Q4 2022 Thoughtworks Holding Inc Earnings Call
I'd like to thank every thought works around the world for the extraordinary impact they create throw 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 resilience in the face of unpredictability.
We continue to drive our business with rigor and discipline.
Managing supply and demand and being proactive with 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 long term differentiator.
We believe that <unk> have the best talent in the industry.
And our clients continue to value our people and our services.
Our clients are looking to digital innovation to help them navigate uncertainty.
We're seeing continued interest from clients in our data services, especially data mesh data governance, and how data can transform and scale their businesses.
We're seeing solid demand from our clients with our expertise in enterprise monetization and platforms.
We're also continuing to see client interest in our propositions that drive productivity and cost efficiencies.
For example developer experience platforms, which boost the productivity and retention of critical engineering talent.
Also our digital application management and operations offerings, which aimed to make customers software zero maintenance.
Within digital application management and operations. We apply ahead of the curve engineering practices like extreme programming and continuous integration continuous delivery see ICD to the post build phase of the software.
In this way.
Aimed to revolutionize digital operations by evolving the software run phase to be further automated and intelligence driven.
This will reduce client total cost of ownership of target software over a fixed timeframe with predictable costs.
And our clients continue to look to thought works to enhance their customer experiences and develop new digital products and services.
Removing friction and bringing customer facing services together in.
In January we published research in Association with Harvard Business review analytic services, showing that while 94% of business leaders say industry, leading customer experience is crucial to their business only 10% of customer experienced professionals say that their organization strategy is effective the <unk>.
Acquisitions of connected and handmade that we made in 2020 to have expanded our customer experience and digital products and services to further address this opportunity.
We're pleased with both the pace of integration and the leverage we're getting by working together with clients.
And you May recall two years ago thought was acquired for kite to boost our AI capabilities.
We believe AI is a significant opportunity and we have been investing for some years to build the capabilities.
It has to be interesting to see the renewed interest from clients in generative AI created in part by the recent launch of open the eyes chat GPT.
Our thought leadership article chat GPT, a useful tool buried beneath the hype has been well received by clients.
Enabled by our looking glass lens partnering with AI fireworks is helping clients navigate the risks and seize the opportunities of generative AI technologies in areas like AI augmented product development.
Our client, where we're achieving scale business benefits is mono Lee's international one of the worlds largest snack companies.
We have a work in close collaboration with them since 2019.
Helping their product developers create snacks in tandem with generative AI.
We have designed and built a AI augmented product development platform.
That enabled product developers a model is R&D to interact with machine learning models independently without data science expertise.
This amplified creativity has yielded amazing result, including faster experimentation and iteration capabilities that lead to better products with a reduced time to market.
For all these reasons, we believe that thought works is so well positioned in the market.
Now, let me share some more details of our growth strategies at the core our revenue growth is from deepening relationships with existing clients and winning new logos.
We then supplement this with focused strategies around M&A partners and geographic expansions.
Turning first to M&A earlier this month, we announced our acquisition that I talk a leading Amazon web services, a double as the bans to consulting partner and cloud managed services provider in Australia.
They have deep expertise with AWS services and have over 100, AWS certifications, including security and SaaS.
I talk 70 strong team has helped accelerate hundreds of clients' digital transformations through the creative and optimal use of their it infrastructure on a highly flexible AWS cloud platform now let me share update on partners as a growth strategy.
Our primary focus is to develop go to market partnerships with a hyperscale cloud providers, including AWS G C P and usher.
For example in the fourth quarter with published a case study about our previous work with Etsy, a global marketplace for unique and creative goods with over 90 million buyers as of the end of 2021 with similar etiologies of agile software development technology sustainability employee care diversity and open source.
And as he chose thought works as their strategic partner to assist scaling efforts and migration to Google cloud platform.
NSC relied on physical hardware in two data centers presenting several scaling challenges.
With our expected growth it was apparent that the cost would ramp up quickly.
The migration was eventually completed in nine months.
Less time than the full year originally planned with the Monolith, then tweaked and tuned to situate better in the cloud, adding features like auto scaling and all of the fixing bat nodes.
The observer ability stack was the last to move over due to the complex nature.
They require a rebuilt rather than a lift and shift.
Observer ability is the ability to determine the internal stays of systems from their output.
Rides a means to evaluate data in real time and build better software.
With <unk> commitment to hyper observation <unk> the amount of data being analyzed is in small parts.
Our deliverability itself series each team gets decide what he wants to measure <unk>.
<unk> 20 terabytes of locks a day.
To help you visualize the sheer daily volume 20, terabytes is equivalent to about 340000 hours of digitally stored music.
Large part of that because of the ability to stack, where move into managed services and third party SaaS products.
And after the cloud migration the optimization for the cloud didn't stop.
