Thoughtworks Holding Inc (TWKS) 2022 Q1 法說會逐字稿

Hello, everyone, and welcome to Thoughtworks earnings call for the first quarter of 2022. We will be recording today's call. (Operator Instructions)

Joining us today will be Thoughtworks' President and CEO, Guo Xiao; and CFO, Erin Cummins. The earnings press release was issued earlier today and is available on the Investor Relations page on thoughtworks.com if you want to review or download a copy.

Some of the matters we'll discuss on this call, including our expected business outlook, are forward-looking and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors described in today's press release and discussed in the Risk Factors section of our annual report on Form 10-K, our quarterly reports on Form 10-Q and other reports we may file with the SEC from time to time. 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 they were made.

During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We also provide growth rates in constant currency as a framework for assessing how our underlying businesses performed, 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, which is 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 or superior to the measures of financial performance prepared in accordance with GAAP. Thoughtworks assumes no obligation to update or revise the information presented on this conference call.

I will now hand over to Xiao.

Thank you, [Sean]. Welcome, everyone, to our first quarter earnings call. I would like to start by sharing an overall update on the business, and then Erin will take you through our first quarter financial results in more detail. I'll then share some of our business highlights before Erin provides guidance and we open for Q&A.

Let me start with a recap about Thoughtworks. We're a global technology consultancy that integrates strategy, design and engineering to drive digital innovation. We enable enterprises and technology structures to thrive as modern digital businesses. I'm pleased to report excellent results in our first quarter, driven by the continued high demand for our digital transformation services. We delivered revenue of $321 million in the first quarter of 2022, reflecting year-on-year growth of 35% and 38.2% in constant currency. In the quarter, we achieved adjusted EBITDA of $73 million, reflecting 35.4% growth compared to first quarter 2021.

Thoughtworks has established a reputation for thought leadership and fostering a unique and cultivating culture. The diverse and global culture continues to attract and retain what we believe to be the best talent in the industry. At the end of March 2022, we were over 11,000 Thoughtworker strong across 5 continents. I would like to thank every Thoughtworker around the world for the extraordinary impact they create through our technology excellence and culture.

We continue to operate in the large and fast-growing market with demand remaining well above pre-pandemic levels. According to industry analyst IDC, global spending on the digital transformation of business practices, products and organizations is forecast to reach $2.8 trillion in 2025, more than double the size of the market in 2020. For Thoughtworks, we see evidence of this growth across all our services, digital transformation, cloud platforms, data and AI, customer experience, product and design. Strong themes are prevailing. Let me share some examples.

We're seeing high demand from our clients for Thoughtworks' expertise in building out platforms across a wide spectrum of their businesses, from end-to-end enterprise modernization to domain-specific areas like payment systems and retail platforms. We're also seeing elevated demand around new digital products and services, enhancing customer experiences, removing friction and bringing customer-facing services together. And demand for our data and AI services continues to be strong, especially high interest from clients in Data Mesh, domain-oriented decentralized data architecture invented by a Thoughtworks luminary, and our growth strategies are working. At the core, our revenue growth is from deepening relationships with existing clients and winning new logos. We then supplement this with focused strategies around partners, M&A and geographic expansion.

Turning first to M&A. In April, we continued our strategy of undertaking targeted acquisitions. I'm pleased to share that we have acquired Connected to further enhance our capabilities in customer experience, design and product development. Connected has more than 160 employees in Canada. They have deep expertise across the entire product life cycle, from strategy and research to design and engineering.

Connected transforms businesses by building better products. I would like to welcome Connected to the Thoughtworks family. I'm looking forward to the impact they will have on our business, both in growing our CX and digital products services and supporting our business in North America.

Turning next to update on geographic expansion. You may have seen in April, we shared news of our planned expansion into Vietnam. Vietnam is a rich market for technology talent. Our talent hub in Vietnam will help service nearshore demand from our clients in Australia and Singapore, further diversifying Thoughtworks' business.

And now let me share more details on our client portfolio. The depth of our expertise and breadth of our capabilities means that we can help clients address all their challenges from strategy right through to business outcomes. I'm pleased that we continue to see larger client deals. Many clients have ambitions to scale their digital transformations at a faster pace. Our clients appreciate the value we create with them, and we remain confident in our ability to sustain our premium position and pricing.

In 2021, the average tenure across our top 10 clients by revenue was 7 years, and we continue to grow our relationships. For example, at our client Roche, we're working together on an ambitious Data Mesh initiative. Roche is a Swiss multinational health care company and the largest pharmaceutical company in the world. Our innovative work together is using the Data Mesh architecture and the data as a product constructs to leverage Roche's vast data. We're working across various use cases in manufacturing, supply chain, quality and reliability and finance to deliver better outcomes for customers and patients.

We're selective in our approach to new clients, looking to work with clients with long-term ambitions for digital transformation. We continue the positive momentum from Q4, and we have contracted with 52 new clients in the first quarter. I'm pleased to share some examples of new clients that we have been working with in the first quarter.

