Q2 2023 Thoughtworks Holding Inc Earnings Call
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 and anticipated costs and benefits of our restructuring actions are forward looking and as such are subject to known and unknown risks and uncertainties. These include but are not limited to those factors described in today's press release and discussed in the risk free.
<unk> section of our annual report on Form 10-K, our quarterly reports on Form 10-Q, and other reports we may file the FCC from time to time these 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 during our call today, we will reference certain non-GAAP financial measures. We 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 will include non-GAAP to GAAP reconciliations in our press release furnished as an exhibit to our form 8-K, the non-GAAP financial measures provided.
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 Shao. Thank.
Thank you, Rob and welcome everyone to our second quarter earnings call.
To start by sharing overall update on our business.
And then Erinn would take you through our second quarter results in more detail and we will share our guidance and then we'll open for Q&A in a second quarter of 2023, we delivered revenue of $287 million with the adjusted EBITDA margin of 10.2%.
Both of which were below our guidance for the quarter I want to first discuss the factors that impacted our Q2 results before moving on to the actions, we're taking to address our performance going forward.
This quarter, we experienced challenges with three of our top clients. During the second half of Q2, where the scope of work being executed was reduced due to client specific budgetary decisions or shift in the client strategic direction.
These unforeseen decisions accounted for approximately two thirds of the revenue Miss in the quarter when compared with our guidance, we attribute the remainder of the shortfall to broader macroeconomic factors.
During the quarter any particular, the latter half.
Witness a slowly and pipeline conversion the changing client behavior that we have highlighted in recent quarters, including incremental project ramp ups and delayed decision, making continued during the quarter to a greater extent than anticipated in response to these challenges.
Took a total review of our business and today, we're announcing a structural reorganization as part of the program, we're reducing our employee head count globally by approximately 5% to 6% with this structural reorganization, we will move operational functions from a geographically dispersed to a central.
Lies the model create a new organizational homes. The majority of our professional services workforce, our digital engineering center and evolve our regional market structure.
Centralizing operations globally, we reduce overall costs better align resources to strategic priorities rightsize operations and increase operational efficiencies the new digital Engineering center will provide supply across the regional markets and allow us to respond swiftly to client requirements, including the <unk>.
<unk> shift from onshore to offshore delivery over our 30 year history, we have built various digital engineering centers across the war as a result of our geographic expansions.
The time is right to further optimize our global delivery capabilities.
The D C will play important role in capability building developing talent and driving innovation with our clients. We expect that the D. C will help improve our utilization rates and optimize resource deployment. We're pleased to share that the group will be led by severe tiwari, a regional managing director of India and the middle.
East finally, these changes will enable our regional markets to shift to a more client and industry base to go to market focus and allow the company to continue funding investments in demand generation and we will continue to invest in our outbound demand generating capabilities the.
The investments that we made over the last year are paying dividends as we continue to see an increasing share of our new T. C V attributable to our outbound efforts.
Driving additional business through our focused sales efforts remains a key part of our strategy.
And we're pleased to announce that we have promoted Chris Murphy to the newly created role of Chief revenue and client officer in order to oversee these efforts through these changes we expect to emerge a stronger company in order to navigate the current difficult macro environment, while best positioning ourselves for the future. We will do this one.
Staying true to who we are a company intensely focused on helping solve our clients' toughest challenges by harnessing our expertise with ever evolving and cutting edge technology now.
Now I'd like to move on to additional details about the quarter.
I'm pleased to share that ours was among the leading providers in a Q2 2023 Global ISG Index breakthrough 15 category for the Asia Pac region.
This is based on annual contract value one over the last 12 months, we contract. It was 29, new clients in the quarter or year on year increase of 12% as we continued to build upon our outbound sales motion our voluntary attrition rate of 12, 6% on a TTM basis remains well below industry norms and demonstrate the strength of our.
Employee value proposition.
In June we published our annual social impact report I'm very proud of the work thought works at dusk to amplify positive social change while advocating for equitable with tech future now let me share a few themes, we're seeing in the market.
We're focusing our demand generation programs on data and AI services and.
And we're seeing a lot of client interest, especially for degenerative AI and towers is well positioned to meet this demand.
With multiple initiatives underway to Hans our series offerings capitalize on inbound interest and generate outbound demand first at the end of Q2, we have train around 500 workers in AI assisted software development with a target to train a total of 800 by September 2023, we're trialing a broader array.
Hey of technologies to quantify their impact within software development lifecycle. For example would develop team AI a springboard to create custom tools to leverage Jenny I to accelerate software delivery tasks, including the requirement analysis cogeneration and test plenty.
Second we're developing new services and tools to help our clients pursue Jenny I'll, let innovation and maximize value while upholding high standards in responsible tech. We just launched the thought works generative AI Port accelerator. This is in response to client demand for Gen AI enabled product development.
The generative AI product accelerator combines power's proven their approach to developing products with our expertise in data and AI. This helps rapidly embeds generative AI into ambitious digital product.
We're already working with a top 50 clients and seeing value creation in just a matter of weeks. We have had many questions from clients about how to build gen applications and so we recently published an article to share insights.
