Q3 2022 Thoughtworks Holding Inc Earnings Call

November 14, 2022

Please call on during the presentations all lines will be on listen only joining us today will be thought works president and CEO of <unk> and CFO Aaron comments. The earnings press release was issued earlier today and is also available on our Investor Relations page at Thoughtworks Dot Com, if you want to review or download a copy some of the matters, we'll discuss on this call.

<unk>, 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.

Our reports, we may file with the SEC from time to time these.

These risks and uncertainties could cause actual results to differ materially from those expressed on the 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 provides.

<unk> 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.

<unk> furnished as an exhibit to our form 8-K, which is available on the Investor Relations section of our website at Thoughtworks Dot com.

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 Thoughtworks assumes no obligation to update or revise the information presented on this conference call I will now hand over to Shao.

Thank you Sean welcome everyone to our third quarter earnings call I'd like to start by sharing an overall update of the business and then Aaron would take you through our third quarter financial results in more detail I will then share some of our business highlights before air and provide guidance and we open for Q&A.

Let me start with a recap of about hours, we're a global technology consultancy that integrated strategy design and engineering to drive digital innovation.

We enable 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 third quarter driven by the continued demand for our digital transformation services, we delivered revenue of $332 million in the third quarter of 2022, reflecting year on year growth of 16, 6% and 23, 9%.

Constant currency in the quarter, we achieved adjusted EBITDA of $67 2 million.

Reflecting adjusted EBIT margin of 22%.

<unk> 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.

To think every thought walk around the world, but extraordinary impact they create through our technology excellence and culture today, the world faces a higher level of economic uncertainty.

This period, we continue to stay close to our clients helped.

Helping them to be adaptive to change and resilient in the face of unpredictability.

We're driving our business with rigor and discipline.

Managing supply and demand and being proactive with our clients to help them achieve a better return from their technology budgets.

The towers business is diversified across industries and geographies and we see this as a key differentiator. According to the KPMG Global Technology report published in September 2022, 67% of businesses are set to embrace emerging technologies by 2020 for the report which surveyed 2000.

200 technology executives across the globe found that 44% of respondents cited the lack of talent in areas like data science engineering as one of the biggest challenges for the business. We believe that <unk> has the best talent in the industry and our clients continue to value our people and our services, we have seen better than expected demand in third quarter.

<unk> and our clients are looking to digital innovation to help them navigate uncertainty strong themes are prevailing let me share. Some examples we're seeing strong interest from clients in our data services and how data can transform and scale their businesses clients are looking for us to develop new digital products and services enhancing.

My experience is removing friction and bringing customer facing services together, we're seeing solid demand from clients for <unk> expertise in enterprise monetization and platforms.

We also continue to see client interest and developer experience platforms as a key enabler for improving the return on investment of technology budgets that.

By boosting the productivity and retention of critical engineering talent for these reasons, we believe that <unk> is well positioned in the market now.

Now, let me share the details of our growth strategies at our 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 our client portfolio.

Depth of our expertise and breadth of our capabilities means that we can help clients address all of their challenges from strategy right through the business outcomes. Our clients appreciate the value we create with them and we remain confident in our ability to sustain our premium position in pricing for example at Atlassian one of them.

Australia is most successful technology companies.

Is it work on a mammoth challenge to migrate one of Atlassian flagship products bid bucket to the public cloud.

Bucket enables atlassian customers to build software at scale and processes on average 1 billion transactions per day.

And the last name was managing this data through its own datacenter, which posed a challenge in terms of scale and security.

Flowers enabled the migration of 15 meeting customer code repositories to Atlassian platform as a service which is built on AWS.

While we previously have taken years was completed by <unk> in just three months.

Atlassian saw a 93% reduction in support request due to outage and a 55% improvement in big buckets Web response time performance at.

At our long term client the United States Department of veteran Affairs VA wellbeing.

We have been working together to transform their organization through data mash and data platforms.

<unk> is a federal cabinet level agency <unk>.

Providing health care services to eligible military veterans in order to improve health outcomes for example, VA.

<unk> uses the medication possession ratio calculation and PR to provide clinicians with a view on how well a patient is adhering to a medication regime.

NPR is critical for veterans, who are taking control medication.

<unk> introduced data as a product a core principle of data mesh, which enables data to be managed by VH domain teams.

Were paired with offers of mental health and suicide prevention.

MPR to fully manage data platform and delivered 88% reduction in processing time. Additionally.

<unk> implemented a data catalog for the health data and analytics or platform HD AP.

New NPR data product became the first data product inside the HD AP, Microsoft Azure platform.

Providing a scalable inventory of enterprise data assets now.

Now turning to new clients, we have a focused approach new clients, helping organizations, we work with to deliver rapid business value from digital transformation.

We continued the momentum from the first half of the year and we have contracted with 32, new clients in third quarter.

Now let me provide an example of a new client that we have been working with recently.

Went to sign a multiyear agreement with PCI farmer services.

A leading global contract development and manufacturing organization.

Towards that would help PCI in its journey to digitize its supply chain with the goal of accelerating the time it takes to bring life changing therapies to market for patients. The agreement includes expanding and adapting PCI bridge that.

The industry first of its kind data platform.

Provides real time status of projects automatically identifies risks spot trends and provides business analytics.

With this modern application programming interface clients have the ability to seamlessly integrate their systems with <unk>.

Creating greater transparency and a more simplified the process for decision making.

We're also pleased to share that last month, our federal LLC a wholly owned subsidiary of <unk>, Inc. Was awarded a multiple award schedule Prime contract by the U S General Services administration.

This is a covenant wide indefinite delivery indefinite quantity contract that grants thoughtworks federal and awarded base period of five years, an additional 15 years of optional periods.

This is a big step forward and will allow us to sell to federal agencies directly now.

Now, let me share an update on partners as a growth strategy.

Our primary focus is to develop go to market partnerships with the Hyperscale cloud providers, including AWS TCP in Asia.

For example, as Amazon AWS Premier services partner, we have the highest tier of partnership which less than 3% of AWS partners achieve.

In the third quarter, we also achieved a new AWS financial services competency.

<unk> has deep technical expertise with AWS cloud technologies.

And we're successfully working with a large number of clients at scale. We're also working on a new data platform together with AWS in a natural history Museum.

The natural history Museum is a world leading science Research Center and was the most visited indoor attraction in the UK in 2021.

The new data platform, which is called the data ecosystem.

<unk> is designed to help the museum scientist to bring together a huge breadth of UK biodiversity and environmental data types and one place to help you with scientific understanding of the UK bio diversity and environment. You can find details of some of these customer successes on a new section of our website <unk> Dot com.

I'm now going to hand over to Erin so that she can take you through the numbers in greater detail. Thank.

Thank you Sal and thanks to all of you for joining US today, we were very pleased with our results in the third quarter, which demonstrate continued solid demand across our business. Let me begin by summarizing a few of the highlights for the quarter.

In the third quarter, we saw revenue growth of 16, 6% compared to the prior year period constant currency revenue growth was 23, 9% our revenue growth in constant currency is two one percentage points higher compared to the midpoint of that range I guided to in August . This is primarily due to.

Strong execution and better than expected demand adjusted EBITDA for the quarter was $67 2 million and our adjusted EBITDA margin of 22% with 270 basis points higher compared to the midpoint of the range I guided to in August Q3, adjusted EBITDA margin decreased.

When compared to the prior year period due to the impact from lower utilization now let me share some details turning to revenue for the third quarter revenue growth year on year was 16, 6% and 23, 9% on a constant currency basis, our clients remain committed to large digital.

Nation programs. However, we are starting to see a change in client behavior. Some clients are contracting in smaller phases to allow themselves flexibility and sales cycles are normalizing from the accelerated post pandemic levels.

Our demand environment, However remains healthy and clients value working with thought works. This is evidenced by our average revenue per employee of 112000 annualized for the first nine months of 2022, which remains higher than the industry average in the third quarter of 2022, we continue to see clients select thought works.

For their digital transformations over a trailing 12 month period, we had 41 clients with bookings greater than $10 million compared to 33 clients over the same period last year, an increase of 24, 2%.

Our overall bookings in the trailing 12 months increased by 19, 1% year on year to one 5 billion.

We have a diversified business across industry verticals and geographies North America grew by 24, 7% Europe by 15%.

Sam by 13, 3% and APAC grew by nine 7% our growth in APAC continues to be impacted by the COVID-19 situation in China, given the continued 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 currency.

Alongside the U S dollar or the euro great British pound and Australian dollar.

I am pleased with the underlying strength of our business. This quarter for example on a local currency basis, our revenue contracted in euros grew by 26, 1%, great British pounds by 20% in Australian dollars by 15, 9% compared to the prior year period.

Due to the diverse nature of our business on a geographic basis 62, 6% of our year to date revenues as of September 30th are contracted and non USD currencies. We also continued to see good growth across our industry verticals during the quarter.

The strongest growth within technology and business services growing at 25, 5%.

Automotive travel and transport grew at 23, 5%.

<unk> services grew at 17, 7% energy public and health services grew at 16, 5% and our retail and consumer vertical was in line with last year as we shared with you in May NRG public and health services is a strategic focus and this industry vertical has returned to double digit growth.

As expected in the third quarter and the retail and consumer vertical we are seeing normalizing spend after the post pandemic them at.

At the end of the quarter on a TTM basis 88, 6% of our business came from existing clients, we have a balanced customer portfolio with relatively low client concentration in the third quarter, our top five top 10, and top 50 clients generated 16, 1% 20.

Five, 4% and 65, 4%, respectively as a percentage of total revenues. We now have 36 clients with trailing 12 month revenues greater than 10 million seven more than the third quarter of 2021, representing a 24% increase moving down the income statement for us.

The quarter adjusted gross margin was 47% compared to 45, 7% during the prior year period impacted by utilization as previously discussed with respect to adjusted EBITDA in the third quarter, our adjusted SG&A as a percentage of revenue with 21, 2%.

Which is better than the third quarter 2021 by 100 basis points due to efficiencies from scaling and strong execution. Adjusted EBITDA was $67 2 million for the third quarter and adjusted EBITDA margin was 22% a decrease of 310 basis points compared with the <unk>.