In Asia Pacific, we're now working with a new client, Siam Makro. Siam Makro is a leading wholesale trade retailer in Thailand. Thoughtworks will help to define and build an infrastructure to transform Siam Makro into a truly data-driven and customer-centric organization. We will build the platform using Data Mesh principles to enable increased data visibility, reliability and access.

The rapidly changing landscape for consumers has brought new opportunities for those retailers who can make data-driven decisions in real time to digitally engage their customers.

In North America, our new client Ritchie Bros., a global asset management and disposition company, has signed a multiyear agreement with Thoughtworks. Ritchie Bros. is working with Thoughtworks to accelerate the delivery of a modern enterprise architecture. We're developing Ritchie Bros.' digital marketplace ecosystem using software development best practices, including continuous integration, continuous delivery methods and tools. You can find details of some of these customer successes on the News section of our website, thoughtworks.com.

I'm 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 first quarter, which demonstrate continued high demand across our geographies and verticals. Let me begin by summarizing a few of the highlights for the quarter.

In the first quarter, we saw strong revenue growth of 35% compared to the prior year period. Constant-currency revenue growth was 38.2%. Our revenue growth in constant currency is 7.2% higher compared to the guidance I shared in March 2022. This is primarily due to strong demand and execution, including a faster ramp-up of new clients, a lower-than-expected impact from Omicron and lower-than-expected attrition for the quarter.

Adjusted EBITDA for the quarter was $73 million, representing year-on-year growth of 35.4%. Our adjusted EBITDA margin of 22.7% was 320 basis points higher compared to the midpoint of the range I guided to in March. Adjusted EBITDA margin when compared to last year has remained consistent mainly due to improvements in adjusted gross margin, offset by the effects of foreign exchange impacts during the quarter.

Now let me share some details. Turning to revenue. For the first quarter, revenue growth year-on-year was 35% and 38.2% on a constant-currency basis. Thoughtworks is a premium brand, evidenced by our high average revenue per employee. We have a diversified business across industry verticals and geographies.

In the first quarter of 2022, we continue to see clients accelerate their digital transformations with Thoughtworks. Over a trailing 12-month period, we had 42 clients with bookings greater than $10 million compared to 29 clients in the same period last year, and our overall bookings in the trailing 12 months increased by 39.6% year-on-year to $1.5 billion. We saw strong momentum across all geographies and verticals. APAC grew by 40.8%, North America by 35.8%, Europe by 29.3% and LATAM at 24.2%.

We also continued to see good growth across our industry verticals during the quarter. The strongest growth was in financial services, growing at 70.7%. Our retail and consumer vertical grew by 51.8% and continued to perform well, and we are very pleased with our growth from existing clients. Technology and business services grew at 28.9%. Energy, public and health grew at 21.1%. Automotive, travel and transport grew at 16%.

At the end of the quarter, on a TTM basis, around 88.3% of our business came from existing clients. We now have 31 clients with TTM revenues greater than $10 million, 8 more than the first quarter of 2021, a 34.8% increase from the same time last year.

Moving down the income statement. For the quarter, adjusted gross margin was 45.6%, a 90 basis points improvement compared to first quarter 2021. Our adjusted gross margin performance was positively impacted by a higher build rate due to our premium services, partially offset by utilization.

In the first quarter, our adjusted SG&A as a percentage of revenue was 22.6%, consistent with the first quarter 2021. The impact of increased costs due to operating as a public company was offset by increased operating leverage in other areas of SG&A.

Adjusted EBITDA was $73 million for the first quarter, an increase of 35.4% compared to the prior year quarter. Adjusted EBITDA margin was 22.7%, consistent with the first quarter last year. GAAP diluted loss per share was $0.20 primarily due to noncash stock compensation charges. On an adjusted basis, our adjusted diluted earnings per share was $0.13 compared to $0.14 in the first quarter of 2021.

Negative free cash flow for the quarter was $11.2 million compared to positive free cash flow of $24.2 million in the prior year quarter, driven by solid operating profitability, offset primarily by lower customer prepayments this quarter and compensation programs with annual payouts in Q1, and we continue to have good liquidity. Our cash balance at March 31, 2022, was $340 million compared to $397 million at March 31, 2021. Further, our debt balance was approximately $508 million as of March 31, 2022.

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

Thanks, Erin. Let me start with our amazing Thoughtworkers. We've grown our community of Thoughtworkers to over 11,000 with a long-term focus on diversity and inclusion. 40.8% of Thoughtworkers are now women and underrepresented gender minorities, WUGM.

We're pleased to have been recognized again this quarter, winning a number of awards for increasing the participation of women in the workplace. In March, at the Diversity Awards 2022, we won in 7 categories, including for women leadership development and women returnee programs. We've also been recognized by the Workplace Gender Equality Agency, an Australian government statutory agency. This is the 11th year Thoughtworks has been cited for our work promoting gender equality in Australian workplaces.

