Thoughtworks Holding Inc (TWKS) 2021 Q3 法說會逐字稿

Hello, everyone, and welcome to Thoughtworks' earnings call for the third quarter 2021. We will be recording today's call, and during the presentations, all lines will be on listen-only. Joining me today will be Thoughtworks' President and CEO Guo Xiao and CFO Erin Cummins.

The earnings press release was issued earlier today and also available on the Investor Relations page on thoughtworks.com if you want to review or download a copy. Some of the matters we will discuss on this call, including our expected business outlook, are forward-looking. And as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors described in today's press release and discussed in the risk factors section of our registration statement on Form S-1 in connection with our initial public offering and other reports we may file from time to time with the SEC, including our quarterly reports.

These risks and uncertainties could cause actual results to differ materially from those expressed on this call. We caution you not to place undue reliance on these forward-looking statements because they are made only as of the date when made.

During our call today, we will reference certain non-GAAP financial measures which we believe will provide useful information for investors. We also provide growth rates in constant currency as a framework for assessing how our underlying businesses perform, excluding the effect of foreign currency rate fluctuations. We include reconciliations of non-GAAP financial measures to our GAAP financial measures in our press release furnished as an exhibit to our Form 8-K filed earlier today, which is also available on the investor relations section of our website at thoughtworks.com.

The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. Thoughtworks assumes no obligations to update or revise the information presented on this conference call.

I will now hand over to Guo.

Thank you, Michael, and welcome to everyone who has joined us today. This is our first earnings announcement as a public company after our successful IPO on September 15, 2021, which was oversubscribed. A total of $890 million was raised with $315 million in net proceeds going to Thoughtworks.

Given that we are new to the market, I'd like to start the call by giving you an overview of Thoughtworks. And then Erin will take you through our Q3 financial results in more detail. I will then update you on some of the business highlights in the quarter before Erin shares our guidance and we open for Q&A.

Let me start with an introduction to Thoughtworks. We're a global technology consultancy that integrates strategy, design, and engineering to drive digital innovation. We enable enterprises and technology disruptors to thrive as modern digital businesses.

And our strategy is working. I'm pleased to report that we have delivered revenue of $285 million in our third quarter of 2021. This is an increase of 45% year over year and 42% constant currency. In the third quarter, we achieved adjusted EBITDA margin of 23%. At the end of September, we were over 10,000 Thoughtworkers strong in 17 countries across 5 continents. I'd like to thank every Thoughtworker around the world for the extraordinary impact they create through our technology excellence and culture.

The Thoughtworks that you see today is the result of a 28-year journey building some of the best capabilities in the industry, establishing a reputation for thought leadership, and fostering a unique and cultivating culture. Our diverse and global culture has allowed us to attract and retain what we believe to be the best talent in the industry, all of which has enabled us to become a premium brand with a diversified business across industry verticals and geographies while driving rapid growth with strong margins. This unique combination of best-in-class strategy, software engineering, design, and organizational transformation expertise has made Thoughtworks a leading digital transformation partner in this large and rapidly expanding market.

Spending on digital transformation services is expected to more than double to around $1 trillion by 2025 from $470 billion in 2020 according to MarketsandMarkets. This growth is driven by megatrends across cloud, digital platforms, IoT, AI and machine learning, and digital products and customer experience. And we see our key growth opportunities coming from deepening our relationships with existing clients, establishing new client relationships, developing new technical capabilities and client solutions, developing and growing our strategic partnerships, and undertaking strategic targeted acquisitions.

The depth of our expertise and the breadth of our capabilities helps attract a wide spectrum of clients, from Fortune 500-type enterprises transforming their global businesses to up-and-coming disruptors with hypergrowth business models. This slide shows a snapshot of some of our existing clients. Through September 30 year to date, around 90% of our revenue was derived from existing clients. These strong metrics demonstrate the value we bring to our customers.

In Q3, we contracted with 44 new clients. We're very pleased to have won Telkomsel, Indonesia's largest telecommunication services provider, as a new client. We're excited to be partnering with Telkomsel on their three-year digital transformation journey.

We're seeing good client growth in financial services. Recently, we have won Xapo, an industry-leading fintech company. Xapo has partnered with Thoughtworks to become a globally accessible bank, offering US-dollar banking services with regulated access to bitcoin. Thoughtworks in the UK and Romania will work with Xapo at the cutting-edge of technology, shaping the future of important developments in financial services that we believe will have long-lasting impact.

Another new financial services client is Saxo Bank. Saxo Bank is one of the largest online investment banks in Europe. Our UK and Indian teams are partnering with Saxo Bank across data governance, data platforms, and data managed architecture. We are seeing strong revenue growth in the public sector. For example, over the last six months, we have collaborated with the Department of Transport and Main Roads, TMR, in Queensland, Australia and won new business at this existing client to establish a microservices and event-driven architectural platform, which enables TMR to develop customer-oriented solutions faster and more cost effectively.

And at Kroger, our existing client, we have expanded our partnership within their health and wellness business around OptUp. OptUp helps Kroger simplify how customers make informed healthier food purchases by making nutritional information core to finding and buying better-for-you food. Once a standalone app, Thoughtworks integrated the OptUp web experience within the Kroger online ecosystem, amplifying customer reach and impact before sunsetting the standalone app.