<unk> and practices in building a L. L M powered generative application.
And third actively engaging with clients.
We're currently working with 12 clients on generative AI project and a further 20 clients where the work we're doing involves coding assistance with Jennie O.
A number of these our top 50 clients. The work we're doing with clients is across a diverse set of use cases for example software development search knowledge management data analysis and product development. We are working with a new client bolt works finish technology company specializing in staff recruitment vault.
It works employee recruiters the scheme unstructured text to find potential matches for candidates interviews and final recruiting decisions. This many process is a bottleneck for scalable growth the hours to build a large language model based matching engine for jobs that workers to enhance scale and speed up the capabilities of their.
Our platform and business our solutions based on chat GPT, coupled with the open source large language model for the more sensitive data operations other service offerings that drive productivity and cost efficiencies are getting traction in the market for example, fin us climb.
Clients are looking to achieve efficiencies from their cloud as states.
We recently worked with a global top 10 pharmaceutical client by applying our differentiated approach to fin ops, which combines phenol platforms with continuous automated remediation.
We were able to identify 30 million dollar of cost savings across our cloud estate, which had expected spend profile of $100 million over five years.
And we're seeing good progress in our digital application management and operation services demo demo Hauser, where clients achieved zero maintenance of their software by leveraging our strength in digital application management and operations 11 of our top 50 clients aren't demo clients at the end of Q2.
Our demo team is working with 30 brands of U S. Leading home service franchise group to evolve their success, where product and continuously improve and ensure its long term reliability stability and success.
We continue to invest in our capabilities and we believe we have the best digital talent in the industry for.
For these reasons, we believe that ours is well positioned in the market at the core our strategy is to deepen relationships with existing clients and win new logos.
We then supplement this was focused strategies around M&A partners and geographic expansion.
We continue to focus on the shape of our portfolio to more resilient verticals, while investing in our service offerings for example demo.
First starting with partners I'm pleased to share that thought worst recently became an official premier Google cloud partner in North America.
We have exciting program plan at Google next in San Francisco later this month, our client global Latin America's largest media company will be speaking global was sure Howard by working with outwards. The successfully migrated a petabyte scale data pipeline from a legacy platform solution to Gogo cloud.
Turning now to claim portfolio.
The depth of our expertise and breadth of our capabilities. It means that we can help clients address a broad range of challenges.
We assist from strategy right through to business outcomes were focused on improving the resilience of our vertical client portfolio. For example in public sector, a new client in the U S. Federal sector is the U S consumer financial Protection Bureau.
All works along with some partners have been awarded a five year design development blanket purchase agreement to provide it and digital services, including Web security Dev ops design and product development in our existing public sector client the national payments Corporation of India Our.
<unk> are working closely with M. P C I to scale with a unified payments interface ecosystem as its protocols are entering new countries, including the ones in North America and the Middle East. We also work with a N C. P. I on enhancing and upgrading BH I am BH I am is a payment app that facilitates easy and fast to finish.
Transactions using a unified payments interface towers redesign beach, I am customer Onboarding and lifecycle.
We migrated the App from a legacy framework to highly scalable react native framework using our strangler approach you can find details of some of these client successes on our new section of our website dollars Dot com.
Now going to hand over to Erin so that she can take you through the numbers in greater detail. Thank.
Thank you Sarah and thank you to everybody for joining us on today's call.
Earlier. This morning, we released our second quarter results as Shao Ernie mentioned unexpected ramp down by three significant clients in the second half of the quarter jump approximately two thirds of the quarterly revenue mix compared to the guidance. We provided in May. In addition, our performance was impacted by slower pipeline conversion and incremental.
Hi Tech startups, while these trends are previously witnessed during recent quarters, the degree to which they impacted client behavior and therefore, our results with greater than we anticipated.
Moving to our results revenues declined 14% year over year during Q2 to $287 million and constant currency revenue declined 13% compared to the prior year period acquisitions contributed one percentage point to the revenue growth rate in Q2, we remain close to our clients while macro uncertain.
Disrupt near term budget spending we are ready and committed to assist our clients with the toughest challenges of their multiyear digital transformation journeys, our thought leadership and expertise allows us to solve these difficult problems and our annualized average revenue per employee of 100000 for the second quarter, which remains above.
The industry average reflects the highly strategic work that we deliver for our clients and let's move to additional details about the quarter. We had another stable quarter with respect to bookings and we are pleased to report that our overall bookings at the end of Q2 on a TTM basis stood at $1.5 billion, our revenue base remains diverse.
<unk> and we continue to focus on increasing the participation from more resilient articles that the quarter, we saw year over year declines of 8% in both Europe , and APAC, 20% in North America, and 25% and Latam moving to our industry verticals automotive travel and transportation continues to be our fastest.
Growing vertical rising 18% year over year energy public and health services declined 2% financial services declined by 12% technology and business services declined by 27% and our retail and consumer vertical decreased by 29% for the second quarter on a TTM basis around 90.