From inception, diversity and inclusion has been embedded in our values and culture, and Thoughtworks now ranks in the top 5% for diversity and inclusion in the technology sector. I'm proud to share that our work in India to enable inclusivity of the LGBTQ+ community is now the subject of a Harvard business case study. The Indian Institute of Management Bangalore developed the case study to better equip future leaders on how to develop inclusive cultures and systems.

Our strong employer brand continues to attract the best talent in the world. We had over 90,000 applicants to Thoughtworks during the first quarter. I'm very proud of our recruiting engine, and we continue to see around 1/3 of our hires coming from Thoughtworks referrals, 1/3 from sourcing and 1/3 from inbound.

Now let me share an update on our people and capability initiatives. Technology is advancing very fast with high demand for top talent in areas like data and cloud. Our skill program to train Thoughtworkers in the new technologies around data and cloud is progressing well. We're now on track to train an additional 1,000 Thoughtworkers during 2022.

I'm also pleased to share Thoughtworks is now an industry partner for the data analytics career accelerator, a program being developed by the London School of Economics and Political Science and online education company FourthRev. The 6-month accelerator will train students from different backgrounds to develop holistic data skills. Thoughtworks will provide projects designed to simulate real-world situations that support Thoughtworks' approaches and values. Our priority is for Thoughtworks to be a place for talented technologists to grow and have impact.

Our global Glassdoor rating is a measure of the progress we're making. In the first quarter, our overall rating was 4.49, which is again higher than the rating for the IT services sector of 3.95. We're known as thought leaders who revolutionize the technology industry, and that's how we build our brand and our reputation from our early days as a company. Let me share some recent thought leadership that is being well received in the market.

In March, we published our 26th edition of the Thoughtworks technology radar. It is a de facto standard in the industry. It lays out our guidance based on hundreds of real client engagements. Thoughtworks Technology Radar provides our insights on the latest tools, platforms, techniques, languages and frameworks that can help digital transformations be successful.

One concept we explore in the latest edition is securing the software supply chain. Many organizations focus on security for systems in production, but it is just as critical to have robust controls on testing, sandbox and cloud environments. Standards such as the Supply chain Levels for Software Artifacts, SLSA, are new entries to this edition of the radar, demonstrating that there are now pragmatic tools to address these issues.

And I'm delighted that the much anticipated book, Data Mesh, Delivering Data-driven Value at Scale, written by a Thoughtworks luminary, is now available. With more than 100 books published, sharing knowledge through authorship is something unique and a very special aspect of our cultivating culture. Data Mesh, first coined by a Thoughtworks luminary in 2019, applies the principles of modern software engineering to unlock the potential of enterprise data. Data Mesh is a data architecture where data is treated as a product and owned by domain teams that understands and consume the data. We're seeing a lot of interest from industry and clients around our leadership in Data Mesh.

And finally, I'd like to share an update on NEO, Thoughtworks' in-house self-service developer portal. The vision behind NEO is to create an environment where Thoughtworks developers can use their valuable time effectively within highly engaged engineering teams. NEO has just been recognized as a winner of the 2022 CIO awards for innovation and impact on operational efficiency, improving developer effectiveness by around 20% to 30%.

Now let me hand back to Erin.

Thanks, Xiao. I would like to update you on some areas of focus within our ESG priorities. Let me start with our approach to the environment.

We have 2 areas of focus: first, our own carbon reduction strategy. We have ambitious targets to reduce our greenhouse gas emissions in line with the Science Based Target initiative. We expect to reduce Scope 1 and Scope 2 GHG emissions by 50% by 2030 from a 2019 baseline and reduce Scope 3 GHG emissions by 85% per employee also by 2030. Additionally, we expect to increase our sourcing of renewable electricity to 100% by 2030. Our targets are currently with the Science Based Target initiative for validation.

Second, we are committed to helping the technology industry and our clients reduce their carbon footprint. Let me share an example of some work that we have been doing in Spain with Holaluz, a green energy technology company whose mission is to enable a planet powered by 100% green energy. Working with Thoughtworks, Holaluz is using the open source cloud carbon footprint tool that Thoughtworks built, leveraging the AWS Compute optimizer service. Holaluz is now able to closely monitor its carbon footprint and act fast. One outcome has been a 3% reduction in its cloud infrastructure costs.

Now moving to social within our ESG strategy. Social change is deeply ingrained in our culture and our business. Thoughtworkers continue to do transformational social impact projects around the world. I am proud to share that Thoughtworks is now an official member of the Digital Public Goods Alliance. Digital public goods are open sourced and help achieve the United Nations sustainable development goals.

Thoughtworks strongly supports these goals. For example, we believe that health care is a human right. Thoughtworks has developed BharatSIM in collaboration with Ashoka University and the Gates Foundation. BharatSIM is an open source agent-based simulation framework for disease modeling using synthetic populations. BharatSIM aims to provide insights to public health experts and policymakers to calibrate and formulate health policies.

