Thoughtworks Holding Inc. Q1 2023 Earnings Call
The press release was issued earlier today and is also available on our Investor Relations page at <unk> Dot com 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 R.
Quarterly reports on Form 10-Q, and other reports we may file the S. You see from time to time.
Risks and uncertainties could cause actual results to differ materially from those expressed on this call. These forward looking statements are made only as of the date when made.
Call today will reference certain non-GAAP financial measures will also provide growth rates in constant currency as a framework for assessing how our underlying business performed excluding the effect of foreign currency rate fluctuations. We include non-GAAP to GAAP reconciliations in our press release furnished as an exhibit to a form 8-K, 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 that works assumes no obligation to update or revise the information presented on this conference call I'll now hand over to shop.
You, Rob and welcome everyone to our first quarter earnings call I'd like to start by sharing overall update on our business and then area would take you through our first quarter results in more detail I will then share some our business highlights before Eric provides guidance and we open for Q&A, Let me start with a recap of about how it works.
We're a global technology consultancy integrate strategy design and engineering to drive digital innovation.
We market Big milestone this week with hours towards 30 years old I joined <unk>, almost 24 years ago and I'm proud of the impact we've had our clients and the world at large our services have helped to transform industries.
New opportunities that make people's lives better and that's something to celebrate I'm pleased to report good results in our first quarter 2023.
Driven by the continued demand for our digital transformation services.
We delivered revenue of $307 million in the first quarter of 2023 three.
3 million better than the midpoint of our guidance.
We contracted with 47, new clients in the quarter and our overall bookings at the end of Q1 on a TTM basis stood at $1 $5 billion. We now have 39 clients with revenue greater than $10 million on a TTM basis.
26% increase year on year, though the commodity environment is less bullish than a year ago, our sales pipeline is building well.
Our proactive investments in sales and marketing are starting to show results and we're seeing larger deals in the pipeline at the end of March 2023, we have 11840 <unk> workers in 18 countries across five continents.
The number of thought workers employed at the end of the quarter factors in some phasing of employee reductions due to the it doesn't enforce program. We conducted in February and March 2023, the RIF program impacted approximately 4% of our workforce.
We will continue to hire specific skills.
We're driving our business with rigor and discipline, while managing supply and demand.
As we exit the first quarter, we're pleased that our utilization is now in line with our target operating levels.
I would like to thank every thought walk around the world for the extraordinary impact they create through our technology excellence and culture.
And for their commitment during this time.
Global uncertainty continues in the first quarter. However, the recent volatility in the banking industry had minimal impact on thought works.
We continue to stay close to our clients help.
Helping them to be adaptive to change and get better returns from their investments in technology for many businesses keeping up with technology can be a real challenge given how rapidly the industry changes.
To address this gap with publish our annual technology vision, the towers looking glass, which identifies six mega themes. These teens represents significant opportunities for our clients effort. All works this year's themes, which we call lenses.
Include platforms as products.
Making the metaverse and partnering with AI.
With each lengths, we categorized hundreds of trends in two dimensions.
Horizon scanning plus our recommendations.
Looking glass helps our clients, making form decisions about what technologies do prioritize to best capitalize on opportunities.
Let me share some examples of our technology vision in the context of recent client work first platforms as products designing and delivering platforms, which are relentlessly committed to end user value with our client first student.
We're working to deploy a digital platform to help address nationwide bus driver shortages and provide a reliable cost effective transportation to students with special needs first student is north America's leading school transportation solution provider.
Completing 5 million student journeys each day together, we've created a digital platform on AWS.
The platform enables first student to work with third party transportation providers to leverage their unused hours of drive time.
Among the platforms the benefits is data analytics.
This matches student needs to specialized vehicles frame.
For instance, those words wheelchair ramps the platform helps provide timely or route efficient transportation.
And it is having a stronger impact on experience of drivers students and parents. The second example of our technology vision I like to talk about is making the meta versus how.
How extended and augmented reality enables new forms of connection we are working with Google public sector to digitally transform the visitor experience at the Abraham Lincoln Presidential Library, and museum or a collaboration we use artificial intelligence extended reality and augmented reality technologies.
These will be hosted on Google cloud to create assessable engaging and interactive visitor experiences with this partnership the museum, we use XR to bring American history to life for millions of visitors.
The third example, I'd like to share is partnering with AI and machine intelligence becomes a mainstream.
We're seeing this trend in the automotive sector around software defined vehicles and autonomous cars.
We recently won a new contract with existing client one of the top 10 automotive companies in the world.
To provide a fully managed off-board AI platform to stack.