2% of our business came from existing clients. We currently have 35 clients with revenues greater than $10 million on a TTM basis to more than the second quarter of 2022 in the second quarter as a percentage of total revenue our top five top 10, and top 50 clients generated 18% 28.
And 67% respectively. Adjusted gross margin was 36, 6% for Q2 compared to 46% during the prior year period average bill rate and utilization were primarily responsible for the year over year decline, we saw modest low single digit pricing declines on a like for like basis.
Also performing certain exploratory work for clients in the second quarter, our adjusted SG&A as a percentage of revenue was 26, 5% compared to 23, 7% in the prior year period, adjusted EBITDA with $29 million for the second quarter and adjusted EBITA margin was 10, 2% below our guide.
<unk>, mostly due to lower than expected revenue Q2, GAAP diluted loss per share with four cents compared to a loss of 13 cents in the prior year period, our adjusted diluted EPS, that's three cents compared to <unk> 11 for the second quarter of 2022, we had negative free cash flow for the quarter of $19 million compared to free cash.
So a $20 million in the prior year quarter, mostly due to the payment of connected lapped earn out and quarterly income tax payments in the U S. Our cash balance stood at $88 million as of June 30th 2023, alongside an undrawn revolving credit facility. We've made continued progress on repaying our debt this year and our.
Outstanding term loan balance was $299 million as of June 32023.
Now, let me move to our business outlook for Q3 and for the full year 2023, we remain focused on expanding our pipeline as new and existing clients come to thought art not only help solve their toughest challenges today, but also to prepare for future technology opportunities such as AI, but the third quarter of 2023, we expect Rodney.
To be in the range of 275 million to $285 million, reflecting a year over year decline of negative 17% to negative 14% or negative 19% to negative 16% in constant currency for the full year. We now expect revenues in the range of 1.137 billion.
To 1.157 billion, reflecting a year over year decline in the range of negative 12% to negative 11% for both the reported and constant currency profit news, we expect acquisitions will contribute approximately one point of revenue growth rate in Q3, and two points to the revenue growth rate for the full year, we expect adjusted <unk>.
EBITDA margin for the third quarter to be in the range of 9% to 11% for the full year. We now expect adjusted EBITDA margin of 11% to 12%. We expect that the actions we are taking with respect to restructuring and the realignment of our cost base will remove 75 million to $85 million of costs from the business on an annual.
White spaces. This initiative will begin in the third quarter and is expected to be completed within the next 12 months. We expect total pre tax charges of 20 million to $25 million, we expect to incur the majority of the pretax charges in 2023, we expect that the charges will be offset by pre tax.
Savings.
The third quarter, we expect adjusted diluted EPS to be in the range of two cents to three assuming a weighted average share count of approximately 332 million diluted shares outstanding.
For the full year, we now expect adjusted diluted EPS of 11 cents to 13 cents, assuming a weighted average share count of approximately 332 million diluted shares outstanding.
Our Q3 guidance incorporate share based compensation of $18 million.
For the full year, we expect share based compensation will total $74 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 contacts that are shaping our guidance for Q3 and the remainder of the year first the general contracting environment getting more difficult as we progressed through the second half of Q2 and we are in fact.
During a continuation of recent trends into our guidance for the remainder of 2023, specifically, we have moderated our expectations for the pace of pipeline conversion as we continue to see caution with client budgets second we have factored in specific project ramp downs that occurred in Q2 and will impact the rest of the year third our guidance incorporates a higher.
Mix of offshore delivery compared to our previous forecast. We have previously discussed the ongoing shift to work from onshore to offshore delivery, but we have observed a faster than expected pace of change. While this dynamic is generally margin accretive it does present, a headwind to the topline and it's impacting margins in the short term as we rebalance.
Supply and demand and onshore versus offshore locations overall.
Overall, while Q2 results did not meet our expectations. We are confident that we are taking the appropriate steps to build a more durable business. In addition to the actions we are taking to centralize our operations and reduce costs. There will also be some reductions in our professional services head count where individuals skill sets our experience levels no longer are.
Aligned with client requirements and to enable us to make geographic adjustments to better align with client needs.
The majority of the annualized cost savings will come from reductions in operating spend particularly in non client back office functions. We are focused on driving efficiency, while also providing the appropriate investments for the long term such as continuing to build our outbound demand generation and fortifying our technology leadership, our clients' needs for.
Digital transformation remain intact, our pipeline is building and we remain close with our clients and we are partnering with our clients as they look to capitalize upon the various technological innovations of both today and of the future now let me hand back to Rob.
Thanks, Aaron you can find our investor presentation on the thought works Investor Relations Web site will now move onto Q&A. We 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.
Okay.
Thank you if you'd like to ask a question. Please press star one one.
Your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
Our first question comes from Tien Tsin Huang with Jpmorgan. Your line is open.
Yes.
Alright, sorry can you hear me.
Yes.
Yes, we can.
Hi.
So much good morning, so yeah.
The digest that Nokia, let me start maybe with just your reinvestment.
Reinvestment into the outbound man.
Of course, the macro is tough I'm sure you're thinking about replenishing the pipeline and going into next year. So I'm thinking about currently what percent of deals are a result of some of your outbound effort now and as you're looking to diversify your revenue streams you can move more to this.
