do more with less so we haven't really seen any significant impact on.
On the work, we do coming from this kind of change of thinking yet.
I hope that makes sense.
Yes, thank you for that.
Thanks Ashwin.
Our next question comes from the line of Maggie Nolan with William Blair. Your line is now open.
Thank you.
And I'm wondering if you can talk a little bit about talent management, maybe how you look at utilization as a lever to balance fluctuations in demand or your willingness to keep a bench or deploy talent to different clients and an average time to productivity for new hires.
Thanks for the question Maggie I'll start and then Michelle can jump in if I Miss anything.
So.
With respect to talent management, we are always as a professional services business focused on making sure that we are balancing our supply to our demand we have a.
Very strong technology capabilities, and we have a geographic diverse.
Diverse geographic footprint and this gives us a big advantage in that area.
So we constantly are adjusting our hiring targets to what's happening in the business and certainly we're doing that now.
In general we do keep a very close watch on our utilization trends and if we feel that.
The demand pipeline if utilization is getting too tight then oftentimes, we'll see if it makes sense to increase hiring we did that in the early part of the year and if.
If we see that.
Utilization is a little bit.
Sure then we would like to target then we would again make adjustments I would also mention some positive movement on attrition Sharon talked about that earlier, but we've seen attrition come down and so that is another reason that in general we manage our talent pipeline.
We keep up the hard work of balancing supply and demand as we always have.
Shall I talked earlier about.
Some of the visibility into fourth quarter, and the healthy demand pipeline and so we are managing.
Our talent accordingly.
And as I mentioned earlier, we do expect to see an uplift to more normalized or more in target utilization levels.
Sean do you want to add anything I think it's just one thing about the lower attrition to help us in two.
Two different ways one is.
It gave us more supply capacity.
In the short term than probably we expected the second with less attrition theres definitely less handover less transition and a more senior people tenured people to coach and mentor newcomers new joiners. So that's also helping us in the short term in terms of our capability as well.
Thanks, and then what do you think drove that better than expected attrition pattern.
How is it trending so far in <unk> and your expectations from here. Thanks for taking my question.
Well, it's it's hard to say exactly what drives attrition. We we look at a number of factors we spend a lot of time with our employees and doing engagement surveys and so on and so forth and as we talked about on prior calls we invest a lot in our employee.
And our employee value proposition, we offer opportunities for career advancement and for understanding.
Continuous learning and building capability, we know that resonates hugely with thought workers and we continue to focus on our culture and make sure that salt works is a destination employer. So.
There has been a lot of effort and investment going on.
And these focus areas will continue to do that we do believe that has positively impacted our utilization.
So far what we're seeing with respect to Q3 is that.
It's trending relatively stable so we're not seeing.
An increase or decrease at this point in time, we obviously continue to monitor and and so for the moment our outlook is that it's going to stay relatively stable with current levels.
Thank you.
Our next question comes from the line of Brian Essex with Goldman Sachs. Your line is now open.
Hi, This is Charlotte on for Brian . Thank you for taking the question.
Can you talk about.
Given the given the environment or you just spoke about attrition, but have you implemented any pricing increases given the environment to try to offer offset inflation and attrition.
And would you expect this to be accretive to margins or is it more just trying to net net.
Even in the end thanks.
Charlotte I, just want to make sure that I didnt Miss it is that pricing is that right.
Yeah have you implemented any pricing increases given the current environment. Okay. Thanks for the question.
We have always been.
Folks around pricing in two different ways. One is the pricing mix, where I think that's the main way of us increasing our billing rate is to continue to innovate.
And at more premium services offerings.
Where we add more value higher value will get higher rate.
They're often for example, enterprise monetization data digital strategy.
Earlier I think this year and also late last year and the loss.
In the last six to nine months with a high demand low supply situation.
Without macro trend, we were able to.
To be more selective on peak in new deals, where we have better pricing I think that.
That is.
I think there's going to be less of a factor in the in the in the next foreseeable six months or so I think our price increase was going to be mostly due to adding more premium services.
And then that.
And we mentioned earlier is to some extent offset by the <unk>.
Wage inflation, especially the lower utilization, we're seeing we're expecting in Q3.
Offset it to some extent, but overall if you look at our average revenue per employee is still about 116000 for Q2, 2022, which is similar than before.
Then another factor that lowered that number a little bit is due to we are still moving more work to from onshore to offshore so overall.
I think that allow us as part of the factor allow us to keep gross margins stable relatively.
Got you and can you double click into the.
Continued offshore movement I'm, just overall is that moving away from U S or.
I'm just trying to understand exactly like it is at.
Essentially.
Lines are more open to offshore.
Yes.
And overall impact so I guess your revenue per head and then medium term. Thanks.
Sure.
We have I think ours has a different history from somebody other firms we have been doing onshore only.
Earlier.
20 years ago, when we started our journey over the years with always being.
