Q3 2023 Thoughtworks Holding Inc Earnings Call
Paul and during the presentation all lines will be on listen only.
Joining us today will be thought works, president and CEO, <unk>, <unk> and CFO Aaron Cummins.
The earnings press release was issued earlier today and is also available on our Investor Relations page at that works Dot com.
Some of the matters, we'll discuss on this call.
Hello, everyone and welcome to thought works earnings call for the third quarter of.
<unk> 2023.
We will be recording today's call and during the presentation all lines will be on listen only.
Joining us today, we thought works president and CEO of <unk> and CFO Aaron Cummins.
The earnings 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 discussion of risk factors section of our annual report on Form 10-K.
Our quarterly reports on Form 10-Q, and other reports, we may filed SEC 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 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. We 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 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 will now hand over to Joe. Thank you, Rob Hello, everyone and welcome to our third quarter earnings call I'd like to start with the overall up.
Date, our business before airing takes you through our results in more detail.
Erinn would then share our guidance before we move to Q&A the quarter progressed in line with the expectations that we discussed during our last earnings call. We delivered revenue of two and $8 million in line with our guidance and adjusted EBITDA margin of 12%, which exceeded our guidance. The restructuring program. We shared with you in August.
Being executed to plan the results are $17 million in quarterly cost take out by the end of the quarter or $68 million on annualized basis, Our global digital engineer Center is operational and is driving innovation with our clients and improving our ability to innovate in response to client demand now let me share up.
Date on the demand environment, we're seeing stability in our sales pipeline compared with Q2 2023 with fewer client policies. Our new logo acquisition continues to be a strength with 34, new clients in a quarter increase on 29 in Q2 2023, we're prioritizing our investments in sales and marketing we're seeing our efforts.
Outbound demand generation paying off contributing 51% of our net new bookings in Q3, though we're still seeing longer average sales cycles and programs of work being broken up into smaller deals. We're hearing from some of our clients. The budget pressure is starting to ease I personally met with over 70 clients in the third quarter based on my conversations digital tranche.
Formation remains a top priority for our clients. Despite the macro environment, we're focusing on creating value for our clients through Siri expansion. For example demo innovation around Jenny I and core services data platforms data mesh enterprise modernization cloud and finance, we continue to see.
A lot of client interest in journey, II, and we're well positioned to meet this demand we're focusing on four main areas AI assistant software delivery.
Ah powered digital products.
And data platforms at scale and AI assistant enterprise monetization alongside some vertical opportunities for example, drug discovery, we have a gen. AI Reskilling program underway at scale. We have trained over 2300 thought workers across 51 courses. We were excited by thought worker engagement in our AI force.
Software Festival. The festival is a huge success, we're supporting about Microsoft and Github, who are helping with execution contributing co pilot licenses and are not working with us on joint opportunity development. We're pleased with the innovation pipeline that is shaping up as our teams explore and experiment with new tools and technologies legacy bridge.
Which is a good example of our innovation around Janet Hi Legacy Bridge is a thought works AI assisted software delivery technology, which brings a differentiated approach to lexi coat monetization. According to Idc's August 2023 worldwide CIO survey legacy monetization is a top priority for Cio's in Q3, where we are.
With a new client in North America top five insurance company using legacy bridge to accelerate the monetization of their legacy applications at the end of Q3, we're working with around 30 clients on Gen. AI projects. For example, we're working with a new client Emmy G T and Australian employment and training not for profit business.
S M. A G. T has been supporting employers apprentices trainees jobseekers and students since 1982 Emmy G. T has ambitious strategy underpinned by a digital growth and innovation agenda with partner to deliver AI capability assessment to surface high value use cases across M E G.
T value change our scope included base lining organizational digital maturity and readiness, we provided and actionable roadmap to help M. A G T plan and execute on its high value with digital and AI enabled strategic initiatives towers is also working with new client Rightmove right move is the U k's.