Each team continue to look for opportunities to utilize the cloud to its full extent.
For example, the move to the cloud enables etsy to build a new machine learning platform.
And to see Leverages machine learning to create personalized experiences for their millions of buyers around the world. We stayed up the our search <expletive> and recommendations.
Now, let me share three of the benefits NSE has seen.
First.
Seemingly small inefficiencies such as non vector rise code can result in a massive performance degradation and in some cases Odyssey has seen that optimizing a single tensorflow transform function can reduce the model run time from 200 milliseconds to four milliseconds.
In numeric terms, that's an improvement of two orders of magnitude, but in business terms. This is a change in performance easily perceived by the customer.
Second.
Our key metrics as time to productive the time it takes for a new engineered to set up their environments and make their first change.
What exactly that means changes by domain.
For example, it might be the first website push or the first data pipeline working in a big data platform.
Something that used to take two hours now takes 20 minutes.
Third another interesting stat is that the infrastructure has extended to US 10 times the number of nose, but only requires two times the number of people to manage them.
And I'm also pleased to share that in the fourth quarter, we achieved AWS machine learning competency validation of our differentiated expertise in AI and ml ops.
That works has strong capabilities in putting machine learning products into production to help our clients navigate the challenges ml and AI raise in production environments challenges that few operation teams will have faced before.
Now to our geographic expansions in.
In October we opened our new office in Ho Chi Minh City Vietnam.
This reflects star wars wider effort to geographically diversify our business and meet demand from clients in southeast Asia and Australia.
And to enable with ours to leverage the skills diverse talent base in Vietnam.
Turning now 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 to business outcomes.
Our clients appreciate the value, we create with them and increasingly look the thought works as a strategic digital transformation partner.
Able to scale and new technology across the enterprise.
For example, you may be aware that in 2022, 4% and ADT form a JV called canopy, whose aim is to fortify vehicle security using breakthrough technology the.
The F B I estimate that theft of equipment from inside vehicles in the U S cost more than $7.4 billion in 2020, what.
You may not know is that we partner with Ford early in this process to take what was a experimental project that Ford had built on raspberry Pi to something that could be launched to millions of vehicles.
Two value how to scale. The experiment, we developed a series of high fidelity prototypes.
We're running two end to end pilots with real users in the U S and U K.
These evaluated four areas manufacturing what does it take to create as a physical product installation what steps are required to install the device on vehicles performance. How does this pro forma actual commercial vehicles and usability is it easy to use and does it provide the intended peace of mind.
Canopy is in the product prelaunch phase and expects to launch its first smart vehicle security system offering this year and then a reclined authority brands, we have been deploying our digital application management and operations offerings.
Thought works partner with authority brands, the parent company of leading home service franchise brands to deliver a brand new state of the art field service mobile application.
So our focus is on the proactive management of software to reduce cost of ownership.
Maintain business resilience and ensure that the application software is cloud and future ready.
We work with authority brands to cost effectively maintaining and further develop the application, which enable our 30 brands portfolio brands to provide enhanced service and gain market share.
Now turning to new clients.
We have a focused approach the new clients helping.
Helping the organizations, we work with to deliver rapid business value from digital transformation.
We see continued momentum in new logo acquisition, and we have contracted with 33, new clients in the fourth quarter.
For example, we're working with our new client experience U K Ni experience is a world leading global information services company <unk>.
Experian UK Ni has chosen <unk> to assist with this technology transformation program.
You can find details of some of these customer successes on the new section of our website thought works dot com.
I'm now going to hand over to Erin so that she can take you through the numbers in greater detail.
Thank you Charles and thanks, everyone for joining US today, we were pleased with our performance this quarter with continued solid execution across our geographies and industry verticals. Our team continues to perform well, while navigating a cautious macro landscape.
Let me begin with a few of the highlights for the quarter and the full year.
Revenue growth for Q4, it was eight 3% compared to the prior year period constant currency revenue growth was 14, 7%.
Adjusted EBITDA for the quarter was $58 2 million and our adjusted EBITDA margin of 18, 7% with approximately 120 basis points higher compared to the midpoint of the range I guided to in November .
Q4, adjusted EBITDA margin expanded approximately 70 basis points when compared to the prior year period for.
For the full year 2022 reported revenue was $1 3 billion, representing 21, 1% year over year revenue growth and 26, 8% in constant currency.
For the full year acquisitions contributed approximately two percentage points to revenue growth.
Adjusted EBITDA for the full year with $256 8 million representing year over year growth of 17% now let me share some details.
Our clients remain committed to large digital transformation programs. However, we continue to see changed client behavior. Some clients are contracting in smaller phases to allow themselves flexibility and.
Sales cycles are normalizing from the accelerated post pandemic levels.