And we are also collaborating with Lenovo, a global technology leader, on a multiyear engagement with their intelligent devices group's advanced innovation center to evolve the platform for their SaaS-based solutions and services. And for those keen football fans, we are working with Pro Football Focus, PFF, in North America to enrich their mobile experience in support of 32 National Football League teams and their fans. You can find details of some of these customer successes on a new section of our website, thoughtworks.com.

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

Thank you, Xiao, and thanks to all of you for joining us today. We were very pleased with our results in the third quarter, our first as a public company. Let me begin by summarizing a few of the highlights for the quarter.

In the third quarter, we delivered outstanding results, reflecting strong demand for our services across all geographies and verticals. Revenue growth was 45% year over year and 42% on a constant currency basis. Third-quarter growth was robust and was higher than the view we held in the second quarter by 2% after absorbing a 1% foreign exchange headwind.

Adjusted EBITDA margin was 23%, an increase of 110 basis points compared to the same quarter last year. We also generated strong free cash flow of $28 million. We delivered this margin expansion with an execution focused on results while leveraging our scale and premium position in the market.

Now let me share some of the details. Turning to revenue for the third quarter, revenue growth year over year was 45% and acquisitions completed in January 2021 contributed 2% to revenue growth in the quarter. We are a highly diversified business from a geographic and industry perspective. We had exceptional growth across all of our regions, with North America growing at 35%, APAC growing at 53%, Europe growing at 49%, and LatAm at 47%.

Performance across all of our industry verticals was strong, with financial services growing at 61% and a good rebound in retail and consumer, also growing at 61%. Through year-to-date September, around 90% of our business came from existing clients. I am pleased to share that we now have 29 clients with trailing 12-month revenues greater than $10 million, eight more than the third quarter 2020, a 38% increase from the same time last year.

Moving down the income statement, adjusted gross margin for the quarter was 46% compared to 43% for the same period last year. Our adjusted gross margin reflects solid execution and improved staffing leverage alongside our strong value proposition and premium services driving a higher bill rate. Adjusted SG&A as a percentage of revenue was 22% for the quarter compared with 21% for the third quarter last year, which factored in impacts from COVID-19.

Adjusted EBITDA was $66 million for the third quarter, an increase of 53% compared to the prior-year quarter. Adjusted EBITDA margin was 23%, up 110 basis points compared to the third quarter last year. GAAP diluted loss per share was $0.10, primarily due to non-cash stock compensation charges related to our successful IPO. On an adjusted basis, our adjusted diluted earnings per share was $0.14 compared to $0.08 in the third quarter of 2020.

Free cash flow for the quarter was $28 million compared to $24 million in the prior-year quarter, driven by strong operating profitability. We continue to have strong liquidity. Our cash balance at September 30 was $453 million compared to $491 million at December 31, 2020. Further, we have paid down $200 million of debt since the start of July, leaving us with a balance of approximately $511 million today. It was a very strong quarter across all measures. We are focused on capturing the market opportunities while investing in our business and premium position.

Now I would like to hand back to Xiao to share additional updates on our business in the third quarter.

Thanks, Erin. Let me start with our amazing Thoughtworkers. As of September 30, 2021, we were 10,076 Thoughtworkers, of which 40.6% are women or underrepresented gender minority, WUGM. Our strong employee brand continues to attract the best talent in the market. We had 192,000 applicants through the end of September and 1,336 new joiners in the third quarter, a record for Thoughtworks, building on the momentum from the second quarter when 1,303 new Thoughtworkers joined us.

Our overall employee value proposition continues to be highly differentiated, with a net increase in Thoughtworkers of 26.3% over the last 12 months. And we continue to focus on growing and developing our talented people. Let me share a couple of examples.

First, Thoughtworks University is our industry-leading six-week global onboarding and integration program, preparing entry-level graduate hires for their first year as a consultant. Founded in 2005, 339 graduates are in the 2021 cohort year to date, with 54% WUGM. And for future leaders, around 100 Thoughtworkers graduated in September 2021 from our year-long global leadership development program. The goal of the program is to develop and empower well-rounded leaders who live our purpose and values and can lead Thoughtworks into the future. The cohort came from 12 different countries and 53% were WUGM.

Continuing to focus on reaching our unique cultivating culture has paid off. Based on employee feedback, in the third quarter, we were awarded Great Place to Work certified in another five countries. This means that 11 of our 17 countries now have the certification. We are proud that we have achieved industry-leading Great Place to Work trust index scores, with a global average of 90.

Our priority is for Thoughtworks to be a place for talented technologists to grow and have impact. Our overall global Glassdoor rating was 4.5 for Q3, much higher than the rating for the IT services sector of 3.87.

As I outlined at the start of the call, thought leadership and revolutionizing the tech industry is part of our DNA. Let me share with you some recent achievements and what we have done to drive impact in the market. First, let me start with the Technology Radar (sic, Tech Radar). First published in 2010, in October this year, we published our 25th edition. It has become a de facto standard in the industry. Based on hundreds of real client engagements, it lays out our guidance on the latest tools, platforms, techniques, languages, and frameworks that can help digital transformations to be successful.