Number one property website, we're working with right move to explore how EA and Jan AI capabilities to support their strategic goals using Janet I tools in helping build the AI skills in house, we're looking into ways to increase operational efficiency as well as bring deeper user value across our suite of rightmove products from B to C property search.
Two features for estate agents additional new Jenny I wins in the quarter include a fortune 500 pharmaceutical a top 10 semiconductor company and a $10 billion tower European E. Commerce company at the core our growth strategy is to deepen relationships with existing clients and win new logos with.
Then supplement this was focused strategies around M&A geographic expansion and partners first starting with partners in October we announced that <unk> has joined stripes partner ecosystem to provide solutions that enable modern digital commerce and finishing operations at our clients High pages group, Australia is <unk>.
Number one online tradespeople marketplace, we have developed a new and improved payment system on stripes payment processing platform thought works financial monetization solution powered by stripe has made the payment experience, even simpler and smoother for high pages tradespeople and their customers I'm proud that in Q3 thought worse.
Was recognized as the Google cloud global partner of the year for diversity and inclusion striving to be a company that truly reflects the diverse ascites. We're working has been a priority of ours. We passionately believe that technology must be created by diverse teams that reflects society to better serve society now let me share some details.
Recent successes with existing clients <unk> group, one of Australia's leading property Tech organizations has been working with our sins in 'twenty 'twenty. One in August 2023, Texas sign a further three year partnership with all works ensuring work continues on picks us most important digital initiatives at BMW, we have been working together.
On the BMW connected AI platform, which we have built on top of a micro services platform based on kubernetes clusters in AWS cloud the connected AI platform supports multi region compliance regulations and provides a standardized scalable way to support all current and future connected AI use cases.
To ensure cost efficient AI deployments.
Multi tenancy and portability between cloud providers were also key design considerations Bmw's data scientists now don't have to worry about infrastructure aspects like persistent storage identity access and infrastructure security everything is built into the platform. We're now live with the first use.
Case around proactive vehicle maintenance management, we're facilitating and many more AI use cases, including the BMW intelligent personal assistant we're pleased that in Q3, our client fell abella one the Forrester 2023 technology strategy impact award for the Americas fell abella the $14 billion.
Retail and financial services company that operates across the Latina America has been a thought works client since 2018 fell abella partner without works to define the companies and business agility model and develop a e-commerce product blueprint the evolve into is cloud native digital retail backbone. This acts as the cause.
<unk> core technology platform across its channels segments and countries, Google cloud hosts the multi tenant D or b. It enables fell about us store monetization and digital point of sale system that unifies us digital search catalog cart and checkout experiences sell abella expects the DRP as modern architecture.
<unk> to substantially reduce time to market for new features and increase the resilience now let me share a couple of examples our successes with new clients with Air Canada, Canada's largest airline we're partnering to consolidate their disparate design systems into one best in class globally aligned design system iteratively.
Demonstrate its use via rapid prototyping and create a roadmap for its development and evolution in the U K, we're working with manufacturing company axon Labelle could deliver sustainable and innovative solutions to their customers communities and the environment to protect future generations, we're partnering with <unk>.
Accent Nobel on their e-commerce platform to improve their scalability and maintain ability in order to support future growth and strategy now in my discussions with clients. They often tell me that two of the things that really differentiate thought works, our brilliant technologists and our thought leadership I'm proud to share that we issued volume.
29 of the towers technology radar in October our biannual report informed by Rio thought worker experience solve our clients' most complex business challenges the CTO of money supermarket Dot com posted what many of our clients tell me he posted an ever expanding technology landscape its resources like the technology right.
That helped guide us through the maze of options the research insights and recommendations truly stand out and in Q3 thought works was ranked by Forbes as one of the world's best management consulting firms. This recognition was based on feedback from clients and we're delighted to be ranked for the first time in 2023 now let me share update on our peak.
As we've restructured our business during the quarter taken care of thought workers has been a top priority. We're pleased that voluntary attrition remains low at 12, 2% on a TTM basis in Q3, compared with 12, 6% on a TTM basis in Q2, our head count at the end of Q3 was around 11000, we'll continue that.