Gradually increasing the offshore nearshore delivery regions, like India, and China, Latin America Southeast Asia now our onshore work has gradually moved down to about maybe 40%. We are in the process of continuing to move that down a bit further to perhaps 30% maybe 20%.
<unk> in the coming years. So that's a long term strategy. We've been following and then the Kobe situations definitely.
Is it possible to move work offshore given the remote working flexibility our clients are.
Fran and joining themselves so.
We're seeing that and then this like you said it well.
Gradually but theyre slowly bring down our.
This factor alone revenue per head, but then with the price increase in utilization we expect.
In the near term the revenue per head to be kind of stable because of the factors offset each other.
Great. Thanks for taking the question.
Thank you.
Our next question comes from the line of Arvind <unk> with Piper Sandler Your line is now open.
Alright.
Thanks for taking my question I was.
Just wanted to see if you can tolerate any spin.
Pacific areas of weakness.
If you are seeing whether it is by by industry or by Gilles.
Just started you tend to see in this specific area.
That's it.
They are seeing.
On the business or are you just kind of broad based.
Thank you for the question Arvind.
So I'll start from geography from a geography perspective, we definitely feel that North America is is doing well, even though theres. Some general inflation concerns given the leading position in digital of many U S companies and the strong economy with.
We continue to expect strong growth coming from North American market.
APAC has especially for southeast Asia.
Singapore in other countries over there have not seen a lot of the economic concerns.
Grew by 22% in Q2, mostly because of the foreign exchange headwind.
In fact that if we just look at.
Constant currency only local currency only Australian dollar revenue was solely in Australian dollar grew by 41%. So we're feeling.
Very confident about APAC in H, two as well I think Europe , there is a bit of a more of a general inflation and supply chain disruption concerns.
In Q2, even though we saw a 22% of growth in Europe .
If we look at the currency.
Great British pound the revenue from that grew by 41% in euro only about 25%. So there is continued risk in Europe , we're monitoring, but we're feeling that the tide is turning and then.
And a lot of our clients are starting to ramp up so.
So that's from a geography perspective vertical perspective I think.
We we see some of the different.
Our rate of growth across different verticals, and we definitely intentionally focused on driving more from a finished services intentionally but generally we don't run our business from vertical perspective, sometimes we see.
A couple of large programs ramp down in one vertical we don't always replace them with working the same vertical so sometimes they go up and down they fluctuate a little bit but generally we we feel that the growth is coming from all verticals. There is no significant.
Impact we're seeing at this moment from the macros.
Terrific and just a quick follow up.
I wanted to see kind of a work from home or work from office.
Type of dynamic.
Given that <unk> is traditionally a lot of like onsite type of work.
Are you seeing most clients such as getting back to work.
Folks are looking in a hybrid environment and has that had any impact in your business.
We're definitely seeing more and more client return into their offices and they're asking thought workers to go to their offices as well.
The onsite work, but at the onsite work that we do not just consulting strategy, but also a heavy lifting the delivery work.
Overall in the last I think two years.
After the initial kind of hiccup.
Right after the call or where where no one couldn't figure out what to do with this yet.
I think this hasn't had a major impact to our high value add ons onshore onshore onsite work yet.
Terrific. Thank you.
Thank you Robyn.
Our next question comes from the line of Bryan Bergin with Cowen. Your line is now open.
<unk>.
Hi, good morning, Thank you.
Within your <unk> outlook I was just hoping to dig into the second grouping. The second headwind you had mentioned Erin is there any common theme among those clients, where youre seeing the delay of programs as far as maybe region stage of the company or just the industry as those may be from.
Hi, Brian .
No I wouldn't say there was a common theme so actually spoke about the common theme, we've talked a lot about it to understand if there is an underlying thread we want to be aware of.
Ultimately what we found is that there is.
A lot of demand and big programs of work on our client side, our clients are absolutely.
Absolutely committed to investing in their digital transformation and and driving that strategy.
But executing that strategy and it takes work and it takes work on our side and it takes work on the client side and so we've just seen some situations where.
Where our clients are not quite as ready to execute and get going on things.
And we've seen that happen in a few places that it's been.
A couple of different countries definitely and it's also been across industries.
We think and look about it.
We want to identify ways that we can help our clients be prepared and support our clients because we do acknowledge that change programs take work on both sides.
We also.
Recognize that it just highlights the problem that we know that we're in that overall there is just not enough supply.
Of top tech talent on the client side.
To drive the work that needs to be done. So I think that really is the underlying thread for that second point that I mentioned.
Yes.
We ask our clients.
Is it are you just going to reduce budget at some point, where it is is because of some concerns of the macro economy, we're not getting those answers we definitely.
Talk to our clients stay close with them.
It did feel like a lot of this is just one time factors.
It doesn't look like there's any general pattern to it.
Okay.
And then just a follow up have you seen.
The travel component of business just come back and then any notable way as it relates to your operations on delivery.
Definitely a bit more.