Second, based on our work with Lenovo, which I mentioned earlier, we published articles sharing the learnings of how to build a digital platform and of Lenovo's ambitious plans to scale that platform to 75 million active users. And third, we launched our responsible technology playbook. As technology becomes more central to business and society, the ethics of technology comes into sharper focus. The playbook covers the tools, methods, and frameworks to assess, model, and mitigate the unintended consequences of technology, helping businesses navigate the ethical risks of an increasingly digital world.

At Thoughtworks, we strive to revolutionize the technology industry and advance practices to help software developers be more effective by removing roadblocks so that dev teams can deliver more value to the business faster. In a world where the battle for talent is fierce, it's essential to make developers' jobs easier and more productive.

First, in Q3, we went live with the full version of our own internal developer platform called [Neo]. It makes it easier for Thoughtworks' software engineers to build better internal products faster, saving time, costs, and improving the security of the applications being developed. We are passionate about developer effectiveness, and so far, more than 300 teams have used Neo for their application development needs.

Next, we have announced a collaboration with Spotify to deliver better developer effectiveness with Backstage, an open source platform for building developer portals. This was built with Spotify and donated to the Cloud Native Computing Foundation. I'm also excited to share that world-leading Canadian communication and media company Telus and Thoughtworks have already worked together to deliver a Backstage developer portal called Simplify that is improving the developer experience for their 8,000 engineers.

Now let me update you on the progress we have made with our ESG strategy, with a focus on social impact, which has been a core aspect of our unique and cultivating culture for over a decade. Thoughtworks' global strategy is led by our Office of Diversity, Equity, Inclusion, Sustainability, and Social Change, also called DEISSC. It supports the many projects our people are working on around the world and shares best practices within our own social impact framework.

The DEISSC office works to align Thoughtworks with external bodies -- for example, the United Nations Sustainable Development Goals -- where we have prioritized the five SDGs you can see on the chart as well as our alignment to SASB, Sustainability Accounting Standards Board.

In the third quarter, we published our 2021 social impact report, which captures the impact of how we are using technology to directly resolve deep-rooted problems and inequalities to create social impact in service of local communities. You can find the report on our Investor Relations site.

Thoughtworkers continue to do transformational social impact projects around the world. Let me share two examples. The first is in Houston, Texas, where we have begun work with ProUnitas and the Kinder Foundation to expand PurpleSENSE to a web-based platform. PurpleSENSE integrates school-based systems to help students, many of whom carry the burden of poverty, to thrive. To date, PurpleSENSE has enabled students across 440 schools to access services for food assistance, mental health counseling, and afterschool clubs, with 90% improvement in response time and a 60% reduction in administrative work. Our work will help ProUnitas make their offerings accessible to any size school, moving them ever-closer to their goal of serving 1 million students over the next 10 years.

Second, we have also launched two new Thoughtworks Arts residencies, exploring the themes of network improvisation and [serving] economies. Thoughtworks Arts is our global technology research lab, which works with artists to explore emerging technologies and their impact on industry, culture, and society. Past works from Thoughtworks Arts have featured at the New York MoMA and the London Tate museums.

Thank you, Xiao. Moving on to our guidance, we expect demand to remain strong and we are confident in our ability to hire the best talent in the market. Starting with the fourth quarter, we expect fourth-quarter revenues to be in the range of $285 million to $287 million, reflecting year-over-year growth at the midpoint of 39% or 38% on a constant currency basis. This also includes the impact of 200 basis points of revenue contribution from our two acquisitions this year.

We expect adjusted EBITDA margin for Q4 to be between 17% and 18%. Our fourth-quarter adjusted EBITDA margin is informed by a lower number of billable days due to the year-end holiday season, for example, Diwali and Christmas. This is reflective of the seasonal trends normal for our business and timing of second-half investments that are now being executed in Q4. For the fourth quarter, we expect adjusted diluted earnings per share to be in the range of $0.08 to $0.09, assuming a weighted average share count of approximately 331 million diluted shares outstanding. Finally, a key assumption that supports our recorded-to-adjusted measurements in the fourth quarter. Stock-based compensation expense is expected to be approximately $81 million as a result of our successful IPO.

Now for the full year 2021, we expect revenues to be in the range of $1.068 billion to $1.070 billion, reflecting year-over-year growth at the midpoint of 33%, which includes an expected favorable impact of foreign exchange on revenue growth of 4%. On a constant currency basis, full-year revenue growth for 2021 is expected to be 29% at the midpoint of the range, which includes circa 200 basis points of revenue contribution from two acquisitions we closed in January 2021.

We are very pleased with our expected full-year revenue growth of 33%, which is higher than the view we held in the second quarter of 32% for full-year revenue growth. We expect full-year adjusted EBITDA margin for 2021 to be between 20.6% and 20.9%, which is higher than the view we held in the second quarter of 19.5% for full-year adjusted EBITDA margin. We expect full-year adjusted diluted earnings per share to be in the range of $0.45 to $0.46, assuming a weighted average share count of approximately 274 million diluted shares outstanding.