Selectively hire with a focus on specific skill sets such as data infrastructure. In addition to expanding our sales force. Our Glassdoor rating is 3.93 in Q3, we exceeded industry benchmarks in five of the workplace attributes categories, including Korea opportunity culture and valley.
Use and senior management in Q3, we continued to lead the industry and responsible and ethical technology practices. For example, with our work alongside the United Nations.
We're providing guidance on ensuring awareness of bias transparency and the mitigation of negative unintended consequences examinee emergent technologies thought works and at U N team have developed a framework instead of approaches for the responsible creation and management of technology systems and products.
I would like to acknowledge the continuing to support of our thought workers and thank them for their extraordinary impact. They deliver every day now let me hand over to Erin.
Thank you Shao and thanks to everyone for joining us on today's call.
Earlier this morning, we announced our results for the third quarter of 2023, the quarter progressed in line with the expectations. We provided in August.
Our teams are working closely with our clients on their most strategic initiatives and our overall pipeline remains robust our outbound engine is delivering well contributing 51% of net new contracts in the quarter.
New client acquisition continues to be a strength with 34, new clients in the corner.
Our restructuring program is progressing according to plan I am pleased to report that our fast execution has resulted in $68 million of cost savings on an annualized basis.
Our global Digital Engineering Center is operational and is optimizing our delivery capabilities. The D. E C. It's driving efficiencies and improving utilization, which in Q3 was within our target range.
Now, let's move onto our results in more detail.
Revenues in Q3 were $280 million, representing a year over year decline of 16% in constant currency revenue declined 17%.
Acquisitions contributed one percentage point to the revenue growth rate in Q3.
For the quarter, we saw year over year declines of 10% and APAC, 17% and Europe, 18% in North America, and 25% and Latam.
Moving to our industry verticals automotive travel and transportation remains our fastest growing vertical rising 12% year over year with.
With our year over year declines of 14% within energy public and health services, 16% in financial services, 23% in retail and consumer.
And 25% in technology and business services.
The third quarter on a TTM basis around 93% of our business came from existing clients.
We currently have 34 clients with revenues greater than $10 million on a TTM basis in the third quarter as a percentage of total revenue our top five top 10, and top 30 clients generated 19%, 29% and 67% respectively.
In the third quarter, our annualized average revenue per employee was $99000, which is above the industry average and is reflective of the highly strategic work that we provide to our clients and.
And trailing 12 month basis, we ended Q3 with bookings of $1.4 billion. This is a 6.7% decline versus Q3 'twenty 'twenty tail.
As we have discussed previously this is primarily due to smaller contract sizes and shorter contract terms.
Adjusted gross margin was 37, 4% for Q3 compared to 40.7% during the prior year period.
Q3, 2023, adjusted gross margin included some temporary headwinds related to onshore offshore mix shift as well as mid single digit pricing declines on a like for like basis.
In the third quarter, our adjusted SG&A as a percentage of revenue was 26% compared to 21.2% in the prior year period and 26.5% in Q2 2023.
Adjusted EBITDA was $34 million for the third quarter and adjusted EBITA margin was 12%.
Q3, GAAP diluted loss per share was eight cents compared to a loss of 12 cents in the prior year period.
Our adjusted diluted EPS was four cents compared to eight cents for the third quarter 2022.
We had free cash flow of $4 million during Q3 compared to free cash flow of $28 million in the prior year period.
This figure is inclusive of $11 million in restructuring related cash payments.
We continue to have good liquidity, our cash balance stood at $87 million as of September 32023, alongside an undrawn revolving credit facility. Our outstanding term loan balance was $297 million as of September 32023.
Now, let's turn to our business outlook for Q4 for.
For the fourth quarter of 2023, we expect revenues to be in the range of $265 million to $270 million, reflecting a year over year decline of negative 15% to negative, 13% or negative 16% to negative 14% in constant currency.