This enables it's data science team to provide AI connected services and products and used vehicles.
Partnering with AI is a subject of great interest to clients.
They are asking us how they can capitalize on the opportunities driven by chat GBT and other large language models, what other themes, we're seeing from customers looking to partner with AI let.
Let me share a couple alongside all works zero to one part of innovation capabilities, we're helping clients answered the question.
How should I be thinking about using generative AI, a larger language models to support product and customer experience.
Another theme is software development productivity.
Our recent work with clients pointed the productivity to be gained by using large language models.
As a junior partner in software development.
It's always engineer provides architecture guidelines and the AI codes accordingly.
It's recently been to engineer and the AI collaboratively work together to refine the output.
Early test is encouraging and we observed good productivity gains with AI assisted software development working with our clients. We're also embedding guidelines for ethical and responsible application of AI.
You can read about our learnings in a recent article called an example of large language model, prompting for programming.
But Martin Fowler Chief scientist.
We also continue to see interest in our propositions that drive productivity and cost efficiencies.
For example, engineering effectiveness solutions, which boost the productivity and retention of critical engineering talent.
Also our demo managed services offering helps our clients achieve zero maintenance of their software by leveraging our strength in digital application management and operations five of our top 50 clients sign up for demo services in Q1.
For all these reasons, we believe that ours is well positioned in the market.
Now, let me share some more details of our growth strategies.
Core <unk>.
Our revenue growth is deepening our relationships with existing clients and winning new logos.
We then supplement this with focused strategies around M&A partners and geographic expansion first let me provide update on partners or.
Our primary focus is to develop go to market partnerships with a hyperscale cloud providers.
Clothing, AWS G C P and Osha <unk>.
Directionally our goal is to drive 25% of our revenue growth by working with partners.
We're continuing to invest in our partner capabilities in the first quarter, we achieved a swap of certifications and specializations.
These include AWS data and analytics competency, Google cloud data analytics services specialization.
Microsoft data AI solutions partner designations.
Turning now to our client portfolio the depth of our expertise and breadth of our capabilities means that we can help clients address a broad range of challenges.
We assist from strategy right through to business outcomes.
Our clients appreciate the value, we create with them and increasingly looks to thought works as a strategic digital transformation partner able.
<unk> scale and new technology across their enterprise.
This is reflected in the nine year average tenure of our top 10 clients at the end of 2022.
For example, southwest has had a long term digital partnership with MYOB. Since 2019, MYOB is a leading provider of business management solutions.
We're pleased to have signed a new contract submitting the partnership for another five years, the signing positions <unk> to continue to work with M. I obese most important digital initiatives.
Ours has been working with Singapore Government Technology Agency Gov Tech for around six years.
In 2019.
We began our partnership with <unk> Tec impasse Singapore's.
Singapore's National digital identity initiative MDI endy.
India is a government strategic national projects to drive and adopt digital technologies to support the city States digital transformation into the world's first smart nation. The evolution of impacts focuses on three goals first to build a trusted secure and innovative platform.
Second too.
To offer our entire ecosystem of services to Singapore residence and third to be cloud native to provide flexibility scalability and reliability.
<unk> is now one of the worlds, leading NDA platforms used by more than $4 5 million Singapore residents.
Transactions that previously took days or hours to complete offer requiring physical visits now take minutes.
They can be performed from anywhere with Internet connection.
As of March 31, 2023.
<unk> offers seamless access to more than 2000 and services from 700 organizations. It supports more than 350 million personal and corporate transactions every year its evolution as a trusted all in one services App is ongoing.
Now turning to new clients.
Have a focused approach to new clients.
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 47 new clients in the first quarter. We are working with new client total why a more T. W. M North.
North America's largest independent retailer of fine wine spirits, and beer and related products, we have a multiyear agreement to apply the building blocks of a modern digital business.
Were working on T. W. <unk> enterprise resource planning applications with Microsoft Azure.
By embracing a product centric delivery model the engineer team will be able to innovate and evolve legacy applications. This includes those that support our merchandising and supply chain processes, helping to drive productivity and effectiveness.
You can find details of some of these customer successes on news section of our website <unk> Dot com.
Now going to hand over to Erin so that she can take you through the numbers in greater detail.
Thank you Charles and thank you to everyone who has joined today's call.
We are pleased to announce our Q1 results with both revenue and adjusted EBITDA margin exceeding the guidance that we provided in February revenues in Q1 declined 4% year over year to $307 million and constant currency revenue declined 1% compared to the prior year period.