Despite near term caution across our client base the medium term demand environment remains healthy and clients value working with Thoughtworks. This is evidenced by our average revenue per employee of 108000 for 2022, which remains higher than the industry average our overall bookings at the end of 2022 on a T.
T M basis stood at one 4 billion, our revenue base remains well diversified across geographies and industry verticals in the fourth quarter North America grew by 14, 7% Europe by eight 2% Matan by four 2% and APAC grew by two 1%.
Our growth in APAC continues to be impacted by the COVID-19 situation in China.
I'm pleased with the results of our business this quarter due to the diverse nature of our business on a geographic basis 62, 5% of our 2022 full year revenues were contracted in non USD currencies.
As a reminder, our primary revenue generating currencies alongside the U S dollar or the euro great British pound and Australian dollar.
On a local currency basis during Q4, our revenue contracted in euros grew by 19, 3% Australian dollars by six 9% and great British pound by five 4% compared to the prior year period for.
For the full year, our revenues contracted in Australian dollars grew by 31, 4% euros grew by 25, 6%, great British pounds by 24, 3%.
We also continue to see growth across our industry verticals during the quarter the strongest growth during Q4 with an automotive travel and transportation growing at 27, 4%.
Energy public and health services grew at 13, 7% technology and business services grew at 10, 1% financial services was flat in the face of FX headwinds in our retail and consumer vertical decreased by four 9%.
As we shared previously and the retail and consumer vertical we are seeing normalizing spend after the post pandemic.
With the central retail continuing to outperform discretionary retail for.
For the full year 2022 around 87, 2% of our business came from existing clients. We now have 35 clients through 2022 revenues greater than $10 million five mark compared to 2021, a 16, 7% increase year on year.
We have a balanced customer portfolio with relatively low client concentration in 2022, our top five top 10, and top 50 clients generated 15.4% 24, 7% and 64, 1%, respectively as a percentage of total revenues moving.
Down the income statement.
For the quarter adjusted gross margin was 39, 7% compared to 42, 9% during the prior year period.
Full year 2022, adjusted gross margin was 41, 6% compared to 44, 2% for the full year 2021.
<unk> impacted both our quarterly and annual adjusted gross margin.
In the fourth quarter, our adjusted SG&A as a percentage of revenue was 22, 1%, which is better than the fourth quarter 2021 by 250 basis points and improved operational efficiencies.
The full year 2022, adjusted SG&A as a percentage of revenue was 22, 4% down approximately 90 basis points compared to 2021.
Adjusted EBITDA was $58 2 million for the fourth quarter and adjusted EBITDA margin was 18, 7% an increase of 70 basis points compared to the fourth quarter last year. This was due to improved SG&A leverage and a recovery of prior bad debt expense, partially offset by lower utilization.
For the full year adjusted EBITDA was $256 8 million up 15% from $223 2 million in 2021.
2022, adjusted EBITA margin of 19, 8% was down approximately 110 basis points from 2021.
GAAP diluted earnings per share with <unk> <unk> impacted by noncash stock compensation charges on an adjusted basis, our adjusted diluted EPS was 10 cents compared to nine in the fourth quarter of 2021.
For the full year 2022, GAAP diluted loss per share was 34.
On an adjusted basis 2022, adjusted diluted EPS was <unk> 43, compared to 46 cents in 2021.
Free cash flow for the quarter was $27 3 million compared to $18 2 million in the prior year quarter for the full year 2022 free cash flow was $64 9 million compared to $92 2 million in 2021, and we continue to have good liquidity our cash balance at December 31, two.
22, with $194 3 million.
Our debt continues to go down instead at $402 5 million as of December 31, 2022, and we further reduced the balance by $100 million in February .
In addition, during Q4, we upsized our revolving credit facility by 135 million to $300 million of total borrowing capacity. There is currently no outstanding balance on the revolver now.
Now I would like to hand back to shout to share additional updates on our business from the fourth quarter.
Thanks Erin.
Let me start with our amazing thought workers.
With a long term focus on diversity and inclusion our community of over 12500 thought workers included 42, 8% women and underrepresented gender minorities doublet <unk> M as of December 31.
We continue to improve our employee value proposition and we're pleased that attrition at the end of December 2022 was 12% on a TTM basis significantly better than industry norms.
Our better than expected attrition demonstrates the strengths of our employee value proposition.
We believe that <unk> has the best digital talent in the industry and this positions us well to create extraordinary impact for our clients.
Our annual employee survey in the fourth quarter showed the strength of our employee engagement with our score of $8 seven.
Placements all works in the top 25% in the industry.
Our diversity and inclusion score of nine places us in the top 5% in the industry.
This is a reflection of ours aligned values and cultivating culture.
In the fourth quarter, we're pleased that all works once again received great place to work certification in India, Chile, Ecuador and for the first time in Italy.
Our average Trust index score was 91%.