Our Q4 guidance is informed by sales cycles remaining elongated and programs of work being broken up into smaller deals. However.
However, we are seeing stability in the pipeline compared to earlier quarters, especially among our larger clients.
We expect utilization adjusted for seasonality to continue to trend upwards and billable hours adjusted for seasonality to be consistent into Q4.
For the full year, we now expect revenues in the range of $1.139 billion to $1.144 billion, reflecting a year over year decline of negative, 12% or negative 12% to negative 11% in constant currency.
This includes an incremental $4 million of FX headwinds compared to the guidance, we provided last quarter.
We expect acquisitions will contribute approximately one percentage point to the revenue growth rate in Q4, and two percentage points of the revenue growth rate for the full year.
We expect adjusted EBITA margin for the fourth quarter to me in the range of 10.5% to 12.5%.
For the full year, we now expect adjusted EBITDA margin of 11% to 11.5%.
With respect to our restructuring program. We continue to expect total pretax charges of $20 million to $25 million of which we have already recorded $16 million through the end of Q3.
We continue to expect annualized cost savings of $75 million to $85 million, resulting from our restructuring actions.
For the fourth quarter, we expect adjusted diluted EPS to be in the range of two cents to four cents, assuming a weighted average share count of approximately 328 million diluted shares outstanding.
For the full year, we now expect adjusted diluted EPS of <unk> 12 cents to 14th and assuming a weighted average share count of approximately 331 million diluted shares outstanding.
Our Q4 guidance incorporates share based compensation of $17 million for the full year, we expect share based compensation will total $65 million.
By the end of 2023, we will have fully recognized all share based compensation related to our IPO.
As mentioned.
And earlier, we are seeing signs of stability across our client base, we intend to provide our guidance for 'twenty 'twenty four during our Q4 earnings call next year, but our early expectation is that we will see revenue stability from Q4 into Q1 of 'twenty 'twenty four followed by modest sequential growth throughout the remainder of 'twenty two.
24.
In closing we remain focused on driving digital transformation with our clients. These are long term strategic initiatives for our clients and we continue to foster multiyear relationships.
With that I'll turn the call back over to Rob.
Thanks, Erin you can find our investor presentation on the Thoughtworks Investor Relations Web site, we will now move on to Q&A, we ask.
So 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.
Paul.
Yes.
Thank you feel 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 Maggie Nolan with William Blair. Your line is open.
Hi, Thank you.
Aaron I wanted to dig into the last comment that you just made there on 2024 can.
Can you elaborate a little on what maybe some of the drivers would be that would get you to that stability in the first quarter and then sequential growth from there.
Thanks for the question Maggie, Yes, definitely and first of all I will comment on stability generally.
We are we've talked a bit in our prepared remarks already about stability.
And on a relative basis, we have seen a more stable pipeline in the last few months and we're seeing this as a good sign.
The other thing I would highlight that specific to fourth quarter is that there is seasonality and so if we and and and that's because of more public holidays more vacation time that we typically see and expect in the fourth quarter compared to Q3.
So if we adjust for that and moving from Q3 to Q4, we are expecting.
To see similar.
And then.
We're not being specific yet we cannot of course, we'll be more specific in three months. These are critical.
Two months or so as we close out the year, but.
The way things are looking right now we are seeing signs of stability moving into Q1, and so that's our best view.
We have been investing in AD demand in marketing.
And overall and we continue to increase our sales forces as Cheryl mentioned earlier. So all of these things are helping build out that picture in 'twenty 'twenty four but again, we're not guiding now we will be more specific in three months time.
Thank you that's helpful contacts demo, we'll wait for the formal guidance.
Next quarter. My other question was on the margin profile.
Hoping you can elaborate a little on what some of the temporary headwinds are that you're seeing with respect to the mix and maybe just kind of help us understand where offshore and onshore mix is currently given all of the kind of changes that you've put through in the business structurally and operationally.
Okay.