For 2022, we believe the demand environment will continue to support strong annual growth rates. Our bookings are very robust and we're seeing increases in the value of the average client contract size from a year ago. We plan to provide a detailed view of 2022 guidance in February on our fourth-quarter earnings call.

Now let me hand back to Michael.

Thanks, Erin. You can find our investor presentation on the Thoughtworks Investor Relations website. We now move on to Q&A. I would ask that you each keep to one question and a follow-up to allow as many participants as possible to ask a question. Operator, would you please provide instructions for those on the call?

(Operator instructions) Dan Perlin.

Thanks. Good morning, everyone, and congratulations on a great first quarter out of the box. It makes it easy for us. I wanted to just start at kind of a higher level and talk maybe about what you are seeing in terms of the scope and nature of the work that came in this quarter. Are you still finding that the business -- the clients are just really accelerating their transformation plans? And how does that translate as you think about your pipeline heading into FY22?

Thanks, Dan. We do continue to see this customer -- well, consumer expectation and then this next-gen technology continue to evolve. And this definitely requires a company to continue to reevaluate their business models and then go through this digital transformation constantly.

We do expect to see increased IT spending and budget probably across all verticals and geographies in the coming years. Growth might eventually and gradually slow down at some point to a more normal level, like those in the pre-COVID years, but we don't expect any quick slowdown in the next three years.

And from a pipeline perspective for Thoughtworks, we definitely see strong growth coming from all countries, all geographies. And we also believe that most of the industry are doing well from a growth perspective. We've seen really fast growth in the financial service sector, in the public sector, and then we've seen a big rebound in retail and consumer sector. So we feel very positive about the pipeline in the future. And also, we see strong growth coming especially from a service element perspective from data, AI, and then cloud and infrastructure.

That's great. It looked like it was pretty broad-based in the quarter. Erin, I just had a quick follow-up for you in relation to investments. You called out as you were providing the guidance your plans for investments into 4Q, which I'm sure spill over a little bit into next year. So I wonder if you could maybe elaborate on what those plans are; specifically, areas of focus and then maybe how tangible they might be. Thank you.

Sure. So the investments that I touched on earlier for the fourth quarter is largely related to our overall growth strategy. So of course, we continue to invest in our talent and our capability. And what I should say is that the investments are pretty broad. And so we've got some talent and capability investments. We are continuing to upskill our talent and have a lot of focus sessions, for example, around data that we are running in Q4.

And then we're also investing in our client portfolio. Xiao mentioned about the 44 new clients that we won in Q3. So we continue to focus on bringing great new clients on board while deepening our relationships with our existing clients. So we are investing in growth. We do see strong growth continuing in 2022, which Xiao mentioned. And so certainly as we think about the fourth quarter, we are ramping up for a good 2022.

And then finally, we are also investing in our partnership programs. And then we continue to look for opportunities for complementary strategic acquisitions. So really it's a broad range of investments, but really the investment activities that we are focused on is supporting our overall growth strategy.

Great. Thank you very much. Congrats.

Maggie Nolan, William Blair.

Thanks so much and congrats. I'm curious about the 44 new clients. Can you give us a little bit of additional detail on where these relationships first start in terms of size and service offering? And then how you expect them to develop over time contributing to that high growth you are expecting?

Sure. The 44 new clients' starting point from a service offering perspective, it's not always the same. In fact, we have four main service offerings: the digital transformation operation, enterprise monetization platform and cloud, data and AI, and then customer experience and products. Most of the work we do with these clients tends to start with one service offering, but then we kind of do more of a land-and-expand and expand into other service offerings over time.

And then for these 44 clients that we have acquired in Q4, we can't reference all of their names and then the size of the contracts of these clients, but we have done a much better job over qualification process so that we look to acquire the clients that we believe will have a potential to build long-term strategic relationships. Or they are happy to apply cutting-edge technology to help us innovate and build thought leadership. So we fully expect a number of them to become top 10 clients in 2022.

Thanks for that detail. And then on the headcount side of things, I mean, you've had good additions here and you talked through some of the things that you do to keep that value proposition up for your employees. How is your utilization and attrition trending and are you comfortable with where it's at at current levels in this kind of competitive talent environment?

So we are comfortable with both the trends in utilization and attrition. Our utilization in Q3 is what we would consider a healthy range. For us, a healthy zone for utilization means we don't have too many Thoughtworkers on the beach, which some people may refer to as the bench. But it also means that we have the bandwidth to start new work, the 44 clients that we talked about, and also continue to invest in our talent with training and capability development, which I touched on a little bit earlier.

So generally for this year, we've seen our utilization be in a very healthy zone for us. In the first quarter, it was toward the top end of that band but has normalized since then and certainly is operating within a healthy range.

And then for attrition, I think we are all aware that the digital transformation market is very strong and certainly that's leading to a highly competitive talent market. And great opportunities for top talent, particularly this year as COVID restrictions ease certainly earlier in the year. So if we are looking at the trends we are seeing in attrition, we are seeing slightly elevated numbers from what we would consider the Thoughtworks normal based on our historical attrition. We've got several programs and initiatives that are focused on retention and we are confident it will return to normal levels. In fact, we've seen it reduce every month for the past three months. So we do expect this trend to continue.