Industry specific.
FERC is there a risk that we will see some sales disruption during the transition how quickly do you expect to see some of the results assuming a stable macro from here.
Thanks Scott.
Thanks, Tien tsin.
We do believe that the outbound demand generation efforts paying off already.
Historically.
Our power enjoys a plentiful of inbound leads and that's our main go to market.
For many years.
Historically I think that our.
Average number average amount of new wins coming from outbound it was only about 15% of our portfolio and then we.
Achieved.
Even in Q1, almost 30% of our new wins coming from.
Bound demand efforts and in Q2 that number has risen to 45%. So clearly we've made a lot of progress in generating demand proactively going out now.
<unk> targeted marketing campaigns account based marketing campaigns.
We continue to do that and our focus as you've mentioned Tianjin.
Across all industries, we tends to it we're trying to focus a bit more on.
More.
Resilient verticals in this current downturn from public to health care.
To automotives.
We believe that.
For the effort, we can even further increase the outbound demand.
Outcomes.
From 44, 45% to even more and at some point, we're definitely hoping in the long run that with inbound leads coming back again, you will give us even a bigger pipeline to work with.
Great that was very clear at 45% okay.
That's helpful. As we think about them tracking.
Tracking next year. So just maybe for you Eric just on the gross margin side, a quick follow up if that's okay.
Both utilization impact as well as build rates driving the decline.
Was that drove that.
Impact on Bill rate was representative what youre expecting for the second half of the year versus what you are trying to change in utilization, maybe can you walk us through those dynamics as we reschedule our second half outlook. Thank you.
Yes, let me start with utilization pardon me, we did see an improvement in our utilization from Q1 to Q2. So obviously, that's a positive sign but it's important to note and boat show was comments earlier as well as mine that that improvement was not evenly distributed.
In across our business.
We've seen lower utilization in our onshore locations versus our offshore locations and that has an impact both on our top line as well as gross margin.
For Q2, we saw utilization of about three percentage points below what we typically target again, that's an improvement from what we saw in Q1.
But the other impact as you mentioned Tien tsin is around that celebrate.
The Bill rate is add two dynamics. The first one is that shift in mix again from onshore to more offshore focus that's impacting the bill rate on the whole. It's also being impacted some like for like adjustments, where we did see a low single day.
Like for like reduction in Bill rates.
Year over year in Q2 that compares to what we saw in Q1, where we were more flat.
Now in terms of what we expect going forward.
We're seeing.
More stability in terms of that bill rate impact, we're not expecting a further big movement, but to be more consistent with what we observed in Q2.
Great. Thank you so much.
Thank you. Our next question comes from Maggie Nolan with William Blair. Your line is open.
Okay.
Alright, thank you.
Can you elaborate a little bit on how the move to a centralized model is going to affect your ability to sell new business into the existing clients and then is there anything else that you would anticipate needs to change as you manage those relationships.
Ken to continue gaining share in existing accounts.
Sure.
Thanks Maggie.
The centralized model.
Mentioned earlier talks.
Talks about two parts one is we want to centralize our capacity Delaware capacity in consulting capacity around the world moving from a country managed.
Hum structure to a global managed structure under decided I think voice is going to meet significantly is we're evolving our regional demand generation structure to be more centralized as well and then our main focus to be more client focused and client centric than our current country regional focus.
The main impact we hope is going to help us from a new business from winning new business with existing client is that a lot of our customers. They are global customers. They work with in multiple regions.
Across across the world and our Geo model tends to focus now.
Genuine demand and price.
Excellent delivery in a super specific country or even region, but we tend to lack the global focus when it comes to go after new business with a global model. Our teams will report essentially by client by vertical to a global.
A global role that will allow us to go to market it more focused on a glove.
Global delivery footprint, and then working with our clients across multiple countries.
Just focusing on specific one so definitely we believe that it would help the spending.
Spending our spending with existing customers.
In a more efficient way in the future.
That's helpful. Thank you.
And then when you think about the restructuring savings.
The cadence of how those will hit the P&L and how long does it take for those to start materially impacting the P&L and then what does the ramp look like towards that kind of annual run rate that you expect.
With the restructuring from a savings perspective once the actions are complete we anticipate annualized cost savings of 75 million to $85 million.
And we anticipate that we'll achieve most of those savings about 80% on a run rate basis before the end of this year.
I did also touch on that as well as a reminder, say on the whole the savings of 75 to 85 million and we expect to incur related costs that will see via restructuring charges of approximately 20 to 25 million for the total program again, the majority of that will be incurred.
Before the end of the year, we have a clear action plan, where we're focused is the areas that I just touched on particularly from a cost savings perspective, I would highlight that we expect the majority of our cost savings to be coming from non client or back office functions.
And our drive will be not only efficiency and improvement and what we'll see by the time, we get to an exit rate for Q4, 2023 but importantly, we think it sets us up very nicely for the longer term.
Okay.
Thanks for the update.
Okay.