Now let me turn to our business outlook. Our pipeline remains robust. For the second quarter of 2022, we expect revenues to be in the range of $328 million to $329 million, reflecting year-on-year growth at the midpoint of 26.2% or 29.5% on a constant-currency basis. We expect acquisitions will contribute approximately 2% to reported revenues. We expect adjusted EBITDA margin for the second quarter to be in the range of 17% to 17.5%. This is in line with our operating plan and reflects the impact of costs that are seasonal in nature, including the impact of annual pay rises in some of our larger countries. For the second quarter, we expect adjusted diluted earnings per share to be in the range of $0.11 to $0.12, assuming a weighted average share count of approximately 333 million diluted shares outstanding.

For the full year 2022, we expect revenue growth to be in the range of 29.5% to 30.5% year-on-year on a constant-currency basis. We expect revenue growth on a reported basis in the range of 27.5% to 28.5%, which includes a negative foreign currency translation impact of approximately 2%. We expect acquisitions will contribute approximately 2% to reported revenues. For adjusted EBITDA margin, we expect full year 2022 to be 19% to 20%. We expect full year adjusted diluted earnings per share for 2022 to be in the range of $0.51 to $0.53, assuming a weighted average share count of approximately 332 million diluted shares outstanding. For 2022, we believe our employee brand is strong and that the demand environment will continue to support our growth ambitions.

Now let me hand back to Sean.

Thanks, Erin. You can find our investor presentation on the Thoughtworks Investor Relations website. We now move on to Q&A.

(Operator Instructions) Operator, would you please provide instructions for those on the call.

(Operator Instructions) Our first question comes from the line of Tien-Tsin Huang from JPMorgan.

Really nice quarter here. I wanted to ask about gross margin or overall margin, if you don't mind. Clearly, the gross margin was really strong in the quarter. So I just wanted to ask about -- your margin outlook here implies some step down sequentially. So I just wanted to better understand what's driving that. I know there's some seasonality. Is there some conservatism, something going on with utilization perhaps? Any color there would be great.

Thanks, Tien-Tsin. I'll start with that and margins. As you pointed out, we had a really strong first quarter. We saw strong execution. We performed well across the board. And at the heart of it was broad-based growth across our geographies and sectors.

We did drive a higher margin in Q1 than what my guide reflected. There's a number of reasons for that. The first is we were able to ramp up certain engagements more quickly than we expected. This was supported by lower-than-expected attrition for the first quarter. We also had a lower impact from Omicron than we were expecting in the quarter. And then we have the benefit, which affected gross margin and overall adjusted EBITDA margin, of some milestone billing with respect to some of our fixed price engagements. So overall, there was a lot of positives working in Q1. It was a strong quarter.

The final piece that I would add with respect to SG&A is that there was a bad debt recovery in Q1, and that also benefited our margin in the first quarter. So if I were going to summarize that, looking at Q1 strong performance, there was approximately 2 to 3 points of uplift that is specific to Q1.

And then, Tien-Tsin, you mentioned seasonality, which is a key point we've discussed before. There is seasonality within our quarterly margin profile. We saw that just close last year in the Q3, Q4 margins. And so if we think about Q2 seasonalities at play again, there's approximately 2 to 3 points of margin impact that are items that I would describe related to seasonality or items that are specific to Q2 of this year.

First is pay rises. We have pay rises in several countries in Q2. I mentioned that in my prepared comments. The pay rises always have the highest impact in the quarter when the rise is given.

Compared to Q1, there's also a higher level of expected annual leave or vacation that's associated with the public holiday schedules. And in addition to that, there are several demand and marketing events taking place in the second quarter, which is really great actually because a lot of these are events that are happening in person for the first time in a long time. So it's definitely something for us to celebrate.

In general, I would just point out we have a very strong margin profile. And if we look at the margin using the midpoint of the guidance for the first half of the year, that would put us just under 20%, which, of course, is in line with our guidance for the year as well. So all in all, seasonality is definitely a factor. And then the Q1 to Q2 transition, it's just a really strong Q1 which is also affecting the comparability but importantly, in line with plan, as we were expecting. Feeling very good about the first quarter and second quarter.

Good. Good. Erin, that's a very complete answer. I appreciate that.

So my quick follow-up, maybe for Xiao, just on the Connected acquisition. Canada based, I heard 160-or-so employees. Anything unique here that you think -- from an amplification standpoint, if you bring it on to the Thoughtworks platform, that's unique or special here? Just trying to think about how that might layer in and bring in some incremental growth.

Sure. So Connected is actually well known in the area that's about new product development services. It has its own methodology, unique methodology about product development. We are very excited about being able to work with them together.

They have developed some really deep expertise across the entire product life cycle. So it's not just engineering. It's from product strategy, research, product design as well as engineering. And then we have seen very strong demand in this customer experience product development and design area around the world but also specifically in North America.

Majority of Connected customers is based in the U.S., so it has a lot of synergy with our U.S. footprint. Also, it's got, like you mentioned, 160 people in Canada. It gave us a great ability -- chance to further scale our talent pool in Canada. So we're generally very excited about Connected. I hope that answered your question.