Sure.
We have contract work with a couple of airlines that we were not working before recently and then we feel that the sector is definitely bouncing back I think it's probably the latest bouncing back to bounce back from Covid.
We're definitely happy with the pattern, but it's still the volume is not as significant as it was pre COVID-19 yet.
Okay. Thank you.
Thank you Brian .
Our next question comes from the line of Jason Kupferberg with Bank of America.
Your line is now open.
Good morning. This is Tyler Dupont on for Jason. Thanks for taking the question promised I'll be quick.
To expand on the vertical trends and expectations. You mentioned it appears that your financial services and technology and business have had pretty strong growth can you maybe touch on what contributed to that specifically in the quarter and if you expect those verticals to continue to drive outsized growth for the rest of the year.
Thank you Tyler for the question Erin I think you have probably have the numbers on how they contributed to this quarter from a percentage of revenue perspective.
I think from growth perspective finishes or is that going to grew by 46% and in technology business services.
Services grew by 36%.
No I got the number I think as a whole overall I think retail.
Our technology business services about 28% of our business.
Retail, it's about 19% energy public house, 24%.
I'm, sorry, retail financial services or retail is 90 presented there is 18% travel we still low as 12% as I mentioned earlier, we wished that one will grow faster than the size of the pie is getting bigger. So overall, we believe that these that the growth from across these sectors in our line of business will.
<unk> throughout the rest of the year and then we intentionally investing in financial services, because we believe that there is definitely more revenue.
And then we're catching right now we hope that we believe that.
The size of the share of revenue from <unk> will continue to increase in our business later this year.
Okay perfect great. Thank you and then just Super fast follow on from an M&A perspective are there any specific verticals or geographies that you are trying to target or is it more you know whenever you see a strategic opportunity you go for it. Thank you.
We're not looking at M&A from a vertical perspective, it mostly looking from a capability perspective.
We believe we can enhance our our core capability and from a geography perspective.
North America Euro.
Europe , and then I'll.
Australia are the top places we're looking at from a demand perspective, and it would definitely have a lot of offshore locations, where we're continuing to scan the horizon. If theres a good fit good small tuck in complementary acquisition will go for it but that's kind of the landscape.
Alright, perfect. Thank you very much.
Thank you Tyler.
Yeah.
Our next question comes from the line of Dave Koning with Baird. Your line is now open.
Oh, Yeah, Hey, guys. Thank you in a couple of numbers questions. Just quick I know based on the way you're guiding now for the year, we're going to take some out of Q3 and probably put a little more constant currency revenue in Q4 does the little bit of higher almost Q4 revenue create was there anything in there that's a little more one time.
That creates anything different into Q1 now like is there going to be a little inflated impact in Q4 due to what's kind of being pulled out of Q3.
Hi, Dave.
No there isn't anything and that we have assumed in the annual guide with respect to Q4 that would be more onetime in nature.
Nothing surprising or to know about there and no impact on 2023.
Okay. Thank you and then on EBITDA margins I know historically the last couple of years Q4 has been the low point of margins and that's because of the utilization late in the year with the holiday season.
This year it seems like based on your guidance theres going to be a big ramp and I know you already said part of that is just the natural utilizations are low in Q3, now and its going to re ramp but.
Is the bottom half of the full year range more likely it just seems like too big of a ramp in Q4 to get the higher parts of the full year margin range.
Thanks, Dave.
Yes, as you're pointing out so I've maintained the adjusted annual EBITDA margin guide of 19% to 20% and so.
Firstly I would say we were really pleased with our results in the first half of the year. We were just on the top we are just about 20% for the first half.
What we've seen so far this year as we've executed very well, how we'd already talked on the call about managing our wage pressure effectively through our price increases as well as increased leverage and officer offshore capacity.
So to your point.
The third quarter guidance. It doesn't mean, there is increased potential of being on the low end to the midpoint of the guide.
The challenge to profitability as I mentioned already is in Q3, and it's around lower than targeted utilization and we do expect that to normalize.
It is affecting the third quarter, but.
We do see that as an asset because there is just strong capability and growth potential there and importantly, the underlying drivers of our profitability are very strong so.
To answer your question directly and at this point in time, it is more challenging to be at the top end or.
Even exceed that EBITDA margin guide, but we continue to focus on strong execution in the third quarter and we're going to do the same in the fourth quarter.
Gotcha Thats helpful. Thank you.
Yeah.
That concludes today's question and answer session I would like to turn the call back to <unk> for closing remarks.
Thank you. Thank you all for joining the call today apologies for the delay at the beginning of the call due to technical issues I'd like to just acknowledge the continued support of our board and our shareholders.
And in closing I want to thank all of our workers clients and partners for the extraordinary impact we are delivering everyday together.
Stay well, everyone. We look forward to catching up with you on next quarter.
<unk>.
This concludes today's conference call.
You for participating you may now disconnect.
Okay.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].