Thanks Maggie.
Just in terms of overall margin there are temporary headwinds that we're seeing right now so from a structural perspective.
I'll start with what is impacting gross margin.
And while we have seen utilization improve particularly from where we are where we were at the start of the year and moving at a higher position in from Q1 to Q2, then Q2 to Q3. So we're definitely on the right path, we've moved more into our target range, but where.
Not yet at and where.
Where we want to be I would say, we're at the lower end of that target range and so that is an area of focus we are both shallow and I touched on the restructuring and the digital Engineering Center and so we're feeling positive about the benefits on utilization and we believe theres more to come.
I did also touch on pricing given the macro environment, we haven't seen some pressures related to pricing. We are working with our clients, where we are seeing more sensitivity due to constrained budgets on the whole so pricing for us has been a headwind and it's something that as we look forward and we do.
Think that is likely to continue to be a headwind into 'twenty 'twenty four we do believe that normalized supply demand dynamics will return at some point, but we think that as we move into 2024 that will be a situation that that's likely to remain.
And then again just dimension on SG&A, obviously, the restructuring that we've touched on it's going well. We have worked on executing quickly on that so we are seeing that benefit to the cost base.
<unk> of that is making the adjustments you.
Where the moves have been from onshore to offshore in terms of work and we have adjusted for most of that but there is still friction that we're seeing in gross margin from a headwind perspective that just really relates to transition and handover and as these things really take a couple of quarters to fully moved through.
And then again and we are seeing efficiencies from our operations, where we've reduced particularly back office operation. We're still doing more work on that and we'll continue to do that into the next year, but again in the positive we are seeing and we are seeing good signs from a pipeline perspective and where.
We're committed to continuing to invest in our demand and our sales and marketing.
Very comprehensive Aaron Thank you so much.
Thank you. Our next question comes from Ashwin <unk> with Citi. Your line is open.
Thank you.
Okay.
And in the quarter relative to expectations, it's good to see that.
I wanted to ask sort of try to draw a fine line between.
He is not getting worse and worse is getting better.
If you could sort of walk through.
Either by.
Geography.
Or to call our project pie can sort of.
What sorts of things are in the mode of.
Not not getting worse stabilizing versus actually seeing green shoots and getting better.
Or if you need it or if you could kind of get.
Daniel entity on the equity group.
Sure. Thanks.
Thanks Ashwin.
So I'll start as where things are not getting worse, which meant there similar to what we described last quarter from a client buying behavior perspective.
Sales cycle is still long.
No we're still seeing additional layers of approval required.
Do you size the deal sizes do compress, especially any shows statement work with ramp up continue to be incremental.
And also the pipeline conversion is still.
Slower than we used to see similar to what <unk> seen last quarter, because the client sentiment is still cautious budgets tight. So those are the things that similar and it's not getting worse, where we're seeing more stabilization.
Is for example in areas, where we have large programs work and going going out with especially with large client.
We used to see when I say used to see in Q2 Q early Q3, especially in Q2, we called out a few unexpected ramp downs. They have this have been much less frequent in Q3 in fact that after the one we called out just the beginning of July we haven't seen any anything at that scale.
Phil since that there is still a bit of a ramp down here in their scope reductions, but much less frequent and at a much smaller scale.
The other thing we're seeing improving a little is that we are hearing from some cline that budget is opening up in some aspects of the market not all market for sure but some of the market for example, health care energy.
Automotive and then from a Geo perspective APAC is.
Hearing more positive sentiment from our client and we're seeing some new projects starting there as well.
Are you a few 30 million dollar plus deals across the line.
Certainly.
And Neil do you want to point out is.
Our overall volume in Q3's actually consistent with Q2 from hours Bill perspective, there's nothing the science stabilization now of course as Aaron mentioned some of this work is moving towards offshore.
So that's putting a little bit of short term.
Revenue pressure on us, but overall, we're seeing positive momentum in India in Europe Asia and is offset by some of the similar behaviors in North America U K and Australia.