Thank you. Our next question comes from Ashwin <unk> with Citi. Your line is open.
Okay.
Hi, yes.
Hi.
Yes, let me start with the <unk>.
The deceleration in revenue per employee what percentage of your revenue base has the.
Offshore onsite ratio and other cost side metrics that clients are seeking in the current environment and the underlying question is there is a demand weakening that's brought in has affected every player in the industry.
It's why we.
Is that kind of maybe little consensus for example, but.
What seems to have this incremental demand issue.
Particular weighted average price point.
So why should investors believe that you arent say for example in the early innings of the impact as opposed to the later.
Sure. Thanks Ashwin.
So I'll start with the onshore offshore split our.
Revenue per employee is doing 100000 range.
Mostly due to the strategic kind of work, we do it and also our onshore presence, but as you were alluding to as our client budget gets tighter we do work with them to find solutions, such as moving more work offshore or offer demo.
To round because it consists in better versus building new ones right now.
As a result.
Actually we sold more hours in Q2 than Q1, but the mix is a bit is more offshore heavy handset revenues lower from Q1 to Q2.
Now how far we have been going down this journey I think it's worth keeping in mind that we started our.
Our entire portfolio of them.
Work location perspective, a 100% onshore about 30 years ago, we've added offshore over the years starting from early 2000 and at this moment.
We have more than 70, 525% split from a head count perspective onshore offshore.
And then the.
The movement of speed of movement as you mentioned that from moving from onshore to offshore.
It has being about one to two percentage points every two or three quarter three or four quarters. So the movement is not.
That's E D from a from a changing portfolio perspective, now we do want to actually our sales wants to get to 80% or even perhaps slightly more than that from onshore offshore offer percentage perspective, we believe that it's beneficial to both of our clients and <unk> from a delivery mix perspective.
So it is aligned to our strategy is to move towards that that ratio.
And then how far to your point do we think this will go is this.
Going to go further to the 90, 95%. We don't believe that will be the case I think a lot a lot of this near term pressure is to move the engineered type of work.
Two offshore, but the higher value add the consulting work.
The strategy work architecture.
Cloud data AI, a lot of that work still remains onshore.
And then I think as the macro eases a little bit.
Budget cycle. We're in now is through to the next one we do believe that.
Our onshore presence will continue to be a strategic advantage that will allow us to strengthen our relationship with our clients and we will still be able to drive significant revenue growth from that.
Okay I appreciate that.
Appreciate that Dan said Joe.
The second question is with regards to sort of visibility.
You went through.
Several points.
With regards to your new assumptions that was very helpful.
I just want to kind of ask as you sort of.
Look at Q2 with things getting sequentially worse has the situation may be stabilized at a lower level in <unk>.
July is still getting getting worse.
If you could kind of go through the Buffalo, Louisiana outlook, so to speak and maybe any changes that you've made with regards to your.
Casting methodology.
Sure.
That's a good question. Thanks Ashwin.
The macro environment for us definitely grew more challenging Q2, especially during the second half quarter.
That's the main reason, we have reduced our expectations for the full year.
<unk>.
About third of the reduction is we we have without.
We're forecasting is due to Q2 mix and the rest is due to the extension of the challenging Q2 demand environment specifically the factors.
We mentioned earlier project total were slower pipeline conversion and then.
The work moving from onshore to offshore.
And let me add some color to that in terms of how much buffer what what's our visibility on each of these factors from a project all of our perspective.
We've seen most of that in Q2, and that's what we called out.
Robyn.
Given the Miss.
We're still seeing some of that.
Our top clients pause the major re platforming initiative at the beginning of Q3 or beginning of July and we believe that.
Some of our clients are still adjusting and adapting to the to the challenging macro environment and then.
But we're probably going to continue to see project Terra worse in Q3 due to that and we've factored that into our guidance.
In terms of the slower pipeline conversion and the themes around the client buying behavior remains the same that.
Still the sales cycle is long.
<unk> tightened budget in Florida ramp up.
And it did become more difficult in Q2 incrementally more challenging in Q2.
It's moving slower than we anticipated.
The last time, we reported so our guidance does incorporate in this slower rate of conversion into the into the rest of the year that said, we do have a growing pipeline.
A lot of clients engaging with us.
In driving new opportunities new work.
So the size and then the number of leads in the pulp plant continued to grow.
We do have better coverage for Q3 and Q4, but we are taking a conservative view from a conversion rate perspective based on what I've seen in Q2, and so we extended that view and I use that lower conversion rates too.
Hum.
To calculate our or.
Our guidance. So we do feel confident about where we're guiding and then I think finally, just one point to this.
Booking number we do have a stable bookings each one.
And then as I mentioned $1 5 billion TTM implies Q2 booking is in line with Q2 Q2 'twenty three bookings in line with Q2 'twenty two of bookings, which was a better demand environment and then now the ramp up is more incremental so not everything will be converting.
Revenue in the near term.
So as as we probably have seen before but sooner or later. These these bookings will convert into revenue and that give us confidence that we have.
No better visibility for Q3 and Q4.
Very helpful. Thank you.
Thanks Ashwin.