Our next question comes from the line of Ashwin Shirvaikar from Citi.

Congratulations from me as well on the really solid quarter. As I look at the rev outlook that you provided, it seems as though you're only really putting in the impact of the acquisition. Are there sort of countervailing factors that we should consider, maybe seasonality or cadence of some kind, that perhaps offsets it particularly for 2Q? But if you could broadly just talk about that for the full year, that would be great.

Sure, Ashwin. So our guidance for Q2, as Erin mentioned earlier, even just from a revenue perspective is definitely impacted by some seasonality, and then there's a little bit of a COVID impact as well on utilization. So compared with last year, we're seeing more people -- it's not just there are public holidays. We're seeing more people taking holidays in the spring and around Easter now that COVID constraints have lifted in most of the countries. And then there's also a bit of a utilization drop due to the current lockdown in China, as we have seen in the news.

So for us, Q2 revenue forecast, it's on plan. It's exactly where we expect it to be at the beginning of the year. But there's definitely a bit of a seasonality that's impacting compared to what -- how the Q1 looks. But as you mentioned, actually, the full year looks very strong. In fact, we did raise our full year guidance, not just the acquisition. I think we raised it by about 4.5 points than the Q1 guidance, right? So half of that -- about half of that come from acquisition, the other half just from organic growth.

And we see pretty strong bookings at this point. I think it's about $1.5 billion in the trailing 12 months. And then we also have about 42 clients with more than $10 million bookings. So pretty robust pipeline as well for the rest of the year. So I still feel very positive and strong about the full year.

Right. The other question, and this is a relatively frequent point of discussion with investors, is just the broad topic of wage inflation or wage increases versus when you can get pricing offsets for that, the timing of it and things like that. Could you -- I mean should we assume that just given the nature of Thoughtworks' business and the premium that you command that getting appropriate pricing offsets should not be a problem for you to offset levels of wage inflation?

Yes, I would say that. It's not a problem for Thoughtworks in this environment even if the competition of talent is driving up the wages across the countries. The premium value proposition do -- does allow us to command a premium pricing. And then we do this mostly by adding higher value-add services throughout innovation. For example, data management I mentioned earlier. And that allows us to drive higher rate structure and then pricing for the services we offer on average.

We have had high single-digit price increases over the last 12 months. And that is offset only to a certain extent by wage inflation, but it's also offset by moving work to offshore regions in terms of just the average billing rate, where the offshore regions were charging at a lower rate. So you put all that together, our revenue per employee for Q1 2022 remains similar to last year, and then that helped us. And then because of distribution to offshore as well, that really helped us to just manage wage inflation and then keep gross margin at a sustainable level for us in the long run.

Our next question comes from the line of Maggie Nolan from William Blair.

If I could just build on that last question. Can you talk a little bit more explicitly about wage inflation and also attrition by delivery geography and how that may vary for you?

Thanks, Maggie. I'll start. Xiao, you can add in. So wage inflation, as you pointed out by your question, Maggie, it definitely differs by country. What I would say generally is that wage inflation for the last year or so has been a couple points higher than what we historically have experienced, and that's pretty consistent across the geographies. As we would expect, the levels are higher in countries such as India or Brazil than what we see in, say, the U.S., U.K. or Germany. And again, that pattern is historically consistent.

On the whole, Xiao talked about the ways we've been able to mitigate that. So it has not affected our margin. The first is definitely driving price increases with our clients. The other piece of that is really just operational improvements and efficiencies that we're able to drive, looking at leverage as well as looking how we are delivering work across countries. So all in all, we've been able to manage our margins really well through this higher inflationary period, and we feel good about our ability to continue to do that.

With respect to attrition, the attrition trends have been good for this quarter. So there's definitely a demand for talent. That talent competitive environment remains strong, as we've seen. So if we compare to last year, our trailing 12-month attrition is a couple points higher. It's 14 -- around -- right around 14% for Q1 of '22. If we compare that to Q1 of '21, it was around 12%.

So we do think that is a reflection of the strong competitive environment for talent. But positively, that is a reduction from where we ended 2021 where the trailing 12-month attrition was around 15%. So we've seen some positive trends in attrition. We continue to invest in our talent, in our retention programs, and we expect to see attrition staying at similar levels.

And then can you talk a little bit about how the value proposition, revenue and margins would perform in a weaker economic environment? Perhaps drawing on how the company maybe performed during the Great Recession and what may be different in terms of how the company is structured today.

I can start. Erin, feel free to add. So in a -- so generally, in a weaker economic environment, we see clients tend to be more careful with their spending. They want to focus on more higher value-add services and reduced discretionary spending. But most of the firms we have been working with, especially the ones with stronger cash flow, have taken the opportunity of a downturn to invest, to double down in digital technology, one of the key strategic initiatives.