Acquisitions contributed three percentage points to revenue growth in Q1, adjusted EBITDA for the quarter was 35 million equating to an adjusted EBITDA margin of 11, 4%.
Thankful for our team's ability to execute in the midst of a difficult macro environment as.
As we've previously outlined remaining close to our clients is a core strategy, while we navigate today's landscape and our sales efforts are driving results. We are partnering with our clients as they undergo their long term digital transformation.
And we are working closely with clients with short term decisions within long term programs.
Our clients recognize our thought leadership and value working with thought works. We see this reflected in our annualized average revenue per employee, which was $100000 for the first quarter and remains above the industry average while some clients still exhibit caution in their buying patterns are solutions remain highly strategic.
Let me share some additional details about the quarter.
Our overall bookings at the end of Q1 on a TTM basis stood at $1 $5 billion, we have a well diversified revenue base across geographies industry verticals and clients.
Europe was our best performing region on a year over year basis, followed by APAC North America than Latam due to the diverse nature of our business on a geographic basis, 65% of our first quarter 2023 revenues were contracted in non USD currencies.
A reminder, our primary revenue generating currencies alongside the U S dollar or the euro great British pound and Australian dollar.
Turning to our industry verticals automotive travel and transportation continues to be our fastest growing vertical rising 22% year over year.
NRG public and health services saw solid growth at 9%.
Services declined by 6% technology and business services declined by 13% and our retail and consumer vertical decreased by 23%.
For the first quarter on a TTM basis around 89% of our business came from existing clients.
We now have 39 clients with revenues greater than $10 million on a TTM basis eight more than the first quarter of 2022 or 26% increase year on year.
We have a balanced customer portfolio with relatively low client concentration in the first quarter, our top five top 10, and top 50 clients generated 17%, 27% and 67% respectively as a percentage of total revenues.
Adjusted gross margin was 36, 4% for Q1 compared to 45, 6% during the prior year period utilization was primarily responsible for the yearly decline, but I am pleased to share that we exited the quarter with utilization in line with our target operating levels.
In the first quarter, our adjusted SG&A as a percentage of revenue was 25, 1% compared to 22, 6% in the prior year period.
Adjusted EBITDA was $35 million for the first quarter and adjusted EBITDA margin was 11, 4% adjusted EBITDA margin declined year over year from lower utilization and the recognition of approximately $6 million in severance related expenses.
Q1, GAAP diluted loss per share with <unk> compared to a loss of 14 cents in the prior year period.
Our adjusted diluted EPS was <unk> <unk> compared to 13 for the first quarter of 2022.
Free cash flow for the quarter was $31 million compared to negative free cash flow of $11 million in the prior year quarter.
We have ample liquidity with a cash balance of $109 million as of March 31, 2023, alongside an undrawn revolving credit facility.
We continue to reduce our outstanding term loan, which stood at $301 million as of March 31, 2023, following a $100 million prepayment in February .
Now I would like to hand back to shout to share additional updates on our business from the first quarter.
Thanks, Erinn, let me start with our amazing thought workers with a long term focus on diversity and inclusion are community of 11840 thought workers included 43% women and underrepresented gender minorities W. E. G M as of March 31, or.
Our voluntary attrition of 13, 1% on a TTM basis demonstrates the strengths of our employee value proposition.
We believe that ours has the best digital talent in the industry and this positions us well to create extraordinary impact for our clients in the first quarter. We're pleased that towers have actually a great place to work certification in 13 countries with average Trust index score of 90%.
Our priority is fatah worse to be a place for talented technologists to grow and they have impact.
Our global Glassdoor rating is a measure of the progress we're making.
In the first quarter. Our overall rating was 4.0, H, which is higher than the ratings for the it services sector of $3 91, we're delighted to be ranked ninth of Linkedin top companies 2023, the best workplaces to grow your career in the U S.
Linkedin ranked companies based on eight pillars that lead to career growth using data from Linkedin talent insights the.
The pillars include the ability to advance skills growth external opportunity and gender diversity and the ability to events pillar tracks employee promotions within the company and when they move to a new company SKU growth looks at how employees are gaining skills while employed at the company now.
I hand back to Eric Thank.
Thank you Shao turning to ESG I am pleased to update that in the first quarter thought works science based climate commitment targets were validated by the science based targets initiative you.
You can find details of our <unk> targets in our investor presentation.
As a cofounder of the Green software Foundation thought works is committed to helping our clients adopt sustainable technologies, while we've reduced our own carbon footprint in the first quarter thought works undertook a sustainability tech assessment for zero to explore how technology can accelerate achievement of its sustainability goals.