Increase from 88% in the third quarter.
Additionally, great.
Great place to work ranked Thoughtworks, Singapore, and Brazil, and a top five companies to work for in technology and it services.
Our priorities were thought worse to be a place for talented technologists to grow and have impact.
Our global with Glassdoor rating as a measure of the progress we're making.
In the fourth quarter of our overall rating was 4.47, which is again higher than the rating of the ITC services sector of 395.
We're known and thought leaders, who revolutionize the technology industry.
That's how we've built our brand our reputation from early days as a company.
I'm pleased to share that in January 2023, Thoughtworks was named as a brand finance services top twenty-five brand for.
For the second year in a row.
According to the Brent Finance report Thoughtworks has achieved one of the strongest brand strength index scores of 77.3 out of 100.
This places the flowers brand in the top five and it services sector.
Turning the AA plus rating.
Star Wars is also among the top 10 fastest growing it services brands with estimated at 15% year on year growth in Brent value.
I've also been proud of the work we're doing in the market and with the clients around the topic of responsible technology.
We published the state of responsible technology report last month in collaboration with MIT Technology review insights.
This is a landmark moment in charting the growing ballroom acceptance of responsible technology thinking it.
It builds on the work we've done in providing technologies methodologies and tools to help clients such as retailer H N M and German ride sharing service Moya.
In a responsible tech efforts.
Both clients made invaluable contributions to the report.
Now, let me hand back to Aaron.
Thank you Shao now, let me turn to our business outlook for Q1, and the full year 2023.
There is caution being exercised in the macro environment. Our clients continue to have ongoing needs for digital transformation, which drives them to thought works for.
For the first quarter of 2023, we expect revenues to be in the range of 303 million to $305 million, reflecting a year over year decline of negative five 5% to negative 5% or negative two 5% to negative 2% in constant currency.
We expect acquisitions will contribute approximately three points to revenue growth in Q1.
Given the more cautious demand environment, we are taking steps to better align our cost base with our revenue expectations, which includes head count management. These targeted actions will result in an approximate 4% reduction to our employee base. Please recall that our reported attrition figure of 12% as of this quarter is based on <unk>.
Trailing 12 month total.
Consequently, these actions will result in an elevated level of attrition until we lap. These changes in Q1 of 2024 in.
In the meantime, we will continue to hire on a limited basis with a focus on specialized skill sets and demand generation.
We expect adjusted EBITDA margin for the first quarter to be in the range of nine 5% to 10, 5% negatively impacted by approximately $8 million of nonrecurring severance related costs in the quarter.
For the first quarter, we expect adjusted diluted EPS to be in the range of three to four.
Assuming a weighted average share count of approximately 333 million diluted shares outstanding.
Our Q1 guidance incorporates share based compensation of $19 million turning to full year guidance for the full year 2023, we expect revenue growth year on year on a reported basis in the range of <unk>, 5% to two 5% or zero percent to 2% in constant currency.
We expect acquisitions will contribute approximately two points to full year revenue growth.
Our full year guidance incorporates modest sequential topline growth in Q2 with higher sequential growth in the second half of the year, we have increased our sales and marketing investments to drive additional demand generation and we remain optimistic about our growth prospects given our view into a healthy pipeline.
For 2023, we expect adjusted EBITDA margin to be in the range of 18% to 19%. We expect that our targeted actions will reduce our cost base by approximately $12 million in Q2, when compared to Q1.
Accordingly, beginning in Q2, we expect the go forward adjusted EBITDA margin that is in line with our historical EBITDA margin range.
We expect full year adjusted diluted earnings per share for 2023 to be in the range of 38 to 41.
Assuming a weighted average share count of approximately 335 million diluted shares outstanding.
We expect stock based compensation expenses of approximately 81 million during 2023.
Beginning in 2024, we anticipate annual stock based compensation to range between 2% to 4% of revenue.
In addition, we have switched to straight line expensing of stock based compensation from the previous accelerated method.
Accordingly, there is a recasting of historical financials, which decreased net loss in 2022 by $2 7 million and decreased 2021 net loss by $23 million now we would like to provide some context that is informing our guidance for Q1 and the rest of the year 2023.
First as we mentioned previously we expect some clients contracting behavior to be at more normalized decision cycles compared to the compressed cycles, we witnessed post pandemic.
Additionally, some clients continue to break larger digital transformation programs into smaller statements of work to provide themselves with flexibility.
Furthermore, some clients are in sourcing work to protect the jobs of their own teams.
Second we expect continued caution in our business in APAC into the first quarter, we expect the benefits of China's exit from the zero Covid policy to slowly materialized during the first half of the year.
Third we continue to see clients in the retail and consumer segment moderate spend due to additional scrutiny on budgets retail clients are being more cautious in response to overall consumer sentiment and economic uncertainty.