And then we've seen this pattern. So what I've been doing over the years has always been trying to focus on building long-term relationships with key customers, working with them on their most strategic digital assets. And then that tends to be -- proved to be the best way for us to remain relevant, continue to work with our clients during the hard times of a potential economic downturn.

So we're definitely doing -- we have done that in the previous recessions, from 2021 to 2008. We definitely feel comfortable about our value proposition, our approach when it comes to a weaker economic environment.

And I would add just 1 or 2 points to that. I think Xiao explained that well. Just to your question, Maggie, about what is different versus the Great Recession about Thoughtworks. One thing for us that's different is definitely our demand capability.

We've invested a lot over the last few years at not only improving how we qualify inbound clients but also in terms of outbound clients and building that outbound sales engine, which we did not have during the last recession. And so that we do see as the strength of our business today. And then in general, from a margin perspective, what we've seen is while it does impact top line growth, what we've seen historically from a recessionary perspective, from a margin point of view, it's been margin neutral or slightly margin positive.

Our next question comes from the line of Brian Essex from Goldman Sachs.

This is Charlotte on for Brian. Congrats on a great quarter. I guess now that you have been a public company for a couple of quarters now, have you seen your pipeline benefit from your public company status? And can you talk about the breadth of your pipeline going forward?

Charlotte, yes, we can certainly talk about that. The -- so first of all, the pipeline strength, we have seen a steady growth of our pipeline over the last -- certainly, over the last 12 months. The booking has remained very strong, like I mentioned, $1.5 billion TTM. That's about 40% higher than the previous quarter at the same time last year. And then the pipeline is very robust across verticals and geographies.

We have definitely seen more brand recognition as a public company, both on the demand side and on the supply side. From a pipeline perspective, we definitely see benefits in terms of the inbound leads. There's more -- I would say there's more quoting of us being a public company being referenced during the conversations.

But I wouldn't say that being a public company has significantly changed the brand recognition because majority of the strength of our brand comes from the thought leadership, from the technical innovations. After the last -- I've been working on this in the last 29 years. So it's -- in the technical community, the brand recognition has always been strong, and that's where a majority of the inbound leads comes from. The public company status is nice to have for sure, but it's not a significant paradigm shift for us.

On the supply side, it definitely helps a lot, especially with the ability to now be known as a public company with the ability to provide stock-based compensation, for example, more broadly. That helps with the recurring side as well. So I hope that helps with the question.

Our next question comes from the line of Darrin Peller from Wolfe Research.

Look, you're obviously handling the wage environment and the labor environment very well, but a couple of questions on that. Number one is have you seen anything change in the environment, whether the geopolitical environment has caused this more tighter market on labor?

And then second part of that would be you tend to charge a higher revenue per head to begin with. So passing through this wage inflation, is there anything we need to worry about in terms of the ability to sustain that over the next medium term?

Thank you, Darrin. So I'll start with the geo impact on labor. We have -- first of all, we have very little exposure in Eastern Europe and no exposure in Ukraine or Belarus or Russia. So it really hasn't impacted our pipeline from a supply perspective.

We have a very diversified talent pool around the world, from India, Asia to Latin America to Europe. And then what we have seen is certainly some of our clients asking to pivot some of their work from capacity that used to be in Eastern Europe to other continents to diversify a bit more than they have done before. This definitely fits our strength as we see higher demand for people in India and Latin America.

But we haven't seen, from a recruiting perspective, that has created -- has been a big impact. As Erin mentioned earlier, we have continued to have a strong recruiting pipeline. And then similar to the demand side, because of the technical brand, we attract a lot of people as inbound. We have been working very hard to build the sourcing capability internally, and then we have a very strong referral program. Almost 1/3 of the people we hire come for referrals. So overall, we haven't really seen much impact on the supply side from the geopolitical tension.

And then on the pricing side on how do we -- I mean wage inflation, we feel strongly about our ability to continue to increase our pricing. We actually do more value-based, outcome-based -- value-based pricing rather than cost-based pricing. So that allow us to -- as long as we continue to innovate, add new value, we're able to charge a higher rate. And that's why I think we feel comfortable that we have been and will be -- continue to maintain the gross margin by adding price changes.

So we feel comfortable with that single digit, sometimes high single-digit price increase year-on-year. It is sustainable for us at least in the next few years. That allows -- give us a lot of leeway, and we got room to manage the wage inflation.

All right. That's great to hear. Just one quick follow-up, as it would be, on the demand side. I mean is there any change to where you're seeing the most demand come in now? I mean is it still very broad-based? Or is there something that you guys have been doing that's differentiating more and more as the quarters go by since -- even since the short time since you've gone public?

Sure. It's definitely broad-based but also with some highlights. It's broad-based because we think, from all the service offerings across the geography and verticals, we continue to see strong demand coming from all directions. Highlights would be on the service line. A highlight would be the enterprise modernization platform and cloud.

We continue to see increasing demand for that as more and more companies double down, dig in deeper into the digital transformation. Actually, the low-hanging fruit, the customer-facing applications, many of them realize that they have to modernize their legacy systems, not just moving them to the cloud but also modernize the architecture at the same time. So we're definitely seeing even higher demand coming from that area.