And the engagement of roadmap with developed categorized into now Nexgen later horizons for helping to achieve tech enabled organizational sustainability goals.
Now, let me move to our business outlook for Q2 and for the full year 2023.
Both new and existing clients continue to engage with thought works to drive their digital transformation journey. These needs remain intact and our pipeline continues to grow.
For the second quarter of 2023, we expect revenues to be in the range of $300 million to $304 million, reflecting a year over year decline of negative 10% to negative, 9% or negative 9% to negative 8% in constant currency.
For the full year, we expect a revenue decline of 3% to 1% or 3% to 1% in constant currency.
We expect acquisitions will contribute approximately two points to revenue growth in Q2, and two points of growth for the full year.
We expect adjusted EBITDA margin for the second quarter to be in the range of 15% to 16%.
For the full year, we expect adjusted EBITDA margin of 17% to 18%.
For the second quarter, we expect adjusted diluted EPS to be in the range of three to four.
Assuming a weighted average share count of approximately 329 million diluted shares outstanding for.
For the full year, we expect adjusted diluted EPS of <unk> 31 to 34.
Assuming a weighted average share count of approximately 333 million diluted shares outstanding.
Our Q2 guidance incorporate share based compensation of $18 million for the <unk>.
Full year, we expect share based compensation will total $76 million.
As a reminder, beginning in 2024, we anticipate annual stock based compensation to range between 2% to 4% of revenue.
And we would like to provide some context that is informing our guidance for Q2 and the rest of the year.
First the general contracting environment is similar to what we noted last quarter, but there are incremental green shoots clients are discussing larger more widely encompassing projects compared to earlier in the year.
We still see elongated sales cycles and clients continue with more incremental ramp up but the size and scope of our pipeline is strengthening however pipeline conversion is moving more slowly than previously anticipated and we are therefore seeing a slower ramp up in certain projects. This has led to our revised full year guidance.
We are seeing resilience in Europe , and early signs of recovery in China as we enter Q2, we continued to see caution exercised in Australia. While continued strong growth in India serves as a positive offset within APAC.
The environment in North America remains relatively in line with last quarter third and consistent with recent quarters, we still see strength in our automotive vertical while technology and retail verticals face pressure.
Lastly, we continue to build our outbound sales generation capabilities and we are seeing progress we saw strong bookings in the quarter, while also bringing in 47 new logos.
In 2023, we remain focused on executing against a robust and expanding pipeline, while managing our costs balancing supply and demand and investing into our growth initiatives. We continue to believe that our talent represents the best in the industry and I am extremely thankful for the efforts of all thought workers as we navigate this macro environment.
Ironman.
Will remain close to our clients as our services remain a key element of their multiyear digital transformation journeys. Our renewal rates are strong and we are growing the number of 10 million dollar annual revenue clients underpinned by a highly relevant and service offerings and let me hand back to Rob.
Thanks, Erin you can find our investor presentation on the thought works Investor Relations Web site, 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.
Later would you please provide instructions for those on the call.
If you would 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.
First question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Hi, Thanks, so much great to talk to everyone again today I am not sure just to ask it upfront.
If you can comment on some of the press reports of a.
It would take private bid for thought works.
It's always tough to assets on a public call, but we're getting questions on it. So I figured this is a good opportunity to ask your thoughts on leverage and.
Just the news itself. Thank you.
Thanks, Tien tsin.
As we all know that we as the management team is mostly focused on execution of our strategy our people deliver value to our clients and growing our business over time.
Obviously, if there is any offer on the table is the board's responsibility to evaluate carefully but.
But we as a management team, where we're not in position to speculate.
Or will comment on any street rumors.
Very good I appreciate it.
Well I asked the question, Jeff So let me ask on the on the business side Directionally very consistent with what we've heard from.
From some of your peers I know you mentioned some of the.
The turmoil in the banking system, which happened in March so I'll ask on just maybe a little bit more detail on how.
The demand environment shaped up as the quarter progressed and as we went into April do you have any exposure on the on the financial services side that we should be watching for example, I think.
And you didn't mentioned financial services as you called out so just any update on the on the cadence of demand.
You played out thank you.
Sure.
So first of all the banking crisis we.
Kind of mentioned briefly that we don't have any direct exposure very little direct exposure to the to the to the crisis itself and then we did decide to invest intelligently in the financial services sector last year, knowing that we only have maybe lessen.
Listen, 70% to 80% of revenue.
All of our entire portfolio that's in this sector.
Sector, that's going to it's still going through a lot of digital transformation, we believe theres a lot of potential in the long run so we did invest in it.