Thank you. Our next question comes from Puneet Jain with Jpmorgan. Your line is open.
Okay.
Pretty good.
Telephones muted please on mute.
Yeah, Hi, Savi ever I didn't realize I was on mute.
So.
Can you talk about like what you are seeing or what you expect from client budgets early next year like in terms of magnitude and timing and are there any differences like in demand environment that youre seeing across verticals it seems like.
DMT retail the vertical cracker week beyond stabilizing, but energy utilities and financial services are deteriorating.
Sure. Thank you puneet.
First of all the 'twenty 'twenty four budget cycle.
With our clients, we are having a lot of conversations with our clients about this.
The overall tone is still very cautious 'twenty 'twenty four I don't think is as as.
As cautious last year, but is not.
Significantly better is not back to normal so the timeline is still little bit delayed theres still a lot of a last minute decision.
Where.
We're expecting.
Budget discussions probably continue late into December even early January.
Yeah.
And then the other thing to call out many business as we having this discussion our steel part housing cost reduction programs over growth initiatives in the near future. So we expect any budget increases for 2024 to be limited and.
Incremental.
And then to answer your question from a vertical perspective, where we see I think the biggest challenge is still tech in retail as you mentioned.
We continue to see.
For their pullback of spending as it declines going through this type of budget cycles.
From our perspective, our clients and finishes services is relatively stable on a whole but.
Obviously remedy decline was impacted Q on Q from some of the coin specific scope reductions, we mentioned last quarter, including a large one in Q2.
And then.
Energy public health care is a strategic focus for us.
And then there are more recession resilient and we're seeing.
The sector doing reasonably well, but similarity with a large client ramp down we called out again last quarter, which was at the beginning of July that impacted the overall revenue growth from a year on year perspective, but we're happy that.
We're now 26% of our portfolio is in energy public health care and.
And finally.
Automobile is travel.
Travel insurance reputation remains drawing Q3 was 12% growth and also a positive outlook.
Got it thank you.
Thank you. Our next question comes from Bryan Bergin with TD Cowen Your line is open.
Hey, good morning. Thank you I guess first one any early learnings you can share ear from a centralized delivery structure.
Yes.
For sure.
Thanks, Brian for the question. So we are.
We're seeing one of the things Aaron called out is the utilization getting back to the range. We're aiming for even though he is still at the lower end of the range.
This is largely to do with the BDC to a center.
Center, we've created.
Now that we're managing our supply capacity in that more centrally matter as opposed to each country or even a sub sub sector in the country doing one thing. So we're seeing a very obvious improvement on utilization optimization.
In several regions that they had they have to get back to the mid range or even getting back to the high end of that range up there off their utilization, which is declared a good sign from a go to market perspective.
We are still in the middle of getting through the transition to have the market team.
More.
Client centric and vertical centric, we're definitely seeing signs where where our teams are generally spending more time with our clients with less internal friction. We do believe that it's going to help us to become more intentional and strategic in our in funding.
Investment in demand generation and Aaron can probably comment on some of the lessons learned on the.
Operational central Asia inside of it.
So I think the point that I would want to add a route around the operation side of it and would simply be.
We're opening up a lot of opportunities to drive both efficiencies and process improvements in our business and for US. We're seeing that very much is a win win Shao touched on an example of that from a demand perspective, where.
The centralization of how we're going to market is actually reducing friction for some of our demand leaders in and enabling them to be in front of clients more nuts. That's a great thing that's not the only place that we're seeing and I think going through this restructuring and looking for these opportunities where refining process.
Etsy is that.
Really.
Not again, not only will provide cost saving by moving into a lower cost part of the business, but just general improvement overall so.
On the whole I think things are trending very well.
Thank you. Our next question comes from Jason Kupferberg with Bank of America. Your line is open.
Hi, Good morning, Gerald Erin that the pilot Dupont on for Jason Thanks for taking my questions.
So it seems like the industry trend of moving towards more cost reduction programs compared to growth.