And in general, we are comfortable also with the level of attrition. We've executed really well. I think the attrition is just something that comes with the strong demand environment. But the employee trends are really strong. Xiao mentioned a few of them. We did hire at record levels in Q3. We received more than 190,000 applications in Q3 alone, so there's a really good hiring momentum in Q3. And in general, we are very comfortable with the utilization and attrition.

Okay, thanks for that detail, Erin. Thanks, Xiao.

Brian Essex, Goldman Sachs.

Hi, this is Charlotte Bedick on for Brian Essex. Thanks for taking the question. How should we think about demand for onshore services compared to nearshore and offshore considering shortage of talent, attrition, wage inflation in local markets? And are you seeing them moving more work towards offshore? And if so, are you able to maintain premium revenue per head?

Thanks for the question. So from an onshore to retro ratio perspective, we have seen reasonably stable trends. And maybe just a little bit more offshore than we used to do is mostly because now remote working is kind of the new norm. A lot of clients who were a little bit hesitant to go nearshore offshore now are more open to the conversation and actually do that.

From a value proposition perspective, first of all, both our onshore and offshore offerings are premium services that we provide to a customer relatively to others in the market. This is really demonstrated by the revenue per person -- revenue per employee per year data we have.

And then at the same time, people onsite, they get to work closer with our clients, building a deeper relationship, understanding their contacts, and most importantly helping them to transform. That is and will continue to be a critical component of our service offering.

So while we are glad that we are moving -- we are able to do more work distributively to leverage the global talent pool, we don't expect the onshore component of our portfolio to decrease dramatically. And we do believe we are going to continue maintaining a significant portion of work onshore.

And from a talent perspective, it is I think challenging for any region to recruit top talent at the moment, not just onshore but also offshore as well. So all the investments Erin mentioned on retention, on building a better culture for [dollars to feel] at home is effort we're putting across all the countries, both onshore and offshore. So we're not really worried about attrition or competition for talent onshore teams over offshore teams. I hope that helps.

Great. Yes, definitely very helpful. I guess a follow-up maybe for Erin. With the mix maybe slightly changing, are you seeing impacts affecting gross margins and do you expect any changes going forward?

We are -- the mix is slightly changing, but we are not seeing any significant shifts to our gross margin. So we focus on maintaining a healthy gross margin. Certainly we saw that in Q3 and expect to see that in Q4. So on the whole, no, it's not shifting much for us and we're able to maintain the strong margins that we have.

The one thing that I would also cite, because I think as we are talking about hiring and talent and how we think about that onshore and offshore, I think I maybe stated that we had 190 -- more than 190,000 applications in Q3. And I'm sorry; I mean to say year-to-date Q3. Still a very strong number of applications and certainly reflecting the great employer brand that Thoughtworks has. Thanks, Charlotte.

Great. Thanks for the questions and congrats on your first public earnings.

Tien-tsin Huang, JPMorgan.

Thanks so much. Let me say congrats as well on the first public call and listing. I also wanted to ask on gross margin, if you don't mind. Just it came in a little bit ahead of where we had modeled. I'm curious just how do you grade your contract execution, delivery cost, pricing, those kind of areas? Any surprises?

No surprises --

Go ahead, Erin.

Okay, well, I will start and then certainly you can add in. But I do just want to say that the third quarter was a great quarter. I think Tien-tsin, as you are pointing out, we saw a strong adjusted gross margin in Q3 and that was about 3 points higher than the same time last year.

And what we would say is that it really was driven by solid execution. You heard us talk about the record number of Thoughtworkers that we hired in Q3, and we also drove improvements to our leverage in the quarter. And so overall, very good performance from that point of view.

Then we also increased the percentage of revenues from our new clients. So about 90% of our revenues year to date are coming from our existing clients. If we look at Q3, that number is just a little bit higher, around 85%. Tien-tsin, the one thing that did happen in Q3 was we had lower travel costs than we were expecting. We did expect to have a little bit more travel in some of our countries and ultimately that was a benefit that we saw to gross margin. But what happened is that some countries tightened up on COVID-related restrictions, so travel costs were definitely low in the third quarter.

But on the whole, it was a really strong quarter for us. We continue to have strong client delivery and premium services, of course. And with the client contracts, we're executing really well and have been able to drive growth at our existing clients as well as bringing those new clients on board. Xiao, do you want to jump in?

I think you covered it well. There's probably one thing Tien-tsin mentioned on pricing. I just want to add that we do continue to see an easier year-over-year increase in our average bill rates and this is just -- it's part of the reason that contributed to the higher gross margin. I think this is just a good reflection of the strong demand for our premium digital services.

Makes sense. That's all good stuff. My follow-up I just wanted to ask, now with the IPO behind you and you are going to turn the page on the calendar year, is M&A going to be a bigger focus, do you think? Is there an appetite and is the pipeline there that maybe we would expect an acquisition sooner rather than later?