And then despite the current headwinds in the sector, we feel strongly about the long term potential. So we'll continue to focus on it but just generally you ask Tien tsin that the demand environment, we're coming into April .
Still similar to the recent quarters, we have commented before.
Macro headwinds persist clients are cautious and tightened budget.
But we're seeing more and more conversations about larger programs of work in fact that we're starting some of them. It's just that they're ramping up our Morgan are kicking in later during the year in Q3 and later.
So overall still cautious tied on budget, but where.
We're optimistic about the pipeline the health the health of the pipeline the activity in the pipeline and also the conversations we're having with our clients about larger programs of work started.
Great. Thank you for your thoughts.
Thank you.
Our next question comes from Maggie Nolan with William Blair. Your line is open.
Hi, Thank you.
Don't know if we should expect any further changes in your cost initiatives in light of the lower expectations for revenue.
Can you give us an idea of what adjusted EBITDA margin would look like in Q3 compared to Q4.
Hi, Manny sure. So just in terms of how we're managing our costs and our cost initiatives.
There is two primary focal points. The first one that you've heard us talk a lot about in prior quarters and remains.
On driving higher utilization, so as we look to incur.
Increase our EBITDA margin levels across the year.
Big piece of that is the increased utilization expectation.
We are managing our head count very closely.
Just a low number of hires we are hiring but we're hiring and very limited places and so as we continue to have.
Normal course attrition voluntary attrition then that is a good path along improving utilization as well as the increase in the topline that we anticipate in the second half.
In terms of just overall SG&A management again. This is a continuing theme for us our focus on our focus is investing in sales and marketing spend that remains a commitment for our business and we did see that in Q1, and we continue that in Q2.
So we will do that as Joe talked about in some of his earlier comments, we are starting to see the benefits of that pay off.
Good signs there.
So if we look at G&A on the whole we are investing in sales and marketing we're looking to continue to drive efficiencies in G&A. So it's really about where that spend is while remaining thoughtful about discretionary spend and keeping that too limited amounts.
And then in terms of the margin in second half of the year Q3 Q4.
I would just remind everyone. There are seasonality factors that are at play with respect to margins.
Q2 does tend to be a quarter, where we have lower margin seasonality Q3 tends to be higher.
And then Q4, a little bit lower so.
We have no reason to believe that normal margin cadence I wouldn't apply for this year.
Thank you and on some of the more cost focused solutions that you've you've announced like the engineering effectiveness solution in there.
Digital application management are those playing a role already in some of the new logos that you signed this quarter or how is the demand looking for those and what impact are they having on the pipeline.
Yeah.
I'll take that question Terry.
Thank you Maggie.
Thank you for calling out those two new services offerings that we put out there we're definitely seeing a big uptick on these two specific new offerings, that's cost oriented, especially definitely in the new logos, we acquire Q1 this year.
By definition some of these engagements are smaller given that their cost oriented they're focused on taking out some of the costs that were clients are.
Looking at and then.
We mentioned earlier that the top 50 declines we're also getting.
Engagements in these two areas.
Size of the new logos, so we're seeing a pipeline developing and we're seeing new opportunities getting started they might start small, but we believe that it's going to give us.
Bigger baseline of revenue in the following quarters.
Okay. Thank you.
Thanks Maggie.
Thank you. Our next question comes from Matthew Roswell with RBC. Your line is open.
Yes. Good morning. Thank you for taking my question I guess thinking about.
The delays in the pipeline implementation how much of that is just clients being cautious sort of about changing things given the macro environment, how much of that is because budgets might be constrained.
Bob.
Thanks, Matt, it's a little bit of both.
We were seeing some of the ramp ups.
Starting later and starting smaller than we thought it's mostly because the clients are cautious with sign up these bigger deals as you can tell from the stronger booking we have in Q1, we had our TTM bookings now $1 5 billion.
Compared with $1 4 billion in Q4 is that lots of signing a revenue is has contracted but the ramp up is getting slower than we thought mostly because of coins are cautious they want to start small and they want to.
Proof that it's working before the or at least see that risk is not as big as we thought before they ramp up to a bigger team. So that's one factor. We're also seeing some of this is due to budget constraints that that.
Instead of <unk>.
Especially our existing work streams instead of continuing with certain amount of our budget.
And sort of on the size of the team, we're seeing some pressure downward pressure or reducing the team size. That's what mostly gave us the cautioned about Q2 and then.
And then both factors placed in to some extent.
As in the current macro environment.
Okay, and I guess as my follow up for Aaron.