And we are also seeing this moderation of spending some of our clients in the technology sector and some of our clients balance internal and external supply in the context of available budget.
For 2023, we are focused on execution, while remaining vigilant of any potential impact of external factors.
Highly focused on cost management balancing supply and demand and investing in our growth while scaling our operations efficiently R.
Our value proposition and services remain highly relevant our clients are continuing with their multiyear journeys. Our renewal rates are strong we continue to stay close to our clients and expect to gain additional visibility as clients continue to finalize spend decisions.
We believe that our talent is the best in the industry and attrition remains low we will continue to calibrate supply and demand in order to balance solid utilization with an ability to respond to new and expanded opportunities now let me hand back to Rob. Thanks, Darren you can find our investor presentation on the Thoughtworks Investor Relations website.
We will now move onto Q&A I would ask that you each keep to one question and one 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 if you like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
While we compile the Q&A roster.
Our first question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Thank you so much good morning here I wanted to drill into the to.
Through the first quarter outlook, if that's okay, because we're two months in.
I think historically, we've seen sequential revenue growth.
And you're guiding to a decline so I just wanted to drill in on the how broad base.
Yes.
Weakness that youre seeing in the first quarter I know you mentioned normalizing sales cycles in.
Some evidence of in sourcing also the retail sector.
Broad based.
The change in demand and the slow start to the year.
It would be great.
Yeah.
Thanks, Tien tsin.
Q1 Q.
At were almost halfway through the current demand environment is we believe is still similar to Q4 as you mentioned, we expect a small revenue decline from Q4 to Q1.
Normally would've CAE, probably a bigger upside than the previous years and this is still a reflection of this macro headwind that's still persist in this market. We are seeing our clients are still being cautious and tight budget from a vertical perspective.
Tech and retail verticals are still underperforming, but we are seeing automobiles public and health care sectors.
Our over performing.
Do see stronger from a geo perspective headwinds in Asia Pacific.
Europe is doing better in North America.
Is having a more modest January than we've seen before but has seen a fast rebound in February and beyond Q2, and Q3 for sure. So.
Overall still cautious about Q1, but the pipeline is very healthy and they're active.
We continue to see the total pipeline.
Spend to a historic level one of the large opportunities setting for an office to work for the next few months.
Great.
Follow up to Joe.
I thought I heard Aaron correctly, you are increasing your sales and marketing to drive.
Some demand, but you're.
Did show a lot of sales and marketing leverage that I'm, just trying to think how you're balancing.
The margin.
Embedded in your guidance. So you are up in Europe .
Edwards.
Nathan savings. Another so can you just comment on on that balance as well as your visibility on utilization forget the.
Jumbled question.
More on margins.
No problem. Thank you.
Sure Andrew do you want to comment on that sure.
I'll start with your first point in Tianjin, which is around sales and marketing. So we are investing in our sales and marketing spend.
But overall, if we compare the margin guide for 2023 versus 2022 performance is relatively in line.
The the.
Sales and marketing spend our focus there is really looking for opportunities to drive efficiencies in G&A and then.
Reallocating that cost in that spend in the sales and marketing that's something that we really started doing as early as the fourth quarter of last year and continue doing into Q1 and will do so for the remainder of year.
Yeah.
In order to understand the margin for 2023, and just a little bit more color and commentary from me.
I think it's it's fair to say that our Q1 margin has been impacted I talked about the reasons why in my prepared comments.
But we're just remind in the Q1, we have about $8 million of nonrecurring severance costs.
That are impacting our first quarter.
After that in the second quarter, we do expect to see a margin returning to higher levels and further expect that are eight to margin is going to be stronger than our each one margin Tien tsin, you mentioned utilization.
And we are focused on driving higher levels of utilization in 2023, if you recall in the second half of 2022, we were operating at lower levels of utilization and that's why we made the decision to right size our cost base now.
And we are resetting early in the year, we will continue to manage our cost base as we always do our focus right now really is returning to growth and making sure that the spend is in the right areas for the business.
Great. Thanks for the complete answer there. Thank you. Thank you Bob.
Thank you. Our next question comes from Maggie Nolan with William Blair. Your line is open.
Thank you.
Can you talk through the pricing trends that you've seen in the last several months.
Little bit more granularity on kind of a month over month basis, as we think about how <unk> is developing.
Sure.
Thank you Maggie.
Yes.
We still in Q4, we saw low single digit pricing increase from a year on year perspective.
We certainly believe that the strategic partner position allow us to drive.
Generally higher bill rates for higher value add services in the market.
During the last few months, we do ourselves have seen more pressure from the our clients just in terms of general budgeting pressure.
And cost cutting measures, we have become more mindful of how much of our clients would be willing to pay.
Given these budget constraints.
We definitely observed more pricing pressure than usual, but not evenly.