And also, from a vertical perspective, financial services and retail are the highlights. We have been investing a lot in both of the areas. And then also with financial services, there's the neobank, cryptocurrency. The fintech continued to disrupt the landscape. So we're working with both the incumbents, the bigger banks and as well as the new scale-ups in the fintech sector. That's where a lot of the strong growth come from. And retail customers had been benefiting from the post-COVID surge of online shopping, digital channels and also recovering pretty well post COVID. So we're seeing strong demand coming from that as well.

And then those are the highlights. But also I think that the broad-based nature of the growth hasn't changed.

Our next question comes from the line of Dan Perlin from RBC Capital Markets.

Let me add my congratulations as well. Really strong results here. I wanted to just ask a question around visibility embedded in guidance for the rest of the year. There's just clear uncertainty at a macro level. You talked about kind of some utilization rates around China lockdown.

And I'm thinking here specifically -- I thought you said 88% or so of growth is coming from existing clients. So maybe can you just outline how that cohort is growing, I think, in the current environment? And then what are some of the other factors that give you so much confidence in the remainder of the year?

Sure. So that 88% existing client growth is what we have seen in this quarter. Normally, this cohort of increasing customers, the long-running relationship would generate about half of the growth of our business, and then the pattern remains pretty consistent over time.

We have been focusing on building long-term relationships, especially with our top 25, top 50 clients. And then we've seen that -- especially the top 50 growing in a very robust way. I mentioned earlier 42 clients have billings that's more than -- have bookings more than $10 million revenue, and then 31 of them have a TTM of revenue more than $10 million as well. So we expect more of the top 50 clients to become $10 million-plus clients, and we also expect more of these relationships continue over the years. So that kind of pattern of growing existing customers is something we've been focusing on for a long time. That gives us a lot of visibility.

Also, new customers, we are feeling the momentum is continuing. We contracted with 52 new logos this quarter, and in the previous quarter, I think we contracted 36 new logos. So most of these new logos will continue, as we have seen before, to ramp up and as we continue to develop relationship. So that's another foundation we've built that will continue to give us this revenue for the rest of the year. So all this adds up to that $1.5 billion of total billings through the last 12 months.

And also, we see the pipeline for the rest of the year continues to trend way ahead of what we have seen in the previous years. Although that pipeline is -- there's some economic concerns about some economy in the -- regional economies in different parts of the world because our revenue is -- our demand is highly diversified across the world, including North America, for sure, Europe, but also APAC. So that gives us confidence that we have this -- the broad geography diversification to mitigate any risk of some of the regional economic slowdowns. So I hope that helps address the question.

Yes. That's great. My quick follow-up is, as we think about the free cash flow, I know it was negative in the quarter. It sounds like there were some, I think you called out, lower customer prepayments and then compensation programs. Are there any dynamics that you want to call out as we think about the cadence for that improving throughout the remainder of the year?

Thanks, Dan. You pointed out the key elements. So Q1 free cash flow was impacted definitely by strong growth and that ramp-up that we had, particularly in the end of Q1. Overall, if we look at our DSO or our percentage of AR and unbilled revenues to our overall revenue for the quarter, it's right in line with what we would expect and in line with what we target. So there's nothing significant to point out in terms of cadence beyond Q1, where we do see a bit of seasonality with respect the free cash flow in that first quarter, again, particularly because of the annual compensation programs.

As we compare it to last year, that was less evident because we had the deferred revenue or that client -- significant client prepayment in Q1. So nothing more to add than that. On the whole, our accounts receivable, our client payments and invoices are behaving as we would expect.

Our next question comes from the line of Bryan Bergin from Cowen.

Hoping you can dig in a little bit more around talent. Can you talk about where your comfort levels stand around the pace of hiring and maybe the quarterly kind of net new head count potential? And I think you mentioned you're on track to add or train an additional 1,000 professionals in 2022. Was that a reference to new professionals that are joining? Or was that something within the existing base?

Bryan, I'll start with your question, and Xiao can add in. So in general, we're feeling very strong about our talent, our ability to develop as well as retain our talent. I'll start with your last question just around the training that we're doing.

We are seeing very strong demand in data and cloud infrastructure. So we have started a training program to address that client need. And the 1,000 professionals, some of them are new, some of them are existing Thoughtworkers. So some will be new hires, but a lot of it is training programs that we are making available to our employee population generally. So it is a new skill set development of technical skills that we'll see across the board, not just incoming Thoughtworkers. We're really excited about those programs.

And then with respect to the pace of talent, last year, in 2021, we've really challenged ourselves and have proven to ourselves that we are capable of bringing in talent at higher rates than we have done historically, and we expect to see that continue for 2022. We saw strong hiring in Q1 as we look out across the year. And you'll probably recall from our prior comments Q3 tends to be the highest number of hires that we have in terms of talent. That also has to do with the timing of our graduate program and university hires.