Should we think about any changes in seasonality when it comes to the revenue cadence between third quarter and fourth quarter, given the possibility of these ramp ups.
No I don't expect any changes in the cadence around revenue seasonality. It really our expectation is that it would remain similar to prior years in.
In line with what I just mentioned the Maggie's question are there.
Okay. Thank you very much.
Okay.
Thank you. Our next question comes from David Koning with Baird. Your line is open.
Good morning, Thank you everybody I guess.
My first question.
When we look at top clients top five clients and in the filing.
Excuse me I think they were up 9% year over year, so pretty good trends there and then the non top five clients and we kind of did the math I think were down 7%. So a pretty big disparity is is there something to that either bigger clients are actually spending more right now or maybe the acquisition brought on one or two very very large clients.
This quarter and maybe just kind of talk through that.
Sure. Thanks, David.
Our top five clients are similar to the top five in fact that we look at those top five top 10 top 50, our larger clients cohort.
Indeed, our growing faster than the longer tail of smaller clients that we have over this period of time and is not because we just brought in one or two of them in fact of our top 10 average tenure of our top 10 clients was nine years, so they're pretty stable cohort now.
We believe that the fact that they are growing faster in our portfolio is both because.
For two reasons one is in the current macro environment when it's tough.
We are we have a better chance of.
Going for expansions extensions with existing customer then ramping up big projects with new logos of worried a bit more risk averse at this moment joined trying to try new new partners new things.
And the second is that with our with the top clients. We have they are also going through in this current environment.
A bit more vendor consolidation than they would otherwise do in a normal time, we actually benefiting from that we believe were taking more wallet share.
With our top 50 clients. During this time. So so that's that's the second reason, we believe that we're going growing faster where the top clients are.
Like I said, it's not just top five as top 10 top 15, and then the other I think data. We said earlier is that we now have 39 clients that have a TTM revenue of over $10 million.
Compared with 31, a year ago.
Got you. Thank you and just my follow up gross margin.
I think was like 36% compared to 45 in the in the last Q1.
Do you expect that to recover like towards the back half of the year will it be pretty flattish with the back half was about 40% last year like just kind of how do you see the cadence of improvement in gross margin.
We do expect that to recover we are in fact seeing that in.
In the second quarter already.
Don't see the full extent of the recovery until we get to the back half of the year and again that's in line with the improvement around utilization that we talked about.
But with respect to gross margin of course, our Q1 was impacted by the onetime costs related to the reduction in force.
In total the costs were about $6 million and a lot of that was included in gross margin so that impacted Q1, specifically.
And then I did talk about in my comments earlier and that we are seeing utilization start to trying to higher levels that was true as we exited Q1 that continues to be true now into the second quarter. So we still have room to go were still moving up with respect to utilization, but that will drive higher levels for the year.
On the whole if we consider gross margin in 2023 expectations versus last year and I would say, we expect it to be relatively similar and in line no no major no major differences, but the shape of that.
We will be quite different than last year. We're clearly, we're starting 2023 out at a more challenging.
Level. Then then we expect to finish for the year, whereas the opposite was true last year.
Yup got you great well thanks, guys.
Thank you.
Next question comes from Bryan Bergin with Cowen Your line is open.
Hi, Thanks for taking the question. My first one is on per capita revenue I think now around 100000 can you comment on the drivers here as far as our onshore offshore Mexico shifted as you potentially work in lower cost per clients versus things like like for like pricing versus other factors on time in the workforce optimization.
Hi, Brian , Yes happy to comment.
The main factor actually is back to the utilization piece of it and so obviously that's a recurring theme for us that is why it is our number one priority.
So I would firstly highlight the impact that we're seeing from lower utilization, which is of course a temporary dynamic.
And I would and I would then say that with respect to the other factors are pricing in general is stable and given the more challenged macro we see that as being a good outcome and so stability in the pricing and we will continue to focus on that and to get higher pricing <unk>.
Grant.
The the genomics is shifting that is something where we're seeing we're seeing.
We talked about where we had more headwinds.
Part of what we're doing is rotating certain work for our clients, while staying with the clients rotating certain work from onshore locations to offshore or nearshore nearshore location. So that shifting the geo mix that is reflected somewhat in the pricing and then of course, there's a little bit of an FX headwind that remains from the change from 2022.
2023 so so those are all factors that are changing the per capita.
On the revenue per employee and but the biggest one dimension and utilization and again, that's a temporary dynamic.
Okay. Thank you that's helpful. And then just a follow up on some of the harder hit industries, So retail consumer and business Tech services do you have a view to stabilization in those industries.