Third quarter last year due to lower utilization.

GAAP diluted loss per share was <unk> impacted by noncash stock compensation charges.

On an adjusted basis, our adjusted diluted earnings per share was 8% compared to 14 in the third quarter of 2021, primarily due to effects from income taxes.

Free cash flow for the quarter was 27 7 million compared to $27 5 million in the prior year quarter and we continue to have good liquidity.

Our cash balance at September 32022 was $185 million compared to 453 million at September 32021, our cash balance reflects debt repayments of $100 million in October 2021, and $100 million in July 2022.

Our debt is continuing to go down and is $404 million as of September 30th 2022.

Now I would like to hand back to shower to share additional updates on our business from the third quarter. Thanks, Erinn, Let me start with our amazing thought workers with growing our community without workers to over 12500 with a long term focus on diversity and inclusion.

Two 2% of thought workers are now women and underrepresented agenda minorities WGN.

We're continuing to improve our employee value proposition and we're pleased that attrition at the end of September 2022 was 11, 8% on a TTM basis.

Significantly better than industry norms.

I'm pleased that our attrition is better than our operating plan assumptions <unk>.

Demonstrating the strength of our employee value proposition.

We believe that <unk> has the best digital talent in the industry and has positioned us well to create extraordinary impact for clients.

Investing in thought workers is a longstanding business priority.

One example is our commitment to leadership development.

The <unk> Global management team has a deep bond with our culture.

In part to their average tenure of 16 years.

One way, we have achieved a strong and diverse leadership is through our focus on the global leadership development program.

Which has been running now for over 14 years.

We're proud that around 80% of our global management team are alumni of the global leadership development program.

Our 2022 to 23 Global leadership development program launched in September This year's cohort of 121 leaders are 56% of women and underrepresented gender minorities WGN.

The program is developed in house and is supported by 116 internal coaches, 53% of whom are W. <unk> and 65% of global leadership development alumni in.

In the third quarter, we're pleased that once again received the great place to work certification in Singapore, Germany, Spain, and China with all regions meeting or surpassing the previous year's Trust Index score.

This brings our current total of active great place to work certifications to 13.

Our strong employer brand continues to attract talent with outwards was.

With over 53000 job applicants during the third quarter.

I'm very proud of our recruiting capability and we continue to see over 50% over hires coming from thought workers referrals and direct sourcing.

Our priorities for thought works 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 third quarter.

Our overall rating was $4 41, which is again higher than the rating for the it services sector of 395.

Our score for diversity inclusion was $4 77.

Then the rating for the it services sector of four point out too.

92% of thought workers will recommend the company to a friend and employee referrals continue to be an important source for new hires.

We're known as <unk> revolutionized the technology industry.

That's how we build our brand and our reputation from our early days as a company.

We continue to stay close to our clients and.

From June to August we ran <unk> ex comp 2022 in nine countries with over 4510 days X cough now in its <unk> year as a thought works flagship program run by Technologists for technologies. This year's global theme was making tech better together.

The program consisted of 108 talks panels and workshops, covering a wide range of topics, including enterprise monetization data mesh customer experience and product thinking accessibility and sustainability as well as career oriented sessions.

Our clients consistently feedback to us that they value our thought leadership.

In the third quarter, we inform and guide our clients with papers, including on such topics as how to use low code tools effectively.

How to approach digital fluency in uncertain times.

In a paper was practical suggestions for our clients through exploration of the three significant narratives of meta versus.

And in the third quarter <unk> published a Harvard business review data mesh white paper beyond technology, creating business value with data mesh. This white paper from Harvard Business Review analytics services in Association with all works is based on research with academics industry experts and three of Thoughtworks date.

<unk> clients, Rosh ITV and <unk> bank.

We're also pleased to share that ITV and <unk>, where the winners of the data IQ Awards 2022.

Power's partner with ITV to implement a data mesh approach and we're imagining of data use for content production promotion distribution and monetization in a way that is scalable and shareable.

The result has been that ITV is marketing team and identify addressable audiences in minutes.

Rather than the prior three months timeline.

Our shared culture and <unk> self service data exchange impressed the judges.

Now, let me hand back to Aaron.

Thanks, Shao I would like to update you on some areas of focus within our ESG priorities are.

Our transformational social impact work is a core part of <unk> culture for.

For example, Bonnie our long term global priority in health care is now the first open source hospital information system to be accepted to India's National Digital Health mission and.

In the third quarter Thalberg setup, the core architecture to support the <unk> vision to create a national digital health ecosystem that supports universal health coverage, which over a billion people are expected to benefit from.

Another focus of our approach to ESG is in the practices around responsible technology <unk>.

As technology becomes ever more pervasive in our lives the field of responsible tech is growing in importance to help mitigate negative and Burton consequences of technology.

We are a leader in the field of responsible Tech for example, Dr. Rebecca Parsons, our Chief Technology Officer opened the world's first responsible Tech Congress held in Ecuador. In September <unk> is also a contributor to a new report by Forrester, a leading global research and advisory firm the fourth.

Just a report responsible and ethical technology strategy spotlights that every company not just big Tech is accountable for having a responsible and ethical technology strategy that earns trust and drive sustainable differentiation now.

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 fourth quarter of 2022, we expect revenues to be in the range of $303 million to $309 million, reflecting year over year growth of five 6% to seven 7% or 14, 2% to 16, 3% in constant currency.

We expect acquisitions completed during the year will contribute approximately 3% to fourth quarter reported revenue growth.

We expect adjusted EBITDA margin for the fourth quarter to be in the range of 17% to 18%.

For the fourth quarter, we expect adjusted diluted earnings per share to be in the range of eight to nine assuming.

Assuming a weighted average share count of approximately 330 million diluted shares outstanding.

As we did in the third quarter, let me provide some context that is informing our guidance for the fourth quarter. We expect the demand environment for digital transformation programs to remain solid as we help our clients drive growth and efficiencies within that framing let me share a few factors.

First as we mentioned last quarter, we expect some clients contracting behavior to be at more normalized decision cycles compared to the post pandemic compressed cycles.

Additionally, some clients breaking larger digital transformation programs into smaller statements of work to allow themselves flexibility.

Second we expect the caution we are seeing in our business in APAC, primarily China to continue into fourth quarter and third and a few clients in the retail and consumer segment. We are seeing signs of moderation in demand due to additional scrutiny on budgets.

Certain retail clients are being more cautious in response to overall consumer sentiment and economic uncertainty.

For these reasons, our fourth quarter guidance is prudent we have taken a realistic view.

We expect that managing the impact of the challenges we have just shared with most likely negate any over performance on our fourth quarter guidance now turning to full year guidance for the full year 2022, we expect revenue growth year on year on a reported basis in the range of 24% to 21%.

Or 26, 7% to 27, 3% in constant currency.

Reported revenue growth includes a negative foreign currency impact of approximately six 3%. We expect acquisitions completed in the year to contribute approximately 2% to full year 2022 reported revenue growth since I last provided our full year 2022 outlook in August the U S dollar.

<unk> 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 $69 million compared to the $57 million due to foreign exchange that I shared in August this negative FX impact comprises $23 million to the mid year 21 million FX.

Impact in the third quarter and expectation of $25 million negative FX for the fourth quarter.

For adjusted EBITDA margin, we expect full year 2022 to be 19, 4% to 19, 6%. We expect full year adjusted diluted earnings per share for 2022 to be in the range of 40 to 41 cents.

Assuming a weighted average share count of approximately 331 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 2022, we remain highly vigilant of any potential impact of external factors or emerging global developments with our focus on strong execution and scale.

<unk> our operations efficiently R.

Our value proposition and services are highly relevant and we continue to stay close to our clients, we have solid bookings and good visibility into our business. We believe that we have the best talent in the industry and low attrition levels. We expect to continue hiring in fourth quarter around specific skill sets at more moderated level.

We remain focused on calibrating supply and demand so that we can balance solid utilization with an ability to respond to growth hotspots in the market. For example, like the high demand, we're seeing for our data platforms and data mesh services and our developer effectiveness propositions and our partner led opportunities.

Now, let me hand back to Sean. Thanks, Erin you can find our investor presentation on the Salt works Investor Relations website, we now move on to 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.

Thank you and as a reminder, that is star one one to get into Q1 moment, while we compile the Q&A roster.

Our first question comes from the line of changing Wang with Jpmorgan. Please proceed.

Alright, thank you.

Nice to speak to you all.

I understand the prudent comment around the outlook and the conservatism I wanted to ask on what you can control, which is really on the on the margin side. If you don't mind. The third quarter margin was was quite good SG&A was down quite a bit fourth quarter.

It looks like Youre expecting that to come down.

So maybe can you talk about the headwinds.

Will impact margins in the fourth quarter relative to.

To the past and what you are proactively doing too to get there.

Thanks, Tien tsin.

Sure So definitely happy to talk about Q3 to Q4 margin and what we're doing.

First it's important to be mindful of the seasonality factor with respect to Q4.

And certainly that is informing the guidance in Q4, so there's a lot of public holiday time in vacation time.

And so that does have a pull down impact on utilization from Q3 to Q4 and that is what is largely driving the margin the margin shift from actual in Q3 to be guide in Q4.

In addition to that what.

We focus on to improve that there there's a few things so.

There is some discretionary spend that we are tightening our bond we did that in Q3, and we continue to do that in Q4.

We also have the benefit of some variable pay impacts so that was higher in Q1 and Q2 than it was in Q3 and Q4. So that helps you offset in part that utilization impact, but on the whole with respect to Q4, we will continue to execute well.

As we did in Q3, I'm, making sure that we are reducing revenue leakage.

Or do you think discretionary spend.

Where we think that makes sense. However, we continue to invest in our demand and our marketing efforts.

We continue to invest in the business strategically.

Great great. Thanks for going through that Erin So maybe as my quick follow up Eric.

Or shall maybe for you just thinking about.

Your management team is quite a bit of tenure you've been through different cycles before how does it feel different at this stage as youre seeing some of your clients change their priorities I know you referenced the KPMG report in.

We agree around digital transformation.

You see a little bit of a pause here and then it comes back with more intensity I'm just trying to think how you are evaluating this given what you've seen in past cycles.

Thank you.