<unk> had been occurring for the past several quarters now given the choppy macro understandably I'd be curious to hear your strategy to sort of capture some of that demand for example, like how much of that $1 4 billion in bookings is focused on more of the cost takeout initiatives versus your higher bill rate consulting projects.
And maybe if you can just sort of how speak to how that impacts both the topline and margin profile of business. Thank you.
Thanks Tyler.
So as we are our clients are definitely.
More cost conscious and then.
And then their internal priorities moving to cost reduction more than growth initiatives.
And then where we've been doing from a service offering perspective is to focus more on offerings that can help to create efficiency and and then targeting cost saving programs.
For example, engineering effectiveness programs that will be enrolling out which is resonating.
Resonating with a lot of our clients in North America and in Europe.
It's targeting building a engineering effective platform to allow our clients to be more efficient with their own internal R&D and then delivery a practice.
The other thing where you allow that rollout is a demo as digital application management operation services. This is it more of a digital version of the traditional support maintenance to help their clients to both keep running their digital assets in a modern way. It also.
For the programming in the wrong mode versus the Bill Mote, and then to allow them to reduce costs in the short term, but also paves the way to get back to the to the build phase when they when the budget situation what are their priorities started to change.
The other thing I think we do a lot is as Aaron alluded to earlier is to move a lot of engineering work to offshore so that we can deliver more with less and this is happening across the board across the verticals.
That's how we're seeing some of the.
The top line revenue being being affected because we're even though we're delivering the same hours is delivering in a lower cost lower bill rate country.
But at the same time in the long run it should be margin accretive because we generate gets higher margin with offshore but in short term, we're not seeing that margin benefit instantly because because of the transition and then which also resulted in lower utilization in some of the onshore.
Capacity, we have is causing.
Office, a small dent on the on the margin side of it but overall, we feel that we're.
Working with our clients.
Helping them with their priorities and our churn rate is very low we continue to work with declines we've been working with for a long time, our top 10 clients average tenure is nine years, we feel confident that if we help them through this difficult time, we're gonna be better positioned to ramp up and focus more on the grocery.
Growth initiatives when the times get Zach it's better.
Okay, Great. That's Super helpful. John Thank you and just quickly to follow up on the margin dynamics.
That you were alluding to.
It looks like your EBITDA margin was particularly healthy during the quarter.
The <unk> guide, maybe modestly below street expectations, but.
How should we be thinking about the moving pieces of the margin story as we look through the rest of the year.
For example, when will be offshore margin tailwind sort of actually hit the business and just how do we think about margins as we go forward into 2024 and beyond should we see a more normal in the low double digit range or should we anticipate kind of a return to the more mid to high teens, just sort of any clarity there.
Would be appreciated.
Yeah.
Thanks for the question Tyler and so how to think about margins I did touch on a couple of these point earlier and I think it's worth repeating and so you you asked around the offshore tailwind and how long.
Until we start to see that work through it.
It's hard to say exactly but my view is that it will probably take about two more quarters to work through that fully and so maybe about halfway into 2024 things do improve and as we move along so it's not as if we will wait to see the benefits fully until that.
That point, but the impact.
Is it incremental and so we're focused on seeing those improvements, but at the same time committed to working with our clients to make to make the shift.
The.
I touched on utilization before as did shall we.
We are really pleased to see the improvements in our utilization profile, but we are not done similarly to the offshore tailwind at those won't all come at one time. There is a few supply demand imbalances that we're working through offshore onshore is one of them, but also a little bit from a skill.
Next and so.
We're continuing to push and that the digital Engineering Center. We believe we will continue to deliver results and so we expect to see that be an improvement to margins overall.
And then again the restructuring costs, we've made a lot of headway already in our overall program.
As a reminder, we expect them.
That we will have a cost take out on an annualized basis of 75 to 85 million and the actions. We took are locked in 68 million already by the end of Q3, so very good progress.
Our view right now is we think that will be towards the upper end of that and that certainly will be a benefit in 2024.