Evenly distributed for a higher value services, we've seen.
Continued willingness to pay for the higher rates.
We definitely see is reflected more on the.
Mix of work, we see clients pushing more.
Okay.
Vanilla engineering work from onshore to offshore there they still willing to pay for transformation special skills as Fort worth down onshore. So that I think that change your pricing mix is where we're seeing more of an average downward pressure perspective on pricing than necessarily.
The average bill rate for the same work that we're doing for them and the same time given the macro constraint we are becoming very flexible in the short term to help our clients through difficult times.
<unk>.
Obviously, the most important thing for us and stay close to our clients focus on delivering value earlier with high quality. We believe that's how we win trust and commitment to the long run. So if you extrapolate forward. We believe that we're going to continue to see more pressure on pricing, but not again not significantly higher than what I see in Q4.
Thank you.
Obviously I can appreciate that it's difficult to get visibility into the COVID-19 policies in China.
How much of that risk or are you trying to take out of the model with the current guidance or how did you consider that when you were putting together the full year guidance.
We believe our guidance is appropriate and it also incorporate the risk we have seen China will believe is going to evolve.
Later this year.
We certainly saw a bigger impact from this from the strict zero Colby policy in Q4.
Which cause the economic slowdown in China. However.
Extending into Q1, the COVID-19 outbreak itself that following the lifting of the zero Copay policy also contributed to the slower growth in China in Q1.
That said we have seen.
The country largely.
Went through.
The first outbreak the major outbreak and then there hasnt been any signs of falloff later outbreaks, we expect China growth.
From an economy perspective.
<unk> has been demonstrating growth since.
Since January February this year, we expect China, our business grows to recover starting in Q2 on the back of accelerated economic growth.
Thanks for taking my question.
Thank you Maggie.
Thank you. Our next question comes from Bryan Bergin with Cowen Your line is open.
Hi, Thank you I wanted to dig in a little bit more on the types of engagement and client behavior. So can you give more detail on the type of work that clients are really deferred here.
Versus those that are continuous I'm trying understand what programs really fell out of the pipeline and can you draw any tangents to the early COVID-19 quarters as it relates to client decision, making and whether you think any of this work and come back quickly or not.
Sure. Thank you Brian .
So.
And we mentioned earlier the behavior change we are seeing from clients are mostly on the sales cycle. The deal size, specifically from a portfolio of the type of work perspective.
The biggest change we've observed.
Between early Cobian now is the or the post Covid and then now is the rotation from just growth purely growth oriented investments two to more efficiency oriented.
Initiatives investments.
We from a data perspective about 30% our portfolio. We believe at the beginning of last year 2022 was.
<unk> focus at this moment it is probably 50% and then slightly even slightly higher than that.
And then where we see the biggest traction is.
<unk>.
Engineering effective effectiveness platforms, we're providing allowing developers to be more productive this seems to be.
A bigger focus for our from our clients, where they are trying to incur.
To increase the productivity of their teams more than.
They were focusing on before.
And then.
I mentioned earlier that some of the work is being pushed more to offshore obviously a lot of engineering work is being pushed but a lot of transformation work.
A special skill sets are still in.
In high demand from our clients.
From a work perspective that you mentioned early during the early Colby quarters are they coming back.
<unk>.
From our portfolio perspective, we have.
Many of these programs are running a multiyear.
Our multi year programs.
Didn't disappear they just.
Didn't grow as fast as it was during those quarters.
We continue to work with most of our clients on these large programs of work that we believe they will continue we're also seeing some of them, especially.
In Q1 Q2. This year some of these were coming back there's definitely signs that despite the macro uncertainty.
The concerns.
That the client or clients are looking beyond 2023, looking at 2024, they believe that given the.
Macro conditions.
Four we are going to.
Likely see much healthier stronger economic growth and they're making investments from a growth perspective for me from a tech digital perspective trying to capture that growth. So we're seeing definitely green shoots and then lots of interest in that kind of work coming back.
Okay. That's helpful.
And then just a follow up here just considering the pricing trends that you had mentioned.
<unk> and I guess, the early part of 'twenty three.
Give us a sense on how you expect gross margin and per capita revenue to trend in 2003. After you get past <unk>.
Thanks, Brian start.
With respect to gross margin.
Yeah.
Again on the whole.
We'll expect to have particularly when comparing to the second half of the year.
Favorable impact on gross margin, resulting from higher utilization.
Typically from a pricing perspective, we're not seeing that as a significant impact on the margin when comparing 2020 due to our expectations for 2023.
So then if we just look at revenue per employee or the.
Per capita view.
We do anticipate our revenue per employee will see the benefit of higher utilization.
That said, there's various puts and takes in that is I know you realize she was already touched on.