Hi, Tien tsin.

Thank you for the question I'll take that.

So we definitely think that in this current cycle a lot of the hesitation is due to just macro induced uncertainty.

Versus should we do this digital transformation or not I think there is there is no doubt that the conviction of leveraging tech digital tech to transform the business to drive growth in the long run is the core strategy for most of the business and we're working with already.

But this macro induced because.

Uncertainty is causing a lot of our clients too.

Just to plan for the better for next year thinking about what should we invest now which areas should we invest now and that's where we're seeing a lot of the additional approval layers required some of the sales cycle cycle's stretching out becoming longer.

And then when we look at this particular.

Timeframe.

What's different from the previous.

Similar situation, we've seen I think.

Couple of things that different one is there is a greater.

Focus on leveraging digital technology to drive efficiency and cost saving programs.

For example, the <unk> developer effectiveness platforms as I mentioned earlier, we're seeing a big uptick in terms of interest in building that out in many organizations.

We're also seeing.

Clients, especially in the in the verticals.

That's been public energy automobile or doing better than.

As Evan mentioned earlier retail for example, so the performance of different verticals are different and third one I think is different is that the.

Geographic.

Variance is different than some of the previous.

Areas, where we've seen North America is doing very well.

Europe is actually doing decent southeast Asia is doing very well.

Then we have this.

Softness in the APAC and besides the China zero copay situation we've seen.

Australia market just the traditional conservatism.

Is driving more.

Caution.

Facing.

Just the macro headwinds.

So overall, we feel that this.

This uncertainty is mostly short term, meaning that isn't in the next three to six months Windows. We strongly believe that once this uncertainty has gone whether.

The recession materialize or not or to what extent I can.

Spending will pick up to continue and then as we've seen before we also believe that the spending on tech will be one of the first.

To pick up once that uncertainty is gone.

Hope that makes sense attention.

Thank you for going through that evaluate thank you.

Thank you and one moment for our next question.

And he comes from the line of Maggie Nolan with William Blair. Please go ahead.

Hi, This is Jesse on for Maggie. Thank you for taking our questions. So previously you talked about.

Expectations for flat revenue in the third quarter as a result of ramp ups being pushed to the fourth quarter.

Still I expect those projects to ramp up this quarter or have you seen them pushed further.

Thank you Joseph for the question.

The ones, we referred to that.

The ramp ups that was delayed from Q3 now are ramping up in Q4.

We as.

We plan.

So there is no change in that.

That said, where we were not seeing that kind of big.

Behavior changed three quarters ago.

We mentioned in the.

Some of the major markets.

I think it's more of that in the last three months, we see some of the concerns about macro headwinds there translate into different behaviors.

All of the other programs of ramp up but less about the ramp up it's more about just this.

The funding, becoming more incremental and then.

The deal side is being compressed with smaller teams to start with.

Our clients are still planning and funding long term programs, we sign up 32, new logos in Q3, which is higher than Q2, and then similar to what we've seen before.

But the deal sizes getting smaller to start with and then I think a lot of our clients are expecting the work of phase one phase III the complete before they reevaluate and further ramp up the team a lot of this is due to this uncertainty I think makes sense and where clients wants to keep up.

<unk> and then the flexibility to ramp up further if the business.

Business conditions remained stable or doesn't deteriorate.

For their worst than what they were expecting.

If it doesn't then we would do we expect these long term programs to continue to ramp up.

Got it. Thank you and then as you're thinking about.

More normalized sales cycles and smaller types of projects, you're seeing do you think that impacts <unk> visibility at all.

How does.

Your visibility now compared to where you have been previously.

The visibility is.

Is actually very similar to what we have been previously internally, we do our own calculation.

We could we could say that we have around about.

About 80% of revenue visibility for Q1, which is similar to what we have said around this time of the year in previous years, because our visibility is not just the signed contract is not just establish itself as the.

The program itself, the willingness and the scheduled ramp up as we can we can see.

In the coming future not everything will be signed when we think about the visibility you take that 32, new logos. For example, some of them are starting with smaller team, but others are also Steve.

Starting with a bigger teams as big teams as we've seen before about four of those 32, new logos from a bookings perspective, even from SW perspective adds up to more than $100 million.

And then five or six of them.

The potential to grow to a much larger footprint in the next 12 to 24 months.

Potentially to top 20 clients. So so we do feel.

Similarly about the visibility at this time of the year.

Both for Q1, and then full year 2023.

Thank you Joe Thank you very helpful.

<unk>.

Thank you one moment for our next question. Please.

And our question comes from the line of Bryan Bergin with Cowen. Please proceed.

Hi, Thank you for taking my questions.

Just the first one I wanted to dig in a little bit more on the details of the client conversations and behavior are you seeing cancellations of work that had been previously signed or work that was in late stage pipeline or is it just more so there's more measured pace and break down into smaller deal size.

Thank you Brian .

There was a bit of a cracking, but I think I got the message.

So I have to say from a cancellation perspective, the only vertical we've noticed that.

In the non usual way is the retail vertical.

We're definitely seeing more caution from retail clients.

Due to the overall consumer sentiment and economic uncertainty, we have seen almost complete pullback on spending and from.

All vendors at a few clients in the retail vertical and this is already showing in Q3's results and we believe it is probably going to remain similar pattern in Q4 impacting the growth in the retail sector that sent in other sectors for example.

Public energy healthcare automobile financial services, we continue to see this strong growth there is bit of a.

Caution here and there small.

Delay pullbacks here and there nothing major payer.

With the retail sector and then that's why I think in Q3 and also in Q4, we expect all of the other verticals to grow in a very healthy pace. Just I think retail sector is the one that's having seen the biggest impact.

Okay I appreciate that makes sense.

And then just on China can you just talk about that the performance of the China business. We know this was something you had called out as a headwind going into <unk>, how did that perform relative to that what you were forecasting and how are you thinking about the headwind in that for Q outlook specific to the China business.

So the China business, how it performed compare with what we have seen in Q3. It actually was very much in line to what we expected in Q3 I think.

From just the zero.

Colby Poly's perspective that impact is extending into Q4 I know, we feel probably into Q1 next year as well, but just put that into context we.

We have three main demand generation regions, North America about 39% of revenue Europe about 24% APAC is 33% is quite significant compared with any other companies I think in this in this area that 33% about 14%.

Is.

19% is in Australia.

And about 7% as in Southeast Asia.

7% is in China local market. So so while there is a significant impact about 7% of revenue from a growth perspective. It's also relatively contained in the in the broader revenue diversification context.

And then just from a local market perspective.

The all the fundamentals are still.

Looking at our policy from pipeline win rate, we're still gaining wallet share.

Most of our major clients is just that the economy is going slow and then zero coli policies, putting a lot of constraints in place. So it's probably going to take a little while longer than three months for it to get back to a similar growth rate compared with the other regions.

Okay. Thank you.

Okay.

Thank you and one moment for our next question. Please.

And our next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.

Good morning, guys just wanted to pick up on some of the comments around visibility I know the Q4 guide calls for mid teens constant currency revenue growth and then <unk>.

<unk> got some pretty tough compares in the following couple of quarters. So it seems like maybe mid teens is a reasonable proxy to think about for the first half of 2023, just trying to be realistic about quarter over quarter growth assumptions as well.

Model over the next couple of quarters beyond Q4 of this year. So I just wanted to bounce that off you.

And see if that seems reasonable or if there's some other considerations, we should start to try and factor into our models just as the demand environment shifting a little bit. Thanks.

Thanks, Jason.

Comment on that Erin.

So.

I think your.

Our estimate is not far off from what where we're thinking there is theres just going to be a lot more uncertainty in the next three to six months due to the macro concerns.

Then as we as I mentioned earlier, while our business is highly diversified across geographies and verticals, we do see.

Growth potential in the ones that are performing better in this potential downturn like.

Public sector energy automobile.

Hopefully finish it services, we also will be doubling down in better off market like North America, Southeast Asia and to some extent Europe .

We believe that the Australia market should bounce back given the healthy economic fundamentals is just as we know it Australian business community is very conservative and then which is kind of helped them to fare better.

During the 2008 global financial crisis, but they tended to slowdown early than others and bounce back early than others as well.

So with all that said.

We are confident about the value proposition and pipeline strengths win ratio wallet share.

The long term programs I mentioned, but given this the drag of the macro headwind we think that.

Probably early 2003, H, one because of that.

That and the tough comps as you mentioned, Jason we're probably looking at sub 20% growth rate in each one on a <unk> basis, and then certainly once the cautions gar getting back to 20% growth rate in H two is highly possible.

Okay, Yes.

That all makes sense.

And I guess just thinking about.

What kind of visibility you might have let's say at the turn of the year versus a typical year I mean, it just seems like and we're hearing this from other companies too.

Client budgets are going to take a little longer to get finalized and decisions around kicking off new <unk>.

Engagements.

Maybe pushed out a little bit Joe are you guys preparing for an environment, where you've just got a bit less visibility on the full year, maybe that doesn't emerge until.

I don't know if March April instead of January February I don't know if im framing that accurately but just wanted to get your perspective on that.

And I can jump in there.

Jason So firstly I would say, which I think indicated by your question. We are in the middle of our planning process right. Now at shot show has already talked about and we do have good visibility into next year.

It is at similar levels as we've had previously.

That said, we are we are not providing guidance at this time and I know I know you wouldn't expect that because we're in the middle of the planning process and we do go through a rigorous process.

We're running our process around the same time, but maybe about two or three weeks later than we do previously in and.

That is just because of the recent caution that we've seen in the markets we want to be thoughtful.

And we want to make sure that we are agile and we're able to move as needed in the business.

I'm so sorry.

Joe's comments, Dan certainly, but again, we are in the middle of our process as you're highlighting there is.

Similar amounts of visibility, but certainly the market dynamics are showing a little bit more caution associated with the macro headwind.

For that reason.

We will be waiting to give final guidance when we are in the market in February .

Understood. Thanks, Erin Thanks Al.

Thank you one moment for our next question. Please.

And it comes from the line of Dave Koning with R. W. Baird. Please proceed.

Yes.

Hey, guys. Thanks for taking the question and I guess first of all you talked a little bit about the retail vertical I just wanted to ask a little more about the financial services vertical I know that was down maybe close to 10% sequentially.