So acquisition is definitely going to be part of the strategy, but I wouldn't say that we're rushing to get it done sooner than later. In the near term, we expect acquisitions to be complementary, small tuck-ins to our core business, more than those transformational bigger deals.

And we do look for companies who can further strengthen our ability to service clients through new capabilities, new markets. We evaluated more than 100 opportunities year to date. Even though we made two acquisitions earlier this year, we haven't made any since because the fit and the cultural alignment and then the capability premium value proposition are all important factors we want to consider before we decide to acquire anyone.

So we will continue to explore this area in the coming years, but it's more important for us to look for the right fit than try to target a number or dollar amount for acquisition. I hope that helps.

It does. Well done. Thank you.

Bryan Bergin, Cowen.

Hi, thank you. I wanted to ask can you talk about how you feel about the headroom to grow within some of your larger clients? So I heard the good commentary about new client editions and your view that they can become top 10 clients next year. About the current top 10 client business? Any expansion plans there?

Sure. So the current top clients -- if I understand it, the question is for top clients that we have, what's the expansion strategy. As part of the portfolio, a lot of our top 10 clients or top 20 clients are Fortune 500 companies who are trying to transform their business into a modern digital business end to end. So this is a cross-vertical cross-geography phenomena.

Our so-called addressable share of wallet with these clients continue to increase year over year. And we believe that we are only scratching the surface of many of the addressable spendings with our largest enterprise clients. So we are far from saturated. We believe we will continue to increase revenue from our top clients. It's just that in some cases, because of the urgency our clients put on this digital transformation, we see a higher revenue growth from some of the top 50 clients. So some of them rise to the very top faster than the others. For example, we have grown 29 clients with TTM revenue of over $10 million and this is 8 more than Q3 2020. So from 21 to 29 within a year. That's kind of reason why the very top shuffles a little.

Okay, makes sense. And then just a follow-up on supply. Can you comment on where you are adding headcount the most aggressively? And where is -- which countries are you seeing the strongest or the highest competition for talent?

So we are definitely seeing broad-based growth, so we are hiring in all of our countries. But where we will probably add the most in terms of headcount numbers is some of our onshore and offshore -- excuse me, some of our offshore and nearshore locations. So India, Brazil, lots of great demands that we're seeing in Eastern Europe, so we're hiring in Romania. But really it is across the board. It's true of Spain; it's true of China. And so we can really go throughout our geos and say that we are hiring.

In terms of increased or competition for talent, what I would say is there's always the competition for talent, for great talent that Thoughtworks has. So I don't know that we see that increasing so much than what we've experienced in the past, but it's definitely a hot market out there. But where we get back to is our employer brand is as strong as ever, so we are feeling really confident about our ability to recruit and bring in great new Thoughtworkers.

Okay. Thank you very much.

Moshe Katri, Wedbush Securities.

Hey, thanks. Good morning and let me add my congrats here for a very strong quarter. A couple of follow-ups here. Any thoughts on hiring plans for calendar '22? That's number one. And then maybe you can also remind us, looking at your typical year, when do you get -- when do we see some of the comp increases during the year? Any specific quarter?

And then maybe also talk a bit about pricing increases. We kind of heard from some of your peers that you are seeing some catch-up to pricing from pre-pandemic levels and some of your peers actually were able to put through pricing increases a couple times already this year. Thanks a lot.

Okay. So I will get all of that, Moshe. So firstly, starting with the hiring plans for 2022. So Xiao already talked about this, but we are definitely seeing strong growth for 2022. And as I mentioned in my comments earlier, we are gearing up for strong year. So just like we have done this year, we will hire across the board in 2022 and certainly expect to have strong rates of hiring in all of our countries onshore and offshore. So that is great to look forward to.

And then in terms of what we do see in terms of compensation increases. Our compensation increase happen across the year, so there isn't one single quarter where everything happened. On balance, there is probably a little bit more in terms of compensation increases just where we have lots of headcount in Q1 and Q2, but we have it so that it is spread out across the year.

And then from a pricing perspective, we are seeing price increases. And again, Xiao touched on this. We've seen a good increase in our average revenue per employee. And part of that is just coming back from last year, which was impacted from the pandemic, and then part of those price increases is just the normal price increases that we get in all years really. And so it's just -- it's reflecting the price increases we're able to get in the market and would expect from the premium services. So good trends there.

Darrin Peller, Wolfe Research.

Hey, guys. Nice job and it's great to see on the demand side you guys delivering on that. One question I do have is the balance. And I remember even just pre-IPO talking to you guys about obviously high demand but you wanting to pace yourselves at a certain rate so really you can make sure the machine doesn't run too hot.

And so when we think about that and wage inflation potential and what you are seeing right now on that front, the ability to continue to source talent the way you have been doing. So albeit it's still a big number, albeit smaller than some of your competitors, can you just touch through that in terms of what you see as the right run rate? And if there's something we should think about in terms of a normalized rate for the Company longer term or medium term?

Thanks, Darrin, for the question. I will take that. So you are absolutely right. We have always wanted to be careful with our growth rate. And mostly to make sure that we protect the premium value proposition, the talent base, the quality of the talent base, and the culture of Thoughtworks. We have been growing at 20%-plus rate for many years, as you mentioned, and we are able to maintain and also evolve our culture positively.