But on the whole, we continue to invest in our talent. We're feeling very strong about our talent proposition. We're excited about these new programs and what it means to our clients. So for us, it's definitely a continued area of strength.

Okay. And then my follow-up on your Vietnam development here. Can you just talk about your expansion plans there? Is this something we should expect you'd pursue both organic and inorganic means?

Sure. We're definitely looking at both. But as a starting point, we're looking at mostly organic growth. We feel very comfortable with the brand we have and our ability to attract top digital talent. We have seen strong demand coming from Singapore and Australia customers who want to further diversify their delivery centers into Vietnam.

We did look at inorganic opportunities as well. And so far, we haven't seen anyone who is a good fit from a premium -- especially on the premium side, the premium value proposition perspective and from a culture fit perspective. It's generally harder to find smaller companies in the nearshore/offshore region that occupy the premium space. It's easier to find them onshore in North America and Europe but less so in offshore.

So we have taken an organic approach. We'll continue to look at inorganic if we find good candidates to help us scale.

(Operator Instructions) Our next question comes from the line of Dave Koning from Baird.

Great job. And I guess my first question -- I was just looking at the filing. And you gave top 50 clients. I think that might have been the first time you gave that. But what's interesting is if we look at non-top 50 clients. It's about 1/3 of revenue, growing 84%. If you'd keep that up, you wouldn't have to grow the top 50 at all and you could still hit high 20s growth. Maybe just wondering, can those non-top 50 clients continue to grow at such a hyper growth pace?

It's a great question. We definitely see higher growth from smaller clients because of just the number of new logos we acquire as well as given the size of their starting point, it tends to get a higher percentage. But with the long-term sustained growth, we would definitely rely more on the top 50 than the rest of the portfolio because the top 50 are the ones who will continue to allow us to build longer-term relationships and then steadily increase the revenue portfolio.

With the -- if we just rely on the non-top 50, I think our portfolio is going to fragment too much and there will be too much fluctuation in our business operation in the long run. So that's something we have been focusing on the last few years so that we intentionally double down, focus more on larger clients as opposed to just rely on new logos and smaller clients, which we could but it's a choice we made based on the -- what we have seen in the previous 20 years in terms of the pattern of growth.

Got you. And then one -- just one thing on stock comp. How do you expect -- I know that had a big kind of nonrecurring in Q1, but how do you expect that to go through the year and maybe longer term?

Yes. Dave, as you point out, stock-based compensation was impacted in our first quarter. Part of the $121 million expense that we saw in Q1 was related to the approval of China SAFE, and I talked about that briefly last quarter. And that was $48 million of the $121 million.

Our stock compensation for Q2 is estimated to be approximately $54 million. And then as we think about the mechanics as time goes on, it will remain elevated through the rest of this year as well as a little bit into next year. It will start to come down. But that really has to do with the timing and the vesting of the RSUs related to the IPO, and so that won't go through a full cycle until next year.

Our next question comes from the line of Moshe Katri from Wedbush.

And let me add my congrats on very strong results and the fact that you're able to bring down attrition rate sequentially. Maybe some housekeeping kind of questions. Do you have any number in terms of planned head count additions for this calendar year? And then as a follow-up, maybe Erin, can you talk about utilization rates during the quarter? And I'm assuming maybe that's one of the reasons why gross margins didn't look that great. But assuming, again, this is a function of hiring and recruiting.

Sure. So I will start with the utilization point. We've already talked about -- Xiao and I talked about the seasonality that we see Q1 versus Q2. So utilization from Q1 to Q2 will definitely be down. The reason for that is certainly the holiday period that we already talked about as well as a little bit more than our operating plan would reflect because of the Omicron impact and some of the lockdowns that we're seeing in China. It's not significant but it's does make a difference in Q1 to Q2. That does impact the margins and the quarterly seasonality.

In terms of the hiring numbers, there's not much more to add than what we already talked about. We expect to have strong hires. We did a record number of hires last year. We expect to do the same in 2022 to support our strong demand. The biggest hiring is expected to be in Q3, along with the graduates. And to give you a sense of where that is, we added around 950 people in Q1. We will continue to see strong hiring throughout the year.

Just a reminder, did you mention any FX headwinds for the year in your guidance?

I did not but that is also a good thing to mention, Moshe. Thanks for that. There is a little bit of FX headwinds if we compare the guidance from last quarter to this quarter. We knew that there was going to be an FX headwind, and that was already embedded in our initial guidance for the year.

That does also affect a little bit of the transition from Q1 to Q2. And then on the whole for the year, there's an FX headwind on growth that's around 200 basis points estimated, I should say.

At this time, I'm showing no further questions. I would like to turn the call back over to Guo Xiao for closing remarks.

I just want to thank you, everyone, for joining us today. I would like to acknowledge the continued support of our Board and our shareholders. And in closing, I would like to thank all Thoughtworkers, clients and partners for the extraordinary impact we're delivering every day together. So stay well, and then we look forward to catch up with you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.