If theres any sub parts of financial services that are maybe stronger or weaker.

I guess, yes, just that.

Thanks, Dave.

Financial services vertical I think it's down sequentially not out of the line with the other verticals I think it's just it's coming back to a more normalized growth pays from this hyper growth phase just post COVID-19.

And within that vertical.

In our own portfolio.

We.

Generally.

Do very well in the digital banking area.

Wealth management payment.

I think the main difference compared with a couple of quarters ago would be the.

The crypto currencies space, there's just a lot of a lot less activity in that area, but other areas. We havent seeing a pattern that causes calls calls out cost of our attention where in particular pocket.

It's pretty similar to what we've seen before so that's why we're still knowing that there is a macro headwinds ahead.

Very confident about our ability to continue to grow the financial services sector and then part of the reason is that if you look at our global footprint from a revenue perspective, our biggest.

If you could share of revenue is in the tech and business services sector for new services, given how dominant from a tech spending in digital spending perspective in the hole.

Among all the whole sectors, we still have a relatively small percentage of revenue.

In this sector compared with what we could get so we're feeling strongly that this higher growth.

Then pre pandemic growth into finished series that will continue but it's just not as hyper as two quarters ago.

Yes got you. Thanks for that and then maybe just a follow up I know, it's really really hard to guide the tax rate win win between GAAP and non-GAAP .

Earnings GAAP was kind of close to breakeven and it's just too difficult, but this quarter was as you mentioned very high kind of adjusted tax rate is there anything as we go forward thats either changed or just for us to think about like 25% to 30% tax rate kind of adjusted his normal going forward.

Yes, Dave.

Dave that range that you've just mentioned.

Is reasonable going forward just a couple of points to help under help you understand what's happening with respect to both third quarter and then included in guidance for fourth quarter.

You will recall of course that we've got outsized stock based compensation and much of that relates to the IPO.

There are significant amounts of nonrecurring expense that runs through our income in 2022, there will be a little more of that in 2023, but the vast majority of that we will be through at the close of 2022.

We also had a vesting event in the third quarter and the dynamics of the share price at the time of vesting led to a higher than expected tax impact and so we've had excess tax deficiencies on stock based compensation.

That was recognized in the third quarter.

And that is why there is that the higher tax for the quarter and so again, we're expecting that to continue somewhat in Q4 and that is included in guidance, but that that really is the big difference for the quarter.

Got you. Thank you for that I appreciate it.

David to answer your question.

Yes.

Alright, one moment for our next question. Please.

It comes from the line of Moshe <unk> with Wedbush. Please proceed.

Hey.

I'll take maybe two quick question here guys. So first.

So you had none.

non-GAAP EBIT margins were down maybe talk a bit about the factors I think you mentioned lower utilization rates, maybe some color on that Aaron.

Yes. It was it was really down to lower utilization, we talked about that with the third quarter guidance in the Q2 release.

I'm sure. Most of you will remember the three factors that we mentioned and Sheryl talked a bit about them on the call.

So that lower utilization was a it was an impact in the <unk>.

In the third quarter, which you can see with gross margin our gross margin was down significantly.

Compared to last year at about four four to five points and so.

That was largely utilization I do just want to highlight.

That if we look at the pricing dynamics or pricing dynamics remain strong and so we did continue to see price increases in the third quarter. The same as we had in the second in the first quarter and so the underlying fundamentals are very strong.

Our utilization is running lower than we targeted and certainly that is the impact that we saw in Q3 and also is impacting the Q4 guide as well.

Alright.

Great color actually my follow up was on pricing the pricing looks good.

Are there any major renewals coming up or anything in terms of anything.

Anything on the pipeline in terms of quiet renewal, but we have to be kind of aware of.

We have renewals throughout the year there is a larger concentration towards the end of the year and certainly that would be in line with our clients planning cycle. So as we are going through our planning process. We do plan on a bottoms up level.

With respect to client accounts account by account.

And so we will have.

A reasonable now of renewals in the fourth quarter.

Nothing nothing that I would note, particularly it's it's all in the normal course, it's part of the really the annual process and so Q4 is heavier but it is throughout the year and so far things are trending reasonably well with that.

Then just the.

Quick follow up on that Erin I think we have been getting looking at Q3 mid single digit increase from a pricing perspective that is obviously offset to some extent by the Geo mix and then the utilization.

But we feel confident that this higher value add service offerings, we are.

Focusing on will continue to.

The pricing power, we have as before.

Thanks, guys. Thank you.

Yeah.

Thank you one moment for our next question. Please.

And he comes from the line of RV Ing run nanny with Piper Sandler Your question. Please.

Hi, Thanks for taking my question.

Yeah.

I wanted to ask when client.

Clients are looking to streamline our kind of reduced budgets are you seeing any behavior of vendor consolidation.

And then predict how you're seeing them consolidate bye.

Increasing spend with some of the larger vendors and.

Everybody was saying.

Spend with that.

The smaller vendors just wanted to ask about.

Kind of where you are seeing on vendor consolidation.

Thanks for the question.

That we have so in terms of decline behavior, the priority change from a vendor consolidation perspective, we've seen some of them.

In some cases the common pattern. We've seen is that there's a desire to to consolidate more on a commodity service providers.

To create more space for strategic providers.

And then in many situations, we are actually seeing an increase of wallet share because of the strong delivery track Records and also the strategic positioning we have.

So we're actually taking the opportunity to even though as the.

The macro headwinds is coming.

We're taking the opportunity to win more wallet share during this vendor consolidation.

It's just more of it come.

Step back just from the overall context of vendor consolidation not too many.

More of a isolated case then across the board a pattern that makes sense.

Yeah, Yeah, Yeah, It does and then.

Just a quick follow up.

Alright.

Just given the potential like demand headwinds.

Yes.

However, when they're thinking about pricing I know I know you said that you know what.

You're still seeing sort of price increases.

But typically when folks are trying to reduce budgets for those those particular clients that are looking to attunity as budgets are there any discussions on on.

On on pricing as I was saying that hey, you know we need to reduce by 10%, but if you can get better pricing than then then we can maybe reduce our spend a little bit.

But by a more modest amount.

Well from a from that kind of a pricing discussion perspective.

That's never surprise and it happens all the time.

Historically, even I think we are definitely facing a tougher pricing environment at this moment and then our teams on the ground are doing all the right things for our clients want us to support them to help them through a difficult time user facing difficult time and also to protect our win rate. So we're definitely not.

Putting our win rate at risk.

Yeah.

Making pricing the only priority, it's a multifactor decision, we're making that but overall I think the aggregate level. We do see there's a tougher pricing environment will end up with perhaps less price increase that we're going to see in the next quarter or two.

But overall, we feel confident that the.

The pricing power, we have and also the.

The higher margin gross margin, we have in general give us more flexibility to deal with these issues than than otherwise.

Perfect and then just kind of last question.

When I look at your.

Q4 to Q3.

Revenue compression, it's roughly about 26, 26, and a half million dollars at the midpoint are you.

Able to dimension how much of that is.

From currency versus volume compression.

Yes.

Helping put that question Arvind thanks for that.

You did mentioned currency that is part of it I think it's really important to understand and looking at Q3 revenue to Q4 revenues. There is a number of structural factors that really is driving the majority of the decline in revenues from Q3 to Q4. So exchange rates are going to account for approximately 1% of that.

In addition, there's one less week day in this Q4 versus Q3, and so that is another about 1.5%.

We've talked about with seasonality at various times, we've talked about it last year in Q4.

I mentioned earlier on the call, but <unk>.

Seasonality is a big factor for revenue growth in the fourth quarter for thought works.

Holidays and vacation leave are significantly more in the fourth quarter than any other quarter in the year and so that has a big pack big impact and it's really easy to underestimate that.

Actually accounts for an additional approximately four 5%.

So a lot of it is really what we would call structural factors and just to help remind of dynamic that we saw last year last year, we had year over year growth in the fourth quarter of 39%, which is clearly a very strong level of growth and even with that our revenues were flat.

Q3 to Q4, and so they are definitely the seasonality impact at play here and that is going to cover most of it there.

You have already talked about some of the areas, where we're seeing just a little bit of softening in some caution but on the whole we are expecting solid growth, 15% D. C y.

But it is a step down from the 24% that we saw in Q3.

Yeah, Yeah perfect.

Thanks for that area.

But I guess.

<unk> has to go back to kind of.

<unk> lost.

Last earnings.

Yes things have gotten like.

Kind of a bit worse than what you were anticipating last earnings.

And is that.

And paradigm mentioned whats changed.

From from last earnings.

These things like.

Kind of the.

Some of the structural things.

Clear right, but.

Was there any extra.

Additional headwinds from FX that.

That's driving the Q4.

Great.

Versus what you were anticipating three months ago.

Yes so.

FX is definitely part of it so there is around 11 million in.

And reduction in USD revenues related to FX factors compared to guidance and a lot of that is in Q4.

And so that is clearly playing a part.

But I would also say.

We didn't see lots of clients, we're talking and.

Talking about potential macro factors, it's been in the news for a long time that that's no surprise to any of us, but I think what has shifted a bit in the last.

Month or two is we have seen.

We have seen that play more into the contracting cycle. Then there is just a general more cautious tone as people manage budgets towards the end of the year and that largely is what we're seeing is a difference.

Joe mentioned, we continue to have very strong win rates. It's just that we are seeing clients start engagements with smaller.

Smaller teams initially a big focus on ROI and in some cases clients have said, okay. Well. It is just going to make more sense to start this in Q1, rather than Q4. So we're just seeing a little bit more of that dynamic, particularly in the last few months than we did in the third quarter and that is the other part of the difference.

Beyond the FX.

Perfect.

Appreciate it thank you so much.

Okay.

Yeah.

Thank you and one moment for our next question and it comes from the line of Dan Perlin with RBC capital markets. Please proceed.

Thanks, Hey, Eric I just wanted to.

I wanted to follow up a bit on this cadence as we think about what you have outlined a little bit for <unk>, I know youre, not giving specific guidance, but you've got 80% visibility.

I think to an earlier question you kind of alluded to sub 20 call. It maybe mid teens.