Thank you. Our next question comes from Bryan Bergin with TD Cowen Your line is open.
Hi, Thank you I wanted to start with a follow up on outlook reduction here. So looking for more detail on the cancellations and the deferrals are the I think three large clients that accounted for a large portion of this.
They are still clients of thought works can you can you comment on the industries and the regions those weighed on Mars and curious about projects like these coming out of plans entirely or do they in source them. There are competitors on anything any other call out would be mindful there.
Yeah.
Sure. Thanks, Brian So the declines we called out they were top.
Clients and then.
The work was stopped unexpectedly.
Completely but scope reduction was significant and team side reduction was significant.
As you mentioned and they were in they were actually spread across multiple industries are way.
<unk> financial services when tech.
Sorry, It went in the energy and one in retail.
None of this is because of declines are complaining about the work we're concerned about the quality of the work.
They're also not being in sourced or or.
Lost to any competition is purely budgetary concern decline.
Are going through their own budget adjustments cycle, and then the either decided to ramp down or stop or not to not extend.
The current work stream.
But theyre all still ongoing clients.
We're still working with them.
As I mentioned earlier in this tough environment, even though theres contract that says we have theres contracts bookings that.
We're suppose execute against we want to maintain a long term relationship there clients Foster this.
This partnership and that's why our top top 10 clients average tenure is nine years. So so we work with them trying to accommodate by ramped down the team moving to offshore we're using <unk> to run the application of existing application and infrastructure rather than building a new one so we would pivot.
But it's inevitable, it's a smaller revenue footprint from that group.
Okay understood and then on bookings just can you give some more color as it relates to the composition of new bookings and really looking for the nature of the work is this.
Shifted predominantly toward more efficiency initiatives for our clients and can you give us a sense of how maybe the average size of your engagements coming into bookings compares versus let's say last year.
Sure.
<unk>.
The New award, we were signing up including expansion.
<unk> are not substantially different from what we're doing today there is essentially still focused more on.
Enterprise monetization platform.
Data usage.
Music experience part of the cost saving efficient saving programs there are more.
But theyre not substantially more and then this is some of this is driven by <unk>.
Our <unk>.
Intention to push for example, more demo.
Service into our portfolio, but it's not substantially.
Different.
And then sorry, what was the second part of the question.
Just as it relates to average size of being OLED screen.
So the bookings itself is hasnt been a significant change the size of the S. W's total bookings were signing.
There.
There is still.
Large size engagements are multiyear programs I think is the ramp up is more incremental than we did than we've seen before and that is starting team becomes smaller it takes longer to get to the 14 size.
Previously at some point it would probably take 30 to 60 days to get to the Fourteens 90, now it will take up to 90 days to get to the 14th size clients just get a bit more cautioned about their spending but.
But the booking average size of booking from a contract perspective, you still.
Similar to what we've seen before it was slightly smaller, but but not not substantially different.
Okay. Thank you.
Thanks, Brian . Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.
Thanks, guys I wanted to circle back on the three large clients that I guess accounted for two thirds of the shortfall here. So just so we're clear is this simply that they're delaying new starts and are pausing existing projects or have there been some outright.
Cancellations here and if it's more of the former.
What's your sense on when they expect to reengage with those delayed or paused initiatives.
It's a it's a mixed and thanks, Jason it's a mix mix of both situations wanting in one situation for example.
The decline is has engaged with us since the.
Mid of last year on the large multiyear re platforming initiative, replacing all of their infrastructure.
Oh, that's running their backend operations.
And then.
Around mid of the year just before the latest second late in Q2.
Our clients their board is down on a another arrow another our ROI analysis. They just couldn't justify the return on investment given the current <unk>.
Budgetary and macro environment, so they decided to pause the entire program.
Now they might come back at some point.
Don't know if.
That's going to be anything in the next.
A quarter or two.
But we will have to pivot to something slightly different and helping them to run their current infrastructure better. So that's a that's a complete stop but we don't know whether it's going to start. Another one is example is.
Is a pivot in that is.
The initiatives are clients that Ronnie is for a business case for entire Europe region, and then I think there's a understanding realization that that project was too ambitious given the current macro that reduces scope to focus only on UK and that means a lot of this architecture.
Product design has to change so that's a restart to and it is going to restart to a smaller team. We're still engaged but we know that's going to even if it's restarts it wont become a smaller team.
So those are the two examples I can think of it that helps.
It does help it does help.
I guess the guidance for the back half of the year implies that quarter over quarter revenue growth will continue to be negative in Q3 in Q4, I mean, I guess in a base case scenario.
When do you think salt works can get back to positive quarter over quarter revenue growth.
I think there's just one caveat from a number of perspective, it doesn't look that way, but we do have seasonality in our business. So Q4 naturally have more holidays and vacation days with tends to have lower.
Revenue in Q4, if we think from a revenue per day perspective from we do expect from Q3 to Q4 issues stabilized already.
So that if we if we just look at the revenue per day perspective accuracy is that Q4 will have better coverage Q4, and we are confident that.
Issued already stable stabilize in Q4, it should be able to return to growth from there a lot of this obviously is due to.