Can you talk about the delay versus the cancellation behavior, there and I guess, how we should expect that trajectory to progress over the next several quarters.
Sure.
Brian So the harder hit sectors for us are mostly the tech and retail sector.
Among our tech clients Theres still a push to keep more projects in house to protect their own workers as they start cutting costs and some sometimes do lay off themselves.
As a result, we do expect this pullback spending to continue in the tech sector for the next at least next two quarters.
The retail is probably the other.
Significant impact each sector given the.
Given the consumer sentiment, where we also believe that the spending cut.
From clients the tight budget in this vertical well will remain similar in becoming one.
One or two quarters it will remain challenging.
For us obviously, the bright spot is the energy public health care sector, which are which is growing very healthy.
They're healthy way and then.
It's now 27% of our total revenue up from low twenties last year. It was since we decided decided to focus on this more.
Resilient sector during the macro tough difficult macro environment and in the bright spot for us is that the automobile automotive industry, where in Q2 as it grew by 22 in Q1 grew by 21% and we expect that strong growth to continue we're excited to continue to work with the BMW group one of the worlds leading premium.
Factor of automobiles.
And we support them, both in Germany, and international teams to develop there they're connected drive cloud platform.
And then to apply UI AI in there.
In there.
In there.
Losses and infrastructures. So that's a quick highlight of what we see among the verticals.
Okay I appreciate the color. Thanks.
Thank you as a reminder, if you'd like to ask a question. Please press star one one.
Our next question comes from Moshe <unk> with Wedbush Securities. Your line is open.
Hey, yeah. Thanks.
A couple of follow ons here, if I remember correctly APAC accounted for about a third of the revenue base last quarter.
And that would probably be the biggest issue.
<unk> guidance for the year.
I think you mentioned that China is looking a bit better or maybe you can talk a bit more in details about China, Australia, and I think in Australia, you have a large retail exposure as well.
Singapore in that context.
Sure. Thanks Moshe.
APAC is indeed, a 33% of our for our global revenue.
A bigger hit.
Wind late last year earlier compared with the other countries, mostly was driven by Australia, and China, Australia has among all the regions. We have has the highest exposure to tech and retail. So it was the first to be impacted it was also the one that's having the biggest seen the biggest impact right now.
And then China definitely recovering in a post COVID-19 environment.
It'll be slow given that it takes time too.
Because we have half of revenue.
Why not working for local clients have revenue for global customers takes time to build to REIT.
To rebuild the pipeline and then start new work in the local market Singapore.
Singapore had a stellar growth in second half of the year last year, but they're a little bit late in the economic cycle compared to the other countries. So we're seeing a bit more headwinds in Singapore. This moment, even though it's still growing it's less.
Less of accelerated growth.
We have seen in H two last year. So if you combine all of these there's a bit of a mixed news in APAC, we expect but we do expect overall positive growth in APAC and in the coming quarters.
Okay, That's fair and then.
Aaron you spoke about some green shoots in Europe , maybe you can talk a bit about that in terms of where are we seeing these and how does it look how does Europe look for the second half of the year. Thanks a lot.
I can I can I can take up that so we are as Eric mentioned, we're seeing a bit green shoes in Europe .
Europe , we mostly we are our two biggest market in Europe is Germany, and U K, we've seen U K stabilizing.
We have signed a couple of large clients, we do expect ramp up to kick in later during the year, Germany is probably what we're seeing more promising opportunities, especially in the automobile automotive sector as I mentioned earlier.
They.
The automotive sector continue to invest in the in the digital technologies as most of the car companies believe that digital.
Center of their future strategy. So we see as besides BMW. We're also.
Working with several other large automobile company companies and then we see large contracts extensions and expansions being signed we believe that theyre going to drive further growth incremental growth for us for Europe later this year.
Thanks for the color.
Thanks Moshe.
Thank you. Our next question comes from Ryan Potter with Citi. Your line is open.
Hi, I'm on for Ashwin. Thanks for taking my question.
Wanted to start with.
Talk of and focus on sales and the investments you've been making there.
Could you give some color on where these sales and marketing investments have done so far has been more concentrated in regions or specific capabilities and I guess, just give us a sense of how much larger the salesforce has become and how much larger you expect to be.
Kind of in the near term.
Yeah.
Sure.
Thanks Ryan.
As we mentioned the sales and marketing activity.
Is is Bose, we're spending money to recruit and then increase the headcount in the sales department as well as spending in our resources in marketing activities to generate inbound and also outbound leads.
It's a cross the board effort, but we're definitely focusing more in the public energy health care sector that is resilient in this current macro environment and also in the automotive industry, where we see a lot of promising opportunities.