And you just outlined a lot of things is to structurally why theres a downdraft in the <unk>, but the absolute number for <unk> based on what you've said is pretty significant.

Absolute dollar ramp sequentially. So can you just help us with why.

Why that would be the case, maybe there are some structural things we need to be mindful of obviously, we'll get back maybe the holidays and things of that nature, but FX will continue to be tough.

So anything there would be very helpful. Thanks.

Sure.

So if we think about the first quarter. So the structural things as we saw in Q1 of this year, they do provide a benefit into them.

In from fourth quarter into first quarter. So thats a typical pattern for salt works, we would expect to see that pattern continue next year.

What we should be aware of is that we've seen strong growth across the year and the we have very very strong growth in Q1, and Q2 of this year and then it's been a bit more moderated in Q3 and Q4.

As we consider growth into the next year, we've got to take into account the FX headwinds as you mentioned Dan that the.

Big factor for Us, but then we also.

I just need to take into account also that macro uncertainty. So that said, we're not going to give specific on growth rates right. Now, we'll wait until February to do that but you know what what Shao said hold true we are expecting a solid growth for next year, but just given the current run rate and <unk>.

Given the market dynamics that will be more moderated.

Leave in Q1, and then it will be.

Potentially in the second half of the year, So I would say and hopefully that's helpful. And then more on that in a few months' time.

That's great.

Alright.

I just have one real quick follow up in terms of utilization.

Is there a level of growth that we think about in order to maintain a margin expansion opportunity as we go into next year again I'm not looking for specifics for the guide, but just directionally.

Is it likely that first half probably has compressed but the second half as you. Just described is going to have better likely outcomes for growth and therefore, we could see some expansion in margin. Thank you.

Thanks, Dan Yes, that's very reasonable we do believe there are margin expansion opportunities again of course, we're too early to talk about the specifics.

We have opportunities to drive efficiency from an operational perspective, we've seen that this year and we expect to continue to see that next year.

That typically is relatively balanced across the quarters and so there's nothing specific to call out.

With respect to next year.

Again.

From a seasonality impact we talked about this in Q2, but our Q2 margin tends to be lower than the average for the year because of the impact of the annual pay cycles. So that dynamic was in place. This year, we expect it to be in place for next year. So I would suggest keeping that in mind.

We are at lower levels of utilization, we're working on a program to drive them to drive increases there and some of that.

It happened through revenue growth, we expect.

So that will play we expect that will benefit a bit in Q1, but the larger margin expansion opportunities are more isolated likely into the second half as you know.

Got it.

Excellent. Thank you.

Yeah.

Thank you and with no further questions in the queue I'll turn the call to a close shall for his final remarks.

Thank you and then so thank you everyone for joining us today for our Q3 earnings call I'd like to acknowledge the.

The continued support of our board and shareholders.

And then in closing I want to thank all thought workers clients and partners.

The extraordinary impact we're delivering together every day stay.

Stay well and we look forward to catching up with you next quarter.

And with that we thank everyone for participating in today's conference and you may now disconnect have a great day.

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The earnings press release was issued earlier today and is also available on our Investor Relations page at Thoughtworks 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 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.

<unk> Form 10-Q, and other reports, we may file with the SEC from time to time.

Revised 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.

Let me start with a recap of <unk> works.

We're a 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 now, let me turn to the financials.

I'm pleased to report strong results third quarter, driven by the continued demand for our digital transformation services, we delivered revenue of $332 million in the third quarter of 2022, reflecting year on year growth of 16, 6% and 23, 9% in constant currency in the quarter.

We achieved adjusted EBITDA of $67 2 million, reflecting.

Reflecting adjusted EBITDA margin of 22% 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 I would like to thank every thought walk around the world, but extraordinary impact they create through our technology excellence and culture today, the world faces a higher level of economic uncertainty.

Throughout this period, we continue to stay close to our clients.

Helping them to be adaptive to change and resilient in the face of unpredictability.

We're driving our business with rigor and discipline.

Managing supply and demand and being proactive with our clients to help them achieve a better return from their technology budgets.

200 technology executives across the globe found that 44% of respondents cited the lack of talent in areas like data Science engineering is one of the biggest challenges for the business. We believe that <unk> has the best talent in the industry and our clients continue to value our people and our services, we have seen better than expected demand in third quarter.

<unk> and our clients are looking to digital innovation to help them navigate uncertainty strong themes are prevailing let me share. Some examples we're seeing strong interest from clients and our data services and how data can transform and scale their businesses clients are looking for us to develop new digital products and services enhancing.

Experiences, removing friction and bringing customer facing services together, we're seeing solid demand from clients for <unk> expertise and enterprise modernization and platforms.

We also continue to see client interest and developer experience platforms as a key enabler for improving the return on investment of technology budgets that.

By boosting the productivity and retention of critical engineering talent for these reasons, we believe ours is well positioned in the market now.

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 was focused strategies around M&A partners and geographic expansion.

Turning first to our client 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. Our clients appreciate the value we create with them and we remain confident in our ability to sustain our premium position in pricing for example at Atlassian one of them.

Australia is most successful technology companies it.

Is it work on a mammoth challenge to migrate one of Atlassian as flagship products bid bucket to the public cloud pit bucket enables atlassian customers to build software at scale and processes on average 1 billion transactions per day.

Last name was managing this data through its own data center, which posed a challenge in terms of scale and security.

It's always enabled the migration of 15 meeting customer code repositories to Atlassian platform as a service which is built on AWS.

While we previously have taken years was completed by <unk> in just three months.

Atlassian saw a 93% reduction in support request due to outage and a 55% improvement in big buckets Web response time performance.

At our long term client the United States Department of veteran Affairs VA Webby.

<unk> been working together to transform their organization through data mash and data platforms.

<unk> is a federal cabinet level agency <unk>.

Providing healthcare services to eligible military veterans in order to improve health outcomes for example via.

<unk> uses the medication possession ratio calculation NPR to provide clinicians with a view on how well a patient is adhering to a medication regime.

NPR is critical for veterans, who are taking control medication.

<unk> introduced data as a product a core principle of data mesh, which enables data to be managed by VH domain teams.

Were paired with office of mental health and suicide prevention.

NPR to fully manage data platform and delivered 8% to 8% reduction in processing time. Additionally.

<unk> implemented a data catalog for the health data and analytics or platform HD AP.

New NPR data product became the first data product insight the HD AP, Microsoft Azure platform.

Providing a scalable inventory of enterprise data assets now.

Now turning to new clients, we have a focused approach to new clients, helping organizations, we work with to deliver rapid business value from digital transformation.

We continued the momentum from the first half of the year and we have contracted with 32, new clients in the third quarter.

Now let me provide examples of new clients that we have been working with recently.

We have signed a multiyear agreement with PCI farmer services, a leading global contract development and manufacturing organization.

Industry first of its kind data platform that provides real time status of projects automatically identifies risks spot trends and provides business analytics.

This modern application programming interface clients.

Clients have the ability to seamlessly integrate their systems with PCI create.

Creating greater transparency and a more simplified the process for decision making.

We're also pleased to share that last month <unk> LLC a wholly owned subsidiary of <unk>, Inc. Was awarded a multiple award schedule Prime contract by the U S General Services administration.

This is a covenant wide indefinite delivery indefinite quantity contract that runs thoughtworks federal and awarded base period of five years, an additional 15 years of optional periods.

This is a big step forward and will allow us to sell to federal agencies directly now.

Now, let me share an update on partners as a growth strategy.

Our primary focus is to develop go to market partnerships with the hyperscale cloud providers, including AWS TCP and Usher.

For example, as Amazon AWS Premier services partner, we have the highest tier of partnership which less than 3% of AWS partners achieve.

In the third quarter, we also achieved a new AWS financial services competencies.

<unk> has deep technical expertise with AWS cloud technologies.

And we're successfully working with a large number of clients at scale. We're also working on a new data platform together with AWS in a natural history Museum.

The natural history Museum is a world leading science Research Center and was the most visited indoor attractions in the U K in 2021.

The new data platform, which is called the data ecosystem.

<unk> is designed to help the museum's scientist to bring together a huge breadth of UK biodiversity and environmental data types and one place to help you with scientific understanding of the Uk's biodiversity and environment. You can find details of some of these customer successes on a new section of our website <unk> Dot com.

I'm now going to hand over to Erin so that she can take you through the numbers in greater detail. Thank.

Thank you <unk> and thanks to all of you for joining US today, we were very pleased with our results in the third quarter, which demonstrate continued solid demand across our business.

Begin by summarizing a few of the highlights for the quarter.

In the third quarter, we saw revenue growth of 16, 6% compared to the prior year period constant currency revenue growth was 23, 9% our revenue growth in constant currency is two one percentage points higher compared to the midpoint of the range I guided to in August This is primarily due to.

Strong execution and better than expected demand adjusted EBITDA for the quarter was $67 $2 million and our adjusted EBITDA margin of 22% was 270 basis points higher compared to the midpoint of the range I guided to in August Q3, adjusted EBITDA margin decreased.

<unk> programs. However, we are starting to see a change in client behavior. Some clients are contracting in smaller phases to allow themselves flexibility and sales cycles are normalizing from the accelerated post pandemic levels.

Our overall bookings in the trailing 12 months increased by 19, 1% year on year to one 5 billion.

We have a diversified business across industry verticals and geographies North America grew by 24, 7% Europe by 15%.

Tim by 13, 3% and APAC grew by nine 7% our growth in APAC continues to be impacted by the COVID-19 situation in China, given the continued 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 currency.

Alongside the U S dollar or the Euro British pound and Australian dollar.

I am pleased with the underlying strength of our business. This quarter for example on a local currency basis, our revenue contracted in euros grew by 26, 1%, great British pounds by 20% and Australian by 15, 9% compared to the prior year period.

Due to the diverse nature of our business on a geographic basis 62, 6% of our year to date revenues as of September 30th of our contracted and non USD currencies. We also continued to see good growth across our industry verticals during the quarter.

The strongest growth within technology and business services growing at 25, 5%.

Automotive travel and transport grew at 23, 5%.

Services grew at 17, 7% energy public and health services grew at 16, 5% and our retail and consumer vertical was in line with last year as we shared with you in May energy public and health services is a strategic focus and this industry vertical has returned to double digit growth.