Now, we are at a phase where we are seeing faster growth. It's not that we haven't seen faster growth before; we have seen faster growth over time throughout our 28-plus-year history. This is definitely what we'd say a high-growth phase thanks to the strong demand post-COVID.

What we're trying to do at this moment is experimenting with some new techniques and processes for onboarding, training, and integration of new hires. This is the area probably compared to all the other functions of the business we're mostly careful about. Because as a premium service provider, all the new hires we have to invest to help them to understand the Thoughtworks way, help them onboard and integrate into our business. But this is definitely something that we have done in different countries and different part of the organization to have -- to be able to have a faster growth pace and then without feeling that we are diluting our culture or the premium value proposition.

Now, can we sustain a higher pace? We believe we can, given all the things we're working on. Now, will this go back to -- will this have to come down because of the concerns about culture? We don't think so. But we're also very careful to make sure that we are going to monitor this so that we don't drive the engine too hot over a long period of time and lose sight of the [stretch] to the core business. So we will continue to watch it. We are not concerned right now with the current growth pace.

All right. That's really helpful. And just one follow-up. When we think about the actual use of capital going forward versus -- sort of just the trade-off you guys want to think about in terms of M&A and investments inorganically. You've really -- I think Thoughtworks has been known among others and probably among the best in the industry as having been an innovator -- organic innovator, just really leading the way with certain ideas. But it seems to me like that's generally been done in-house. And so just strategically when we think about M&A going forward, can you just remind us what your vision is and what to expect even in the near term and the long term?

Sure. I will take that. Definitely, we plan to use the proceeds and then the cash flow that we generate to invest more into M&As. At the end of the day, we feel that as a premium service firm, we're leading many areas in terms of capability, technology, thought leadership as a service provider for our clients. But as a premium service provider, we also have high expectation from our clients who want us to do more and do better.

Historically, organic growth has been the main driver for us, probably the only driver for us for many years. But we also are feeling the pressure that there is just a lot more new techs that is emerging and evolving today than say 10, 20 years ago. And so we have to -- we will rely a lot more on acquisitions in the future to build the capability our clients is asking from us. And this is not just limited to data, machine learning, infrastructure, cloud, many other areas, technical areas we are focusing on.

From a -- I mentioned earlier, from a fit perspective, we are really looking for alignment culture on this premium value proposition on the alignment on business strategy. But in the short term, we do strongly believe that it will continue to be small tuck-ins. We feel pretty comfortable where our core business is from a capability perspective. So we don't really believe that we need a transformational acquisition near term. In the long term, as we continue to grow our muscle, our M&A muscle, we think we'll definitely look for potentially even bigger deals that help us to build capabilities faster.

All right. That's really helpful. Congrats, guys. Thank you.

Arvind Ramnani, Piper Sandler.

Hi, thanks for taking my question and congrats on a great quarter. I had a question on the sort of operational impact you are seeing from folks getting back to work. Are you seeing increased activity from folks getting back to work or -- and is that changing how you are like serving your offerings or even how you are structuring your delivery deals?

Thanks, Arvind. It's a good question. So for us, every country, even every city is kind of on a different timetable based on the local response to the COVID situation. All our offices are open now, even though many with limited capacity. And I think from a delivery perspective, we have adapted so well -- I mean, it's not just us, the industry -- to a remote working model that working out of an office is really optional at this moment for a lot of our people. So we continue to have a lot of people who prefer to work remotely in the countries where we're operating.

Now from a client perspective, we do see requests from some of our clients for people -- for our people to go onsite back to their office and work together. And we definitely be able to cope with that in most of the countries, again, depending on the regional situation.

And then moving forward, we do strongly believe that this hybrid delivery, hybrid mode of working will continue. But with the COVID situation getting better over time, we do also expect more work to return to the client, to onsite, and more people returning to our offices. Especially this is important for building the in-person relationship between our own people and with our clients. Also, for hosting key meetings and social events. I hope that helps.

Definitely. Just a quick follow-up. Certainly the last 18 months has been quite fluid where things were changing kind of in real-time. But given that we are like (inaudible), while it is localized, we're as stable an environment as we have been in the last like 18 months. So with that backdrop, as you look at the next year, year and a half of demand, do you have greater visibility now than before? And if you have greater visibility, can you share a little bit more about how you characterize the demand environment? I'm not looking for guidance into '22, but just more sort of kind of qualitatively how are you looking at the demand environment now versus the past 18 months?

I'm happy to put some color around it. So we are looking forward -- first of all, as Erin mentioned, we continue to see strong growth from both existing clients and new clients throughout this year. Obviously, with 90% of revenue coming from existing clients, it gives us great visibility into the future. We're also seeing more urgent an investment from clients who are looking to accelerate their digital transformation process. As a result, generally bigger and more ambitious projects.