Some of the work seeing some stronger growth offshore. So we do expect that to be a component. So there'll be a mixed shift and factor in there as well and that's been consistent for the last few years.
Okay. Thank you.
Thank you. Our next question comes from Jason Kupferberg of Bank of America. Your line is open.
Hi, Good morning, everyone. This is Tyler on for Jason Thanks for taking the question.
So first can you just speak a little bit more on the project elongation as you mentioned as one of the parts to the story.
The clients are breaking up projects into smaller pieces.
Is there a specific vertical or geographic tilt towards those delays.
And then also when clients break up projects can you just speak to the duration of those projects and whether its artworks as being able to win those follow on opportunities.
Sure so.
From a geography and vertical perspective.
It's pretty consistent across different regions and different verticals.
This behavior.
<unk> that you mentioned, we observed that in.
In all the verticals.
101, one for the ones that automotive and health care public sector, we've seen.
Strong growth in those segments.
In those sectors were seeing similar.
Contracting behaviors now the work itself many of them are the.
The programs are multi year programs.
During the post COVID-19 quarters clients were willing to sign up for a three year five year contracts right away in a single SW, sometimes we're not seeing them signing up for only 12 months or sometimes even six months.
<unk> to start with now with this kind of work.
In our experience in the previous.
232 quarters, and what we're observing right now they.
They are highly strategic and our win rate on the.
Renews, the extensions are especially high higher than the usual extensions and renews.
We've seen before so we're very very confident about the continuation of this work despite the contracting behaviors.
Okay. Thanks, I appreciate that and then also just on a sequential basis. It seems like the financial services and tech vertical has experienced.
The softest growth anything specific to call out there whether it's specific types of projects within those verticals that are more likely to be pushed out.
Or if the slowdown was driven more by a few larger client so broad based any sort of clarity there would be helpful.
Sure.
The changes in tech sector is less about the type of projects is more about.
Just the type of budgeting process, we're seeing from a tech technology clients.
We have all seen the technology sectors is taking.
On a lot of challenges recently, especially with our own cost base, many have announced layoffs.
And then as part of the results we are seeing more of our technology clients wanting to in source.
Work as much as we can so that they can keep their own people busy and so that's so that's one of the things that's causing a lot of the change of behavior from the tech sector from a sequential perspective for new services in fact that if we look at our our own portfolio is having a sequential growth but.
The reported number you've seen is mostly due to tough comps.
At the same time last year.
Or slightly earlier than last year.
Same time in Q4, the previous year, we saw a huge growth in the Finjan service sector. A lot. This is due to the crypto currency surge.
The rise of digital banks.
Especially the critical part of it has came down gradually last year. So from a year on year perspective, we are seeing more modest growth in the financial services sector, but sequentially is doing relatively well.
Okay, Great I appreciate the color. Thanks.
Thank you.
Our next question comes from Moshe <unk> with Wedbush. Your line is open.
Hey, Thanks, good morning.
Two follow ups.
One you mentioned the $1 $4 billion in bookings that's trailing 12 months I think Charlie indicated it's a record level kind of number.
Is there a way to kind of figure out how you know what sort of growth that would represent year over year. So that's my first question.
Yeah.
Up.
Sure So I think what I.
Was trying to highlight is our pipeline is at record level from a booking perspective. The one 4 billion is relatively flat from last two quarters.
If we adjust it by the foreign exchange the currency.
Exchange.
The part of the reason our bookings is not increasing.
At the same pace of the pipeline is because the deal size being compares were signing smaller sw's to start with but the overall pipeline. The kind of work we know that we're going to get we're seeing our clients are committing to is their healthy so that.
To your point Moshe that's exactly what we're seeing right now and then we observed that inbound outbound. These overall size of the pipeline continues to expand we added 33, new new logos we.
We have a large size of opportunities in front of us to execute so we feel that while a bit.
Uncertain.
It's been modest.
We do believe that if we execute against that pipeline, we should be able to see sequential growth from Q1 to Q2, and then even more additional incremental revenue from Q2. The Q3 two later this year.
Okay understood and then.
I think Aaron you spoke about some clients are still finalizing some spending decisions.
This is a pretty big deviation from prior years I guess, there's maybe.
One to two months kind of delay in budget decisions is that what youre seeing out there and then.
One I mean, what sort of indications are you getting about some of those when do we get that.
Timeframe, where clients are kind of done finalizing those spending decisions.
Yes.
We think there most of them are close to be done. It is absolutely you're right, we're seeing unusual budgeting behavior where January .
Towards the end of February some of them are still.
Finalizing their budget.
It's definitely at least two to three months sometimes.
Sometimes longer than we've seen in the previous years now what gave US comfort is that first.
First of all the challenge was due to that was a lot of the work that we were committed.
Earlier to start Couldnt start because of the budgeting cycle and then some of the decisions impacted.