As expected in the third quarter and the retail and consumer vertical we are seeing normalizing spend after the post pandemic them at.

And five 4% and 65, 4%, respectively as a percentage of total revenues. We now have 36 clients with trailing 12 month revenues greater than 10 million seven more than the third quarter of 2021, representing a 24% increase moving down the income statement for us.

Third quarter last year due to lower utilization.

GAAP diluted loss per share was <unk> impacted by noncash stock compensation charges.

On an adjusted basis, our adjusted diluted earnings per share was eight <unk>.

Compared to 14 in the third quarter of 2021, primarily due to effects from income taxes.

Free cash flow for the quarter was $27 7 million compared to $27 5 million in the prior year quarter.

And we continue to have good liquidity.

Our cash balance at September 32022 was $185 million compared to 453 million at September 32021.

Our cash balance reflects debt repayments of $100 million in October 2021, and $100 million in July 2022.

Our debt is continuing to go down and is $404 million as of September 30th 2022.

Now I would like to hand back to shower to share additional updates on our business from the third quarter. Thanks, Erinn, Let me start with our amazing thought workers with growing our community of adult workers to over 12500 with a long term focus on diversity and inclusion 42, 2% of thought workers are now women and underrepresented.

Gender minorities WGN.

We're continuing to improve our employee value proposition and we're pleased that attrition at the end of September 2022 was 11, 8% on a TTM basis.

Significantly better than industry norms.

I am pleased that our attrition is better than our operating plan assumptions.

Demonstrates the strength of our employee value proposition.

We believe that <unk> has the best digital talent in the industry and has positioned us well to create extraordinary impact for clients.

Investing in thought workers is a long standing business priority.

One example is our commitment to leadership development.

The Thoughtworks Global management team has a deep bond with our culture.

In part to their average tenure of 16 years.

One way, we have achieved a strong and diverse leadership is through our focus on our global leadership development program.

Which has been running now for over 14 years.

We're proud that around 80% of our global management team are alumni of the global leadership development program.

Our 2022 to 23 Global leadership development program launched in September This year's cohort of 121 leaders are 56% of women and underrepresented agenda minorities WGN.

The program is developed in house and is supported by 116 internal coaches.

3% of whom are W. <unk> and 65% of global leadership development alumni.

In the third quarter, we're pleased that once again received great place to work certification in Singapore, Germany, Spain, and China with all regions meeting or surpassing the previous year's Trust Index score.

This brings our current total of active great place to work certifications to 13.

Our strong employer brand continues to attract talent to thought works.

With over 53000 job applicants during the third quarter.

I am very proud of our recruiting capability and we continue to see over 50% over hires coming from thought workers referrals and direct sourcing.

Our priorities for thought worse 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 third quarter our.

Our overall rating was 441, which is again higher than the rating for the it services sector of 395.

Our score for diversity inclusion was $4 77.

Higher than the ratings for the it services sector of four point out too.

92% of thought workers will recommend the company to a friend and employee referrals continue to be an important source for new hires.

We're known as thought leaders revolutionized the technology industry.

And that's how we build our brand and our reputation from our early days as a company.

We continue to stay close to our clients and.

From June to August we.

<unk> ex comp 2022, and nine countries with over 4500, Tendies ex cough now in its 12 year is a thought works flagship program run by technologists for Technologists. This year's global theme was making tech better together. The program consisted of one <unk>.

Third a talks panels and workshops covering a wide range of topics, including enterprise monetization data mesh customer experience and product thinking accessibility and sustainability as well as career oriented sessions are.

Our clients consistently feedback to us that they value our thought leadership.

In the third quarter, we inform and guide our clients with papers, including on such topics as how to use low code tools effectively.

How to approach digital fluency in uncertain times.

In a paper was practical suggestions for our clients through exploration of the three significant narratives of the <unk>.

And in the third quarter <unk> published a Harvard business review data mesh white paper beyond technology, creating business value with data mesh. This whitepaper from Harvard business Review analytics services in Association with all works is based on research with academics industrial experts and three of Thoughtworks date.

<unk> clients, Rosh ITV and <unk> bank.

We're also pleased to share that ITV and thought works, where the winners of the data IQ Awards 2022.

It's always partner with ITV to implement a data mesh approach.

We are imagining of data use for content production promotion distribution and monetization in a way that is scalable and shareable.

The result has been that ITV is marketing team and identify addressable audiences in minutes.

Rather than the prior three months timeline.

Our shared culture, and Dana mesh self service data exchange impressed the judges.

Now, let me hand, it back to Aaron.

Thanks, Shao I would like to update you on some areas of focus within our ESG priorities.

Our transformational social impact work is a core part of <unk> culture. For example, Bonnie our long term global priority in health care is now the first open source hospital information system to be accepted to India's National Digital Health mission.

In the third quarter Thoughtworks setup, the core architecture to support the <unk> vision to create a national digital health ecosystem that supports universal health coverage, which over a billion people are expected to benefit from <unk>.

Another focus of our approach to ESG is in the practices around responsible technology as technology.

<unk> becomes ever more pervasive in our lives the field of responsible tech is growing in importance to help mitigate negative and Barton consequences of technology.

We are a leader in the field of responsible Tech for example, Dr. Rebecca Parsons, our Chief Technology Officer opened the world's first responsible Tech Congress held in Ecuador. In September thought works is also a contributor to a new report by Forrester, a leading global research and advisory firm <unk>.

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.

We expect acquisitions completed during the year will contribute approximately 3% to fourth quarter reported revenue growth.

We expect adjusted EBITDA margin for the fourth quarter to be in the range of 17% to 18%.

For the fourth quarter, we expect adjusted diluted earnings per share to be in the range of eight to nine <unk>.

Assuming a weighted average share count of approximately 330 million diluted shares outstanding.

First as we mentioned last quarter, we expect some clients contracting behavior to be at more normalized decision cycles compared to the post pandemic compressed cycles.

Additionally, some clients breaking larger digital transformation programs into smaller statements of work to allow themselves flexibility.

<unk> retail clients are being more cautious in response to overall consumer sentiment and economic uncertainty.

For these reasons, our fourth quarter guidance is prudent we have taken a realistic view, we expect that managing the impact of the challenges. We have just shared with most likely negate any over performance on our fourth quarter guidance now turning to full year guidance for the full year 2022, we expect revenue growth year on.

Year on a reported basis in the range of 24% to 21% or 26, 7% to 27, 3% in constant currency.

Continued to strengthen as such I am providing a deeper view into the impact of foreign exchange on our guidance.

Our full year 2022 expected revenue includes a negative impact of $69 million compared to the $57 million due to foreign exchange that I shared in August this negative FX impact comprises $23 million to the mid year $21 million FX impact in the third quarter and expectation of 25 million negative FX spreads.

The fourth quarter.

For adjusted EBITDA margin, we expect full year 2022 to 19, 4% to 19, 6%.

We expect full year adjusted diluted earnings per share for 2020 to be in the range of 42.

<unk> to <unk> 41.

Assuming a weighted average share count of approximately 331 million diluted shares outstanding.

<unk> our operations efficiently our.

We remain focused on calibrating supply and demand that we can balance solid utilization with an ability to respond to growth hotspots in the market. For example, like the high demand, we're seeing for our data platforms and data <unk> services, and our developer effectiveness propositions and our partner led opportunities.

Now, let me hand back to Sean. Thanks, Erin you can find our investor presentation on the Salt 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.

Thank you Anna Sorry reminder, that is star one one to get into Q1 moment, while we compile the Q&A roster.

Our first question comes from the line of changing Wang with Jpmorgan. Please proceed.

Alright, thank you.

Nice to speak to you all.

It looks like Youre expecting that to come down.

So maybe can you talk about the headwinds.

It will impact margins in that in the fourth quarter relative to.

To the past and what you are proactively doing too to get there.

Thanks, Tien tsin.

Sure So definitely happy to talk about Q3 to Q4 margin and what we're doing.

First it's important to be mindful of the seasonality factor with respect to Q4.

And certainly that is informing the guidance in Q4, so there's a lot of public holiday time in vacation time.

And so that does have a pull down impact on utilization from Q3 to Q4 and that is what is largely driving the margin the margin shift from actual in Q3 to be guide in Q4.

In addition to that what.

We focus on to improve that there there's a few things so.

There is some discretionary spend that we are tightening our bond we did that in Q3, and we continue to do that in Q4.

As we did in Q3, I'm, making sure that we are reducing revenue leakage.

Or do you think discretionary spend.

Where we think that makes sense. However, we continue to invest in our demand and our marketing efforts.

We continue to invest in the business strategically.

Great great. Thanks for going through that Erin So maybe as my quick follow up Eric.

Or shall maybe for you just thinking about.

We agree around digital transformation.

You see a little bit of a pause here and then it comes back with more intensity I'm just trying to think how you are evaluating this given what you've seen in past cycles.

Thank you.

Hi, Tien tsin.

Thank you for the question I'll take that.

So we definitely think that in this current cycle a lot of the hesitation is due to just macro induced uncertainty.

But this macro induced because.

Uncertainty is causing a lot of our clients too.

Just to plan for the better for next year thinking about what should we invest now which areas should we invest now and that's why we're seeing a lot of the additional approval layers required some of the sales cycle cycle's stretching out becoming longer.

And then when we look at this particular.

Timeframe.

What's different from the previous.

Similar situation, we've seen I think.

Couple of things that are different one is there is a greater.

Focus on leveraging digital technology to drive efficiency and cost saving programs.

For example, the dealer developer effectiveness platforms as I mentioned earlier, we're seeing a big uptick in terms of interest in building that out in many organizations.

We're also seeing.

Clients, especially in the in the verticals.

That's been public energy automobile or doing better than.

As Evan mentioned earlier retail for example, so the performance of different verticals are different and third one I think is different is that the.

Geographic.

Variance is different than some of the previous.

Areas, where we've seen North America is doing very well.

Europe is actually doing decent southeast Asia is doing very well.

Then we have this.

Softness in the APAC and besides the China zero Covid situation, we've seen.

Australia market just the traditional conservatism.

Is driving more.

Caution.

Facing.