Now, how does this translate to forward-looking pipeline? We're definitely seeing some indicators -- I'll use the word early indicators that we can see as positive signs. One of them is that we are seeing a shorter sales cycle from initial pursuit to contract signing compared with we have seen before. Our bookings are also very robust. We are also seeing an increase in the value of average client contract SOW size and also the average length of the SOWs that we are seeing today are longer than before. So these are the kind of early indicators we'll say give us more confidence about the visibility about the pipeline without putting a number around it. I hope that answers your question.

Yes, it does. Thank you very much and good luck for the remainder of the year.

Thank you.

Jason Kupferberg, Bank of America.

Hey, guys. This is Cassie on for Jason. Just echoing the congratulations as well. I wanted to follow up on some of the previous questions, kind of a longer-term vision and normalized growth maybe on the margin side. It looks like you are going to exit the year at about, for the full year, 20%-plus adjusted EBITDA margins. Could you just help us think through some of the factors affecting the margin dynamics in fiscal '22 and longer term? Maybe some of the full-year IPO costs are coming in. You mentioned lower travel expenses than expected, so maybe some of that comes back in as well. Just how should we kind of think about it broadly for now? Thank you.

Thanks for the question, Cassie. So as you mentioned, we have delivered strong margin performance this year and we expect that to continue. Our value proposition and our premium services are definitely resonating in the market. And we've talked already about how we are investing in our talent as well as expanding our offerings and our capabilities. We also focused a lot on the fundamentals of our operations and we can see that certainly in the year-to-date gross margin of 45%.

But you mentioned travel cost and definitely travel costs have been very low in 2021 and we do anticipate increases in travel in the coming year. So we expect higher travel cost and we also expect higher costs associated with operating as a public company. And both of those you alluded to. So that will put some pressure on our cost base in the coming year, but at the same time, there are opportunities to continue to drive scale efficiencies in our business. Especially, we have opportunities to use our great tech capabilities to our advantage. So we will give more specific guidance in February, but all to say we definitely anticipate our profit margins to continue to be strong in the coming year.

Okay, that's helpful. And I guess just a quick follow-up about vertical trend expectations. Obviously, financial services and retail and consumer you guys called out saw out-performance. Can you just touch a little bit more about maybe what contributed to that? I don't know if M&A was maybe a little bit of a boost. And sort of do you expect these verticals to continue to drive outsized growth for the business? Thanks.

We don't have like an M&A boost in those sectors from our perspective. Previously, the two acquisitions only contributed 2% of new inorganic growth. And when we look at these three sectors in particular -- financial services, retail consumer and public -- energy public health services, which we group together -- we do believe this [transforce] trend will continue. And we also feel strongly about our ability to capture it inorganically is very strong.

In particular, I want to call out the retail consumer sector. This was the one that was hit significantly by COVID. And we definitely expect it to rebound, to sustain, and then probably even grow faster post-COVID given the digital need from the consumers.

Okay. Thanks, guys. Very helpful.

Dave Koning, Baird.

Yes. Hey, guys. Congrats. Thanks. And I guess my question -- Q3, when we just look at organic constant currency sequential, was one of the strongest or about the strongest we can find across the years we have. I am wondering about when we kind of look at that and then we look at Q4 guidance, which is flat to just up very slightly, was there anything in Q3 that really boosted Q3 but then creates a little pressure on Q4 that maybe some one-time type item or maybe not?

So we touched on Q3 being a great quarter and you've heard from us how we're feeling about the demand pipeline and the general growth momentum. So we definitely expect strong growth to continue.

So Dave, to your question, for Thoughtworks, it's typical to observe some quarterly seasonality in our business. So Q3 is often higher from a margin perspective than the yearly average and Q4 is sometimes lower. And the seasonality is just a function of our billable days, the public holidays, and the vacation time taken around them. So this is really normal for us and expected.

So our guidance reflects that seasonality, but we are seeing continued growth in the business. We are certainly seeing growth on a revenue-per-day basis. If we look at the year-over-year growth rate, I've guided that to be 39% at the midpoint of the range. So you can clearly get a sense for the strong growth that we are seeing.

And as I mentioned earlier, we are investing in our business and our growth in Q4. We do have some one-time investments in Q4, but we're also continuing to hire and add capacity to our teams because we are seeing continued strong growth for 2022. So on the whole, feeling really good about Q4 and the year as a whole.

Thanks. And maybe just one quick follow-up. The numbers you gave us are super clean and easy to drop in, which is great especially in the first quarter getting your press release. Are you going to have any addbacks other than stock comp going forward? I mean, certainly a lot of companies add back IPO costs. Yours were super small; I think a couple million in Q2 -- or in Q3. Are those going to be even in there anymore or are those going to be kind of past?

So we will have addbacks going forward. What we expect to have is the continued stock-based compensation, of course, and then intangible amortization. So clean addbacks and good numbers.

Sounds great. Thank you.

There are no further questions. I'd like to turn the call back over to Xiao for any closing remarks.

Just want to thank everyone for joining us today for our first earnings call. I would like to end by thanking all of our shareholders and NASDAQ in particular for helping us becoming a public company. And then finally, in closing, I want to thank all our Thoughtworkers, clients, and partners for the extraordinary impact we are delivering every day together. I look forward to catching up with you all next quarter.

This does conclude today's program and you may now disconnect. Everyone, have a great day.