Impacted our clients priority.
We've seen work has stopped and then start.
During January and sometimes in February that's I think why we're seeing a more of a modest January in North America. We think that majority of this decision makings are behind us right now.
Your European based customer base.
Customers.
Uhm.
We.
We felt more of that in earlier last year in the Q2 Q3 timeframe. Since then we have seen reasonably strong tailwind in especially in the automotive sector's, which we think all set some privacy the other sectors like retail so overall.
We've seen pretty steady growth in Europe , I think the the the the overall automobiles the automotive sector.
Focus on digital electric cars are taking the center stage and many of the car company's future strategy, that's driving all the gross we're seeing at this moment.
Understood. Thank you thanks for the call.
Thank you motion.
Thank you and our last question comes from Arvin, where I'm 90.
Piper Sandler your line is open.
Uh huh, thank you I.
Just.
One or two follow up on guidance.
Yeah certainly.
I mean, your guidance is better than expectations and try and understand what assumptions have included in physical 23.
Especially when you're trying to figure out how to any client specific large clients that same dynamics are are there.
Specific parts of the business that I, particularly weak that have been included.
You know just just really kind of figure out is it more like downside of conservatism sort of built built into the estimates. That's a quick question and then I have a follow up.
Sure sure. Thanks, Alvin So first of all our our guidance are we believe is appropriate and then I think what you observed Q1 is below expectation was mostly due to from a year your comparison perspective due to.
The larger slowdowns the drawdowns, we've seen Q3 Q for compares whereas perhaps some of the peers and then the two main reasons from from flower from Power's perspective was the higher APAC exposure and higher onshore head count as we.
We've talked about before as some of the clients rotate work two offshore hour onshore mix, which is about 25% compare was.
<unk> around 10% was the main difference that we've seen Q3 Q for now if we.
Project forward and even just look at from Q4 Q for the Q1 and Q1 too.
Just mathematically if we <unk>.
If we look at a full year guidance are sequential grows from Q1 throughout the year of 2003 is pretty healthy pretty in line with our peers reporting now we are definitely feeding that.
H two this year, we should see more incremental higher grows, especially with a stabilized outlook. We expect our clients to return to more typical buying behavior, where does but we're not forecasting macro to change significantly later this year.
What we believe give us the confidence of the sequential grows are twofold, one is <unk>.
Just mentioned that we continue to see a large sizable opportunities sending in front of us.
And our pipeline continue to to grow and offers significant opportunities ahead of us. The second as I mentioned earlier, we are making a lot of folks and investments and driving additional growth.
Not just in sales and marketing capacity or investing more in vertical is that are we believe resilient in this current microenvironment public energy health care sector. For example, it is now roughly 25 per cent of our global revenue Automotives Automotives and finished services. We're also focusing our service offerings.
That's really catching on with our clients intention focus on efficiency and cost saving programs. For example, engineering infection is platforms and also digital application management and operation Operation services. So we feel that we've done the right thing we're investing in the right area, we feel that.
Sequential grows from Q1 two later this year, we feel confident about what we're guiding.
Perfect.
Thank you for that and then.
Just a follow up question here.
Taking some cost actions, even given kind of just the reality of the business environment.
But.
In terms of like like a turn in demand like when things really started to pick up you know I'm sure.
And a three higher and kind of X rayed.
Kind of.
Headcount growth.
But what are some of the science, you're gonna you're looking for to to kind of Mart like kind of a change or pick up in in the in the end market.
We we have so for us is really that demand outlook. We're looking at in terms of what's in the pipeline, we're getting close to be signed.
What kind of deals are high confidence of renewing and the expansion and you're you're right <unk>, we are going to need to hire people. If you want to capture the gross we believe should come later this year and then but even despite the changes will making recently, we feel that we are.
Are.
The realignment, we're doing is exactly what we need to prepare ourselves for the for the for the gross later this year there will be different skill sets require different kind of allocation of capacity, we need onshore versus offshore the skills as we need in different places and we also believe that the.
<unk> recruiting efforts will vary from region from country to country different countries will have their different behaviors in terms of their grocery protectorate. Later this year <unk> recording decisions will be driven by the more nuanced demand outlook for country itself.
Perfect. Thank you very much.
Thank you Arlene.
Thank you at this time I'd like to turn the call back over to jail for closing remarks.
Well, thank you and thank everyone for joining us today for the four Q earnings call I would like to acknowledged the continuous support of our board and our shareholders and in in closing I'd like to thank all how workers clients and partners for the extraordinary impact we're delivering everyday together.
Stay well and we look forward catch up with you next quarter.
This includes the program you may now disconnect everyone have a great day.
[music].
[music].
So.
[music].
Mmm.
[music].
Okay.
[music].
Mmm.
[music].
Okay.
[music].
Please.
[music].