Just the macro headwinds.

So overall, we feel that this.

This.

This uncertainty is mostly short term, meaning that isn't in the next three to six months Windows. We strongly believe that once this uncertainty has gone whether.

The recession materialize or not or to what extent I think the.

Spending will pick up to continue and then as we've seen before we also believe that the spending on tech will be one of the first.

To pick up once this uncertainty is gone.

Hope that makes sense attention.

Thank you for going through the high value it. Thank you.

Thank you and one moment for our next question.

And he comes from the line of Maggie Nolan with William Blair. Please go ahead.

Hi, This is Jesse on for Maggie. Thank you for taking our questions. So previously you talked about.

Expectations for flat revenue in the third quarter as a result of ramp ups being pushed to the fourth quarter.

Still I expect those projects to ramp up this quarter or have you seen them pushed further.

Thank you Joseph for the question.

The ones, we referred to that.

The ramp ups that was delayed from Q3 now are ramping up in Q4.

We.

We planned to.

So theres no change in that.

That said, where we were not seeing that kind of.

Behavior changed three quarters ago, as Aaron mentioned in.

Some of the major markets.

I think it's more of that in the last three months, we see some of the concerns about macro headwinds, they're translating to different behaviors on some of the other programs of ramp up but less about the ramp up is more about just this.

The funding, becoming more incremental and then.

The deal side is being compressed with smaller teams to start with.

Our clients are still planning and funding long term programs, we sign up 32, new logos in Q3, which is higher than Q2, and then similar to what we've seen before.

But the deal size are getting smaller to start with.

And then I think a lot of our clients are expecting the work of phase one phase two to complete before they reevaluate and then and further ramp up the team a lot of this is due to this uncertainty.

Makes sense and where clients wants to keep optionality and the flexibility to ramp up further if the.

Business conditions remained stable or doesn't deteriorate.

For their worst than what they're expecting.

If it doesn't then we would do we expect these long term programs to continue to ramp up.

Got it. Thank you and then as you're thinking about.

More normalized sales cycles and smaller types of projects you're seeing.

Do you think that impacts <unk> visibility at all.

How does.

Your visibility now compared to where you have been previously.

The visibility is.

Is actually very similar to what we have been previously internally, we do our own calculation.

We could we could say that we have around about.

About 80% of revenue visibility for Q1, which is similar to what we have said around this time of the year in previous years, because our visibility is not just a signed contract is not just establish itself as the.

The program itself, the willingness and the scheduled ramp up as we can we can see.

In the coming future something that not everything will be signed when we think about the visibility you take that 32, new logos. For example, some of them are starting with smaller team, but others are also still starting with.

Bigger teams as big teams as we've seen before about four of those 32, new logos from a bookings perspective, even from SW perspective adds up to more than $100 million.

Then five or six of them have the potential to grow to a much larger footprint in the next 12 months to 24 months.

Potentially to top 20 clients.

So we do feel.

Similarly about the visibility at this time of the year.

Both for Q1, and then full year 2023.

Thank you Joe Thank you very helpful.

Thank you.

Thank you one moment for our next question. Please.

And our question comes from the line of Bryan Bergin with Cowen. Please proceed.

Hi, Thank you for taking my questions.

Thank you Brian .

There was a bit of a cracking, but I think I got the message.

So I have to say from a cancellation perspective, the only vertical we've noticed that.

In the non usual way is the retail vertical.

We're definitely seeing more caution from retail clients.

Due to the overall consumer sentiment and economic uncertainty, we have seen almost complete pullback on spending and from.

All vendors at a few clients in the retail vertical and this is already showing in the Q3 results and we believe it is probably going to remain similar pattern in Q4 impacting the growth in the retail sector as I said in other sectors for example.

Public energy health care automobile financial services, we continue to see this strong growth there is bit of a.

Caution here and Theyre small.

Delay pullbacks here and there nothing major.

With the retail sector and then that's why I think in Q3 and also in Q4, we expect all of the other verticals to grow in a very healthy pace just retail sector is the one that's having the biggest impact.

Okay I appreciate that makes sense.

So the China business, how it performed compared with what we have seen in Q3. It actually was very much in line to what we expected in Q3 I think.

From just the zero.

Colby Poly's perspective that impact is.

Spending into Q4, and we feel probably into Q1 next year as well, but just put that into context we.

We have three main demand generation regions, North America about 39% of revenue Europe about 24%.

<unk> is 33% is quite significant compared with any other companies I think in this in this area that 33% about 14%.

Is.

19% is in Australia.

And about 7% as in Southeast Asia, and 7% is in China local market. So so while there is a significant impact about 7% of revenue from a growth perspective. It's also relatively contained in the in the broader revenue diversification context.

And then just from a local market perspective.

The all the fundamentals are still.

Looking at our policy from pipeline win rate, we're still gaining wallet share in most of our major clients is just that the economy is going slow and then zero coli policies, putting a lot of constraints in place. So it's probably going to take a little while longer than three months for it to get back to a.

Similar growth rate compared with the other regions.

Okay. Thank you.

Yeah.

Thank you and one moment for our next question. Please.

And our next question comes from the line of Jason Kupferberg with Bank of America. Please go ahead.

Good morning, guys just wanted to pick up on some of the comments around visibility I know the Q4 guide calls for mid teens constant currency revenue growth and then you've got some pretty tough compares.

Following couple of quarters so.

Seems like maybe mid teens is a reasonable proxy to think about for the first half of 2023, just trying to be realistic about quarter over quarter growth assumptions as well and our model over the next couple of quarters beyond Q4 of this year. So I just wanted to bounce that off you.

See if that seems reasonable or if theres. Some other considerations, we should start to try and factor into our models just as the demand environment is shifting a little bit. Thanks.

Thanks, Jason.

I'll comment on that Erinn.

So I.

I think your.

Estimates is not far off from what where we're thinking there's there's just going to be a lot more uncertainty in the next three to six months due to the macro concerns and then as we as I mentioned earlier, while our business is highly diversified across geographies and verticals.

We do see.

Growth potential in the ones that are performing better in this potential downturn like public sector energy automobile.

Hopefully finish it services, we also will be doubling down in better off market like North America, Southeast Asia and to some extent Europe .

We believe that the Australia market should bounce back given the healthy economic fundamentals is just as we know Australia and business community is very conservative and then which has kind of helped them to fare better.

During the 2008 global financial crisis, but they tend to slowdown early than others and bounce back early than others as well.

So with all that said we.

We are confident about the value proposition and pipeline strengths win ratio wallet share.

The long term programs I mentioned, but given this the drag of the macro headwind we think that.

Probably early 2003, H, one because of that.

That and the tough comps as you mentioned, Jason we're probably looking at sub 20% growth rate in each one on a <unk> basis, and then certainly once the cautions gar getting back to the 20% growth rate in <unk> is highly possible.

Okay, Yes that all makes sense.

And I guess just thinking about.

What kind of visibility you might have let's say at the turn of the year versus a typical year.

Year I mean, it just seems like we're hearing that some other companies too.

Client budgets are going to take a little longer to get finalized and decisions around kicking off new <unk>.

Engagements.

Maybe pushed out a little bit. So are you guys preparing for an environment, where you've just got a bit less visibility on the full year, maybe that doesn't emerge until.

I don't know if March April instead of January February I don't know if im framing that accurately but just wanted to get your perspective on that.

And I can jump in there.

Jason So firstly I would say, which I think indicated by your question. We are in the middle of our planning process right. Now at shot show was already talked about and we do have good visibility into next year.

It is at similar levels as we've had previously.

That said we are we are not providing guidance at this time I know I know you wouldn't expect that.

Because we are in the middle of the planning process and we do go through a rigorous process. We're running our process around the same time, but maybe about two or three weeks later than we do previously in and that is just because of the recent caution that we've seen in the markets, we want to be thoughtful and we want to make.

Sure that we are agile and we're able to move as needed in the business.

So Joe's comments, Dan certainly, but again, we are in the middle of our process as you're highlighting there is a similar amount.

The visibility, but certainly the market dynamics are showing a little bit more caution associated with the macro headwind and so for that reason.

We will be waiting to give final guidance when we are in the market in February .

Understood. Thanks, Erin Thanks Al.

Okay.

Thank you one moment for our next question. Please.

And it comes from the line of Dave Koning with R. W. Baird. Please proceed.

Yeah, Hey, guys. Thanks for taking the question I guess first of all you talked a little bit about the retail vertical I just wanted to ask a little more about the financial services vertical I know that was down maybe close to 10% sequentially and just if there's any sub parts of financial services that are maybe stronger or weaker.

I guess, yes, just that.

Thanks, Dave.

In our own portfolio.

We.

Generally.

We do very well in the digital banking area.

Wealth management payment.

I think the main difference compared with a couple quarters ago would be the.

The crypto currencies space.

Just a lot of a lot less activity in that area, but other areas. We havent seen a pattern that causes calls calls out cost of our attention where in particular pocket.

It's pretty similar to what we've seen before so that's why we're still knowing that there is a macro headwinds ahead.

Very confident about our ability to continue to grow the financial services sector and then part of the reason is that if you look at our global footprint from a revenue perspective, our bigger.

If you could share of revenue is in the tech and business services sector. The new services, given how dominant from a tech spending digital spending perspective in the hole.

Among all the whole sectors, we still have a relatively small percentage of revenue.

In this sector are compared with what we could get so we're feeling strongly that this higher growth.

And then pre pandemic growth in the financial services will continue but it's just not as hyper as two quarters ago.

Yes got you. Thanks for that and then maybe just a follow up I know, it's really really hard to guide the tax rate between.

Between GAAP and non-GAAP .

Earnings GAAP is kind of close to breakeven and it's just too difficult, but this quarter was as you mentioned very high kind of adjusted tax rate is there anything as we go forward thats either changed or just for us to think about like 25%, 30% tax rate kind of adjusted his normal going forward.

Yes, Dave.

Dave that range that you just mentioned it.

Is it reasonable going forward.

Couple of points to help under help you understand what's happening with respect to both third quarter and then included in guidance for fourth quarter.

You will recall of course that we've got outsized stock based compensation and much of that relates to the IPO.