As to how much we do have a we don't report on the numbers of how much we're spending there, but it's a significant increase compared with what we spending before its not to the amount of double but it's also not just a few percentage of increase is a pretty significant increase in spending.
And besides on the on the on the vertical side. We're also increasing our sales efforts in this efficiency warranty cost saving programs in engineered executive days, and then data digital application management operating services and operation services. So that's how we are seeing some of the efforts paint.
Off with its 47, new logos and strong bookings in Q1, that's kicking in.
Geography wise, it's widespread we're not just targeting one or two geographies.
Got it and if I could shift uses of capital how are you kind of thinking of your capital allocation priorities.
So in terms of M&A.
M&A pipeline look internally and what types of geographic.
Geographic or capability exposures are you looking ahead.
I'll touch on the capital allocation quickly, Brian and then I will.
Let's talk a bit about the M&A pipeline.
But on the whole our capital allocation priorities remain consistent our focus is reducing our term loan as well as continuing with our M&A program. So that is absolutely.
Part of what we expect from a capital perspective and investment.
You will of course have noted that we paid $100 million on the term loan in the quarter.
And then we obviously had the successful acquisition of Italian first quarter. So.
Those have been our priorities they remain our priorities shall do you just want to touch on the pipeline a bit.
Sure.
Our M&A strategy is still the same.
It is important to us we expect.
Acquisitions will be complementary small tuck ins to our core.
Core business, rather than transformation, though and we continue to build the M&A pipeline and also the muscle to execute on it.
Great. Thanks again.
Thanks Ryan.
Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.
Good morning, guys. So just looking at the revenue guidance for Q2, and the rest of the year or thinking about quarter over quarter growth growth rates Q2 forecast to decline a little bit quarter over quarter. It looks like the full year guide that implies reacceleration in that quarter over quarter growth maybe to around <unk>.
Mid single digits. So just wanted to.
Get your views on visibility of that ramp I mean, I know that theres a lot of cross currents out there you've talked about sales cycles elongated adding pipeline it sounds encouraging but really wanted to hone in on visibility on the.
The reacceleration and quarter over quarter growth in the second half. Thank you.
And so I can start and you can feel free to add in Jason. Thanks for the question just with respect to Q2.
What I would highlight is that sequentially. It is a small decline from our Q1, but if we normalize that for billable days in the quarter, it's flat to a small increase and so while we were hoping to see in an earlier I expected to see.
A slightly larger increase from Q1 to Q2, we are encouraged certainly by the fact of our and increase on a billable revenue per day basis. So.
That's important to understand and then Jason you asked about visibility and you've heard us talk quite a lot about the pipeline.
We continue to expand our pipeline <unk> talked about the bookings and new logos, there's a lot of encouraging signs there our win rates remain the same our pipeline is very healthy and it is expanding and so.
There is good visibility into Q3 and rest of the year.
But that said, obviously the macro conditions.
And a bit more cautions and of course, we're talking about some budget conservatism and slower start so absolutely we have the visibility.
And we continue to focus on that we feel good about.
How the second half of the year looks.
And in fact, even with respect to Q2 again the growth is a little bit lower but we've seen stabilization and start to return on a revenue per day growth basis.
Okay.
So I guess just a follow up question there is than it does the second half outlook assume that underlying discretionary spending trends will actually improve versus what youre seeing right now you've got the bookings in place like you said, but just thinking through.
Dynamics that could impact converting bookings to revenue.
As you mentioned Jason.
Jason where we are.
This strong bookings, we're seeing large clients ramping up kick in in Q3 Q4 in terms of the pipeline conversion.
Our guide is and our expectation.
In crop is that extension of the current macro environment.
We're not expecting this to get much better or much worse. So the conversion rate of the pipeline, we expect that to remain similar hopefully it will get better and that will give us more upsides.
But I think our confidence in the second half of the year comes mostly from one is the stabilization of the.
Of the existing.
Work, we're doing with our clients second is that the intention of investments, we're making in sales and marketing and our new service offerings, we expect that to pay off later this year.
Okay. Thank you.
Thanks, Jason.
Thank you there are no further questions at this time I turn the call back over to Joe for any closing remarks.
Thank you.
You for joining us for our Q1 earnings call I'd like to acknowledge the continued support of our board and our shareholders in closing I want to thank all thought workers clients and partners for their extraordinary impact we are delivering everyday together.
Well and we look forward to catching up with you next quarter.
Thank you for your participation you may now disconnect everyone have a great day.
Okay.
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