The fact that we are making intentional investments in demand generation the alba demand efforts.
The positive signs, we're seeing from our automotive vertical for example, an 18% growth and then the solid bookings we've seen age too. So we do feel that.
Despite the quarterly number itself from.
From a revenue per day perspective, H to stabilization.
From Q3 to Q4 is essentially.
Essentially it would be flat.
Okay. Thanks al.
Thanks, Jason.
Thank you. Our next question comes from Moshe <unk> with Wedbush Securities. Your line is open.
Hey, thanks.
Can we talk a bit about APAC.
That region was underperforming relative to some of the others in the past.
I don't know where it is now maybe it's stabilized maybe it's not but maybe talk a bit about.
Australia, Singapore and China.
What's going on there and maybe talk a bit about the the head count plans for China as well thanks.
Sure. Thanks Moshe.
So APAC from a year on year perspective declined by 8%.
Last quarter and is mostly driven by Australia. So if we measure by if you look at it our.
Revenue by currency.
By Australian dollar contract at almost 20%.
So that's the main driver of the performance in APAC and then in itself is mostly due to our high exposure in tech and retail in Australia and in the slowdown it is having a bigger impact to the country than others.
If we look elsewhere impact in fact, our Singapore has had stellar growth in age two last year and we continue seeing good growth coming from our Singapore, even though the slowdown is slow down a little bit due to tough comps, but still healthy growth.
India remains a strong growth engine in fact that.
We've seen that.
And from India, local market, especially with interest series Victor grows significantly.
China is recovering.
In this post COVID-19 environment, but is not is not rebounding as fast probably as well we expect just on the general economy in China, but it is recovering from.
Last year already.
And then from a head count perspective, we do intentionally want to contain our exposure from a head count perspective in China. So the head count grows in China.
As.
We're benchmarking that mud at much lower level than India, Latin America, and other offshore regions.
Great and just a follow up going back to T. C V. One and a half billion can you remind us. If you include any renewals in those numbers. Thanks a lot.
It does it does include the renews is both new business that renews and Thats why the number is significant from a TTM perspective is one 5 billion versus our I think guide revenue for years 1.13.
So it.
It includes everything.
Okay. So is there any way to to kind of dissect.
Dissected by new logos, you know versus a year ago or where we are.
Uh huh.
It's.
Not from a booking perspective, we don't look at we don't report that from a booking perspective, but there's there's another color around.
The revenue, we get from existing customers versus new customers I think a couple of quarters ago.
That number from the revenue, we'll get from existing customers was around 88%.
This quarter is 91%.
So we're definitely.
Getting more revenue from existing clients than from just purely new logos and that's a combination of new work stream, new new contracts and extensions with existing customers.
If that helps understood.
Thank you.
Thank you Moshe.
Thank you. Our next question comes from Arvin Ramani with Piper Sandler Your line is open.
Hi.
Thanks for taking my question.
Yeah, I was just wondering what one or two.
Hum.
Of the three.
Three clients that.
Kind of a decline in revenue can you just give a bit more color on some of the underlying reasons. You know was it anything to do with.
With the execution of what is sort of like more internal discussions and is there any.
View that those projects may restart.
Sure. Thanks Alvin.
So we.
With some of the declines that we're seeing I think you're alluding to is are they going to restart or not.
We definitely feel that the work is not going away itself.
We're still talking to our clients about what needs to be done.
And then.
In their digital transformation journey, we're still doing multiple streams of work some of the streams of work gets delayed path or even cancel purity because they have to prioritize from a budget perspective. They the stakeholders. We work with we talk to they know they need this done they know.
No.
The work is necessary is critical for the future of their own business growth and that's how we started engagement and sign a contract.
We're working with them, but then they were surprised themselves a lot of the times.
Getting the mandate from their old CFO or CEO or even the board that they had to pause because there's no budget or the ROIC calculation does it makes sense in the current environment. So.
So a lot of the surprise, both us and our immediate stakeholders with our clients.
That said most of the cases, we manage to.
Pivot, one way or the other even including having a couple of people there doing work for free to keep the lights are helping to bridge this budgeting cycle.
I do feel that many of the key if not most of many of the cases, we would expect the work to restart one shape already another another one the budget pressures car when they get a new face of budgeting cycle, we'll be able to restart some of that work. So definitely in the work not going away. It's just.
Being squeezed by the by the budgets.
Terrific and then.
Just to clarify this.
And 130 million reduction in guidance for the year is it.
It's largely related to these three clients and you know kind of back of the math.
Calculations suggest that this is about time.
100 200 mm.
Kind of decline in number of employees are quiet right like if you take care.
Kind of the revenue of all in kind of the supply to your bill rate at comfortable level 1200 folks.
Whats the plan with these folks who are.
Basically getting rolled off these projects.
Sure Erinn I'll start with the with the.
130 million and then feel free to jump in for the plan for the employees have been rolled off first of all it's not all due to the three clients.
I think that top 30 clients and then also the Miss in Q2 generally that contributed to a third of the reduction so it's not it.