We also had a vesting event in the third quarter and the dynamics of the share price at the time of vesting led to a higher than expected tax impact and.

So we've had excess tax deficiencies on stock based compensation.

That was recognized in the third quarter.

And that is why.

There is the higher tax for the quarter and so again, we're expecting that to continue somewhat in Q4 and that is included in guidance, but that that really is the big difference for the quarter.

Got you. Thank you for that I appreciate it.

David to answer your question.

Yes.

Alright, one moment for our next question. Please.

It comes from the line of Moshe <unk> with Wedbush. Please proceed.

Hey.

I'll take maybe two quick questions here guys. So first.

So you had.

non-GAAP EBIT margins were down maybe talk a bit about the.

The factors I think you mentioned lower utilization rates, maybe some color on that erinn.

Yeah.

Yes. It was it was really down to lower utilization, we talked about that with the third quarter guidance in the Q2 release I'm sure. Most of you will remember the three factors that we mentioned on shelf talked a bit about them on the call.

Is that lower utilization was a it was an impact in the in the third quarter, which you can see with gross margin.

Gross margin was down significantly.

Compared to last year at about four four to five points and so.

That was largely utilization I do just want to highlight.

But if we look at the pricing dynamics or pricing dynamics remain strong and so we did continue to see price increases in the third quarter. The same as we had in the second in the first quarter and so the underlying fundamentals are very strong.

Our utilization is running lower than we targeted and certainly that is the impact that we saw in Q3 and also is impacting the Q4 guide as well.

Alright.

Great color actually my follow up was on pricing the pricing looks good.

Are there any major renewals coming up or anything in terms of anything.

Anything on the pipeline in terms of quiet renewal, but we have to be kind of aware of.

With respect to client accounts account by account.

And so we will have.

A reasonable amount of renewals in the fourth quarter.

Nothing nothing that I would note, particularly it's all in the normal course, it's part of the really the annual process and so Q4 is heavier but it is throughout the year and so far things are trending reasonably well with that.

Then just.

But we feel confident that this higher value add service offerings, we are.

Focusing on will continue to.

The pricing power, we have as before.

Thanks, guys. Thank you.

Thank you one moment for our next question. Please.

And he comes from the line of RV Ing run many with Piper Sandler Your question. Please.

Hi, Thanks for taking my question.

Yeah.

I wanted to ask when clients.

We're looking to streamline our kind of reduced budgets are you seeing any behavior of vendor consolidation.

And then predict how you're seeing them consolidate bye.

Increasing spend with some of the larger vendors.

It really was saying.

Spend with that.

The smaller vendors just wanted to ask about what kind of behavior you are seeing on vendor consolidation.

Thanks for your question.

That we have so in terms of the client behavior. The priority change from a vendor consolidation perspective, we've seen some of them in.

In some cases the common pattern. We've seen is that there is a desire to to consolidate more on a commodity service providers.

To create more space for strategic providers.

And then in many situations, we are actually seeing an increase of wallet share because of the strong delivery track record and also the strategic positioning we have.

So we're actually taking the opportunity to even though as the.

The macro headwinds is coming.

Were taking the opportunities to win won't worry shared during this vendor consolidation.

But just more of a comp.

Step back just from an overall context vendor consolidation not too many.

It's more of a isolated case then across the board a pattern that makes sense.

Yeah, Yeah, Yeah, It does and then.

Just a quick follow up.

Just given the potential like demand headwinds.

Yes.

However, when they're thinking about pricing I know I know you said that.

You're still seeing sort of price increases.

But typically when folks are trying to reduce budgets for those those particular clients that are looking to budget are there any discussions on on.

On pricing as I was saying that hey, you know.

We need to reduce by 10%, but if you can get better pricing than then then we can maybe reduce our spend a little bit.

But by a more modest amount.

Well from a from that kind of a pricing discussion perspective.

Never surprise and it happens all the time.

So we're definitely not.

Putting our win rate at risk.

Making pricing the only priority, it's a multifactor decision, we're making that but overall I think the aggregate level, we do see this.

Tougher pricing environment will end up with perhaps less price increase that we're going to see the next quarter or two.

But overall, we feel confident that.

The pricing power, we have and also the.

The higher margin gross margin, we have in general give us more flexibility to deal with these issues then.

Otherwise.

Perfect and then just kind of last question.

When I look at your.

Q4 to Q3.

Revenue compression, it's roughly about 26, 26, and a half million dollars at the midpoint.

Are you able to dimension, how much of that is from currency versus volume compression.

Yes.

I can help answer that question Arvind thanks for that.

You did mentioned currency that is part of it I think it's really important to understand in looking at Q3 revenue to Q4 revenues. There's a number of structural factors that really is driving the majority of the decline in revenues from Q3 to Q4. So exchange rates are going to account for approximately 1% of that.

In addition, there's one less week day in this Q4 versus Q3, and so that is another about 1.5%.

We've talked about the seasonality at various times, we've talked about it last year in Q4, I mentioned earlier on the call but.

Seasonality is a big factor for revenue growth in the fourth quarter for thought works.

Public holidays and vacation leave are significantly more in the fourth quarter than any other quarter in the year and so that has a big pack big impact and it's really easy to underestimate that.

Actually accounts for an additional approximately four 5%.

So a lot of it is really what we would call structural factors and just to help remind of dynamic that we saw last year.

Last year, we had year over year growth in the fourth quarter of 39%, which is clearly a very strong level of growth and even with that our revenues were flat from Q3 to Q4 and so they are definitely the seasonality impact at play here and that is going to cover most of it there.

We have already talked about some of the areas, where we're seeing just a little bit of softening in some caution but on the whole we are expecting solid growth, 15% in D. C y.

But it is a step down from the 24% that we saw in Q3.

Yes, yeah perfect. Thanks.

Thanks for that area.

But I guess.

<unk> has to go back to to kind of.

<unk> lost.

Lost earnings.

Yes things have gotten like.

Kind of a bit worse than what you asked.

Spitting last earnings.

And is that.

Paradigm actually whats changed.

From from last earnings.

All of these things like.

Kind of the.

Some of these types of things.

Already in clear right, but.

There was any extra additional headwinds from FX that.

Driving this Q4.

Great.

Versus what you were anticipating three months ago.

Yes so.

FX is definitely part of it so there was around 11 million.

And reduction in U S D revenues related to FX factors compared to guidance and a lot of that is in Q4.

And so that is clearly playing a part.

But I would also say.

We didn't see lots of clients, we're talking and.

Talking about potential macro factors that's been in the news for a long time that that's no surprise to any of us, but I think what has shifted a bit in the last.

Month or two is we have seen.

We have seen that play more into the contracting cycles and there's just a general more cautious tone as people manage budgets towards the end of the year and that largely is what we're seeing is a difference and Michelle mentioned.

We continue to have very strong win rates. It's just that we are seeing clients start engagements with smaller.

Smaller teams initially a big focus on ROI and in some cases clients have said, okay. Well. It is just going to make more sense to start this in Q1, rather than Q4. So we're just seeing a little bit more of that dynamic, particularly in the last month than we did in the third quarter and that is the other part of the difference.

Beyond the FX.

Perfect.

Appreciate it thank you so much.

Okay.

Yeah.

Thank you and one moment for our next question and it comes from the line of Dan Perlin with RBC capital markets. Please proceed.

Thanks, Hey, Eric I just wanted to.

I wanted to follow up a bit on this cadence as we think about what you have outlined a little bit for <unk>, I know youre, not giving specific guidance, but you've got 80% visibility.

I think to an earlier question you kind of alluded to sub 20 call. It maybe mid teens and you just outlined a lot of things is to structurally why theres a downdraft in the <unk>, but the absolute number for <unk> based on what you've said is a pretty significant.

Absolute dollar ramp sequentially. So can you just help us with why.

That would be the case, maybe there are some structural things we need to be mindful of obviously, we'll get back maybe the holidays and things of that nature, but FX will continue to be tough.

So anything there would be very helpful. Thanks.

Sure.

<unk>.

So if we think about the first quarter. So the structural things as we saw in Q1 of this year, they do provide a benefit into them.

From fourth quarter into first quarter. So thats a typical pattern for <unk>, we would expect to see that pattern continue next year.

<unk>.

What we should be aware of is that we've seen strong growth across the year and the we have very very strong growth in Q1, and Q2 of this year and then it's been a bit more moderated in Q3 and Q4.

As we consider growth into the next year, we've got to take into account the FX headwinds as you mentioned Dan.

That's a big factor for us, but then we also.

Just need to take into account also that macro uncertainty. So that said, we're not going to give specific on growth rates right now, we'll wait until February to do that.

But you know what what Shao said hold true we are expecting.

Solid growth for next year, but just given the current run rate and given the market dynamics that will be more moderated.

Leave in Q1, and then it will be.

Potentially in the second half of the year, So I would say and hopefully that is helpful. And then more on that in a few months' time.

That's great alright.

Alright.

I just had one real quick follow up in terms of utilization.

Is there a level of growth that we think about in order to maintain a margin expansion opportunity as we go into next year again I'm not looking for specifics for the guide, but just directionally.

Thanks, Dan Yes, that's very reasonable we do believe there are margin expansion opportunities again of course, we're too early to talk about the specifics.

We have opportunities to drive efficiency from an operational perspective, we've seen that this year and we expect to continue to see that next year.

That typically is relatively balanced across the quarters and so there is nothing specific to call out.

With respect to next year.

Again.

We are at lower levels of utilization, we're working on a program to drive them.

To drive increases there and some of that.

It happened through revenue growth, we expect.

So that will play we expect that.

That will benefit a bit in Q1, but the larger margin expansion opportunities are more isolated likely into the second half.

Good.

Excellent. Thank you.

Yeah.

Thank you and with no further questions in the queue I'll turn the call to call shall for his final remarks.

Thank you and then so thank you everyone for joining us today for our Q3 earnings call I'd like to acknowledge the.

The continued support of our board and shareholders.

And then in closing I want to.

All thought workers clients and partners.

The extraordinary impact we're delivering together every day stay.

Stay well and we look forward to catching up with you next quarter.

And with that we thank everyone for participating in today's conference and you may now disconnect have a great day.

Okay.

Q3 2022 Thoughtworks Holding Inc Earnings Call

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