Now on the whole as I mentioned earlier I believe that some of the pricing dynamics supply demand dynamics that are coming from a more challenged macro will continue to persist into at certainly at least the start of 2024.
And so we're not expecting those just to move away where this all gets us in summary is and from a margin perspective again, not being too specific on numbers well, we'll wait for that and but 2023 has been a more challenging year from a margin point of view for reasons that we've talked about we do think.
That we will see improvement in 'twenty, 'twenty, four but unlikely to be at the levels of the high teens and where we were in 'twenty, one and 'twenty two.
Okay. That's very helpful. Thanks for the insights down there and I appreciate it.
Thank you as a reminder, if you'd like to ask a question. Please press star one one.
Our next question comes from Matthew Roswell with RBC. Your line is open.
Yes. Good morning. Thank you for taking my questions I guess, if I could get a little more color on your pricing commentary and what you're seeing from the competitors is it. It is the competitors that are pulling down pricing or is it clients coming back to you and sort of looking for pricing reductions.
Yes.
Sure.
It's a little bit of boats with.
With existing customers, where we tend to have large program work.
But sometimes with new adds to the value of a new statement works getting renew on the six months' annual basis, we're seeing client coming to us, saying that hey, I got a budget constraint.
<unk> do you need to get the same amount of work value and what worked out help me with that and pricing is often a conversation that.
That resulted in a lower.
Pricing for them.
Discount or giving a short term discount perspective. So that's one source of the discussion with new work, especially in new client is becoming very competitive in that I think pricing pressure is mostly coming from all over the place from competitions, where everyone is sharpening their pencils trying to put in a bid that's.
Commercially aggressive trying to win the deal. So that's why we see it.
The pressure coming from competition.
And the competition, if I could your win rates.
The what rate sorry, the win rates on the contracts.
Oh, our win rate actually remains quite stable with both extension of new work.
Our.
Our strategy in this current climate is obviously trying to trying to win work and and and and figure out margin. Later, so when are we going into the bidding situation, especially with the new work. We're also becoming very aggressive ourselves from a commercial perspective is not just pricing. It's obviously the entire career.
Motto.
Including outcome based or potentially.
Similar.
Type of a variant.
Commercial models our win rate remains.
Very similar to what we have.
<unk> seen before and we as we called out we acquired 31, new logos in Q3 on top of the 29 in Q2 and <unk> 47 in Q1, so still pretty good track record of winning deals and new logos.
Okay and then a question for you Aaron how should we think about fourth quarter free cash flow.
Especially in regards to potential further cash restructuring charges and then is there anything as we go into FY 'twenty for a resumption of sequential growth, we should keep in mind around cash flow, maybe working capital needs and things like that.
Okay.
With respect to cash flow for fourth quarter, and largely the dynamics that impacted third quarter will be the same in fourth quarter, Matthew mentioned and.
The restructuring charges Q3 was impacted by the 11 million in restructuring charges. So as a reminder, on the whole and we expect $20 million to $25 million. So that means we've paid about half of that a little bit more than half and depending on where you land in <unk>.
Q3, and there'll be more in Q4, so those dynamics will be similar cash flow and as a consequence likely to be similar what we.
So far in Q3 in terms of 'twenty 'twenty four those are one time charges and so cash flow will benefit as a consequence.
And be careful also should be improved by an improving margin profile and then finally earlier. This year, we did have the payment with respect to the contingent.
Earn out from our.
Canada acquisition, and so that is a factor that impacted 2023 and about wouldn't continue in 2024.
Okay. Thank you very much.
Thank you there are no further questions at this time I'd like to turn the call back over to goes out for any closing remarks.
Thank you for joining us today for our Q4 earnings call.
I'd like to acknowledge continued support of our board and our shareholders and in closing I want to thank all thought workers clients and partners for the extraordinary impact we are delivering everyday together.
Stay well and we look forward to catch up with you next quarter.
Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
Yes.