Is it gets significant part, but it's not a majority of the Artemis the rest of the guide down is due to.
The extension of this demand environment challenge, we're seeing so that will be further project Holborn and some other clients, where we're expecting and then a slower pipeline conversion and acceleration of work moving from onshore to offshore.
Erin.
Yes, so in terms of the head count impact and how to understand the prior guidance and versus the updated guidance and then the head count assumption.
Part of the reduced head count assumptions isn't from people rolling off it's actually what I would describe as and just cost avoidance or hires that we would not make it.
We were expecting to hire more people in Q3 and Q4, we do have a dynamic hiring plan and we are always adjusting our hiring based on what we're seeing in the market and then the pipeline evolution. So a lot of that that you mentioned arvin is actually just through.
Reducing our overall hiring targets for the year.
And the other piece of it that it's worth reminding it simply voluntary attrition. So we have been moderating our hiring levels already and we do have natural attrition that occurs in our business and normal course, just under 13% on a TTM basis, and so again that and that is another fab.
Or in how we're managing head count.
Now we have we have announced a restructuring plan today and we've talked about that quite a lot already I would just reiterate that while the majority of that is focused on our operational spend particularly in non client back office functions and we're making some.
And professional services, where we've seen a bigger imbalance in supply and demand and that's particular and in large part to onshore versus offshore movement, where it's been faster than we expected.
Definitely that's that's really helpful and just kind of last question for me is you know I.
I mean, I know that a lot of these contracts there's a.
Messi and kind of contract or contracts written there.
Potentially some offsets a notice period that the client has to give us that and are there any offsets to some of the ramp downs, where clients are giving like a kind of notice period are there sort of a big Bang.
Paying for some.
Kind of.
Kind of transition during some transition period.
Okay.
Go ahead Sam.
I was just going to say we do.
Each of these situations is on a client by client basis as Sean mentioned earlier, we're very much in a relationship business. Our goal is to maintain our relationships with the clients and the long term and continue to see crowd. There are notice periods and there is some degree of ramped and causes and or offsets, but and on the whole.
So it's.
I'd, just say, it's client by client and and we are seeing the reduced our project scope as we've talked about which has impacted the topline.
Great. Thank you.
Thanks Harry.
Thank you and our last question comes from Matthew Roswell with RBC. Your line is open.
Yes, Thank you for taking my.
Questions for Dan.
Hopefully these relatively short and I hate to keep.
Circling around the guidance, but got it okay.
You said about a third of the guidance reduction was the second quarter. Miss I was wondering if you'd be willing to bucket the eve.
Remaining reduction between the categories you talked about the shift offshore project delays.
Pipeline delays.
And then I guess the other question how much.
Okay, how much kind of a downside.
The guidance now the war.
Are you expecting things to get worse from here better.
Sure. Thanks, Matt.
So.
For the rest of the two thirds, if we want to bucket it will be three buckets.
Project turnover potential project toward due to client specific decisions actually one of them as I mentioned earlier is one of our top 10 clients.
And then the second is slower pipeline conversion and final acceleration of work moving from onshore to offshore.
It's probably more of the first two is probably more significant than the final one so maybe.
Around 40% each is the way we want to put out the first two factors maybe 'twenty presented it the way it will put out a third factor that is for the rest of the three of the three buckets.
Uh huh.
Which overall contributed the rest of the two thirds of the reduction.
And then.
So you have you had a second question I think at least that I guess, how much sort of conservatism.
Yes.
Have you built into the guidance that's right. So we we definitely feel.
Comfortable with the guidance, we've put out there from a visibility perspective, yes. There is project turnover and we already know, there's one and we'd probably expect some surprises some point, but we're not seeing signals of more than we have seen to come from a problem from a.
Just the volume perspective.
And then.
And from a pipeline conversion perspective, we do have more coverage for Q3 and Q4 than we had for Q2 from a volume perspective from a number of leads perspective from a size from the size of the pipeline perspective.
And we factored in a slower conversion rate a lower conversion rate based on what we have absorbed in Q2. So.
So we already I think in our situations factory in the worst case scenario, we've seen that in the previous quarters and use that as the as the way to calculate our conversion.
Conversion rate for Q3 and Q4.
And then overall I think with.
From a visibility perspective, our bookings in Q1 continued to be solid our bookings in Q3. Despite the revenue in Q2 of these by the revenue.
Short fall compared with year ago bookings actually the same as a year ago. So all these put all these together we feel.
We have put a.
Our comparable guidance, we feel that's achievable.
<unk> brought in Franck and then we feel that our if we focus on executing where we're in a good shape too.
Talk to me the guidance.
Okay. Thank you very much.
Thank you. Thank you. This concludes Q&A portion I'd like to turn the call back over.
Okay.
Yeah.
And thank you everyone for joining us today for our Q2 earnings call I'd like to acknowledge the continued support of our board and shareholders and to thank all thought workers clients and partners for their extraordinary impact we're delivering everyday together stay.
Stay well and we look forward to catch up with you next quarter.
Thank you for your participation. This concludes the program and you may now disconnect everyone have a great day.