Thoughtworks(TWKS) - 2023 Q4 - Annual Report

Part I Business Thoughtworks is a global technology consultancy integrating strategy, design, and software engineering for enterprises, serving over 500 clients across 19 countries - Thoughtworks is a global technology consultancy with over 10,500 employees in 19 countries, serving over 500 clients across various industries[22][24][25] - The company's five global service lines are: Enterprise Modernization, Platforms and Cloud; Customer Experience, Product and Design; Data & Artificial Intelligence (AI); Digital Transformation and Operations; and DAMO™ Managed Services[27] - Key growth strategies include broadening service offerings like GenAI and DAMO managed services, deepening relationships with existing clients, acquiring new clients (from 416 in 2022 to 502 in 2023), developing new technical capabilities, and pursuing strategic acquisitions such as Itoc in 2023[32][33] 2023 Revenue Breakdown | Category | Percentage of Total Revenue | | :--- | :--- | | By Geography | | | North America | 37.1% | | APAC | 34.3% | | Europe | 24.9% | | LATAM | 3.7% | | By Industry Vertical | | | Energy, public and health services | 26.1% | | Technology and business services | 24.8% | | Financial services and insurance | 17.5% | | Automotive, travel and transportation | 15.9% | | Retail and consumer | 15.7% | Client Concentration (2023) | Client Group | Percentage of Revenue | | :--- | :--- | | Top 5 Clients | 17.9% | | Top 10 Clients | 27.6% | | Existing Clients | 93.2% | - The company emphasizes a culture of diversity and inclusion, with 39.8% of its technologists and 37.5% of its global management team identifying as Women or Gender Diverse as of December 31, 2023[30][39] Risk Factors The company faces significant risks from macroeconomic conditions, geopolitical instability, client retention challenges, and financial exposures including debt and currency fluctuations - Economic conditions have caused client delays, spending reductions, and significant pricing discounts, which puts pressure on margins and makes forecasting difficult[77][80] - The company faces geopolitical risks, particularly related to its significant operations in China, including potential impacts from government regulations, foreign sanctions, and client sentiment[88] - A high percentage of revenue (93.2% in 2023) comes from existing clients, making client retention and relationship expansion critical[93] - The business is exposed to risks from developing and deploying emerging technologies like AI, including potential for harmful content, bias, intellectual property infringement, and new regulatory scrutiny[102] - As of December 31, 2023, the company had $295.3 million in outstanding debt under its Term Loan, which includes restrictive covenants that may limit operational and financial flexibility[121][123] - The company is subject to complex and evolving data privacy regulations globally, such as GDPR in Europe and CCPA/CPRA in California, which could expose it to significant compliance costs and penalties for non-compliance[140][141][142] - Apax Funds control approximately 61.3% of the company's common stock, making Thoughtworks a "controlled company" under Nasdaq rules, exempting it from certain corporate governance requirements[168][172] Unresolved Staff Comments The company reports that it has no unresolved comments from the staff of the Securities and Exchange Commission - None[186] Cybersecurity Thoughtworks integrates cybersecurity into its Enterprise Risk Management program, overseen by the CISO and governed by the Board's Audit Committee, aligning with NIST and ISO frameworks - Cybersecurity risk management is integrated into the company's overall ERM program and aligns with industry frameworks such as NIST and ISO[187][188] - Governance includes oversight from the Board's Audit Committee, an ERM Steering Committee, and a Technology Risk Steering Subcommittee, with the CISO having over 25 years of experience[194][195][196] - While the company has experienced cybersecurity events, it is not aware of any material cybersecurity incidents to date[192] Properties The company leases its corporate headquarters in Chicago and additional office spaces globally, deeming current facilities adequate for immediate needs - The company leases its corporate headquarters in Chicago, Illinois, and maintains leased office spaces in numerous domestic and international locations[199] Legal Proceedings The company reports no current legal claims or proceedings expected to have a material adverse effect on its business or financial condition - There are currently no legal claims or proceedings against the company that are expected to have a material adverse effect on its business[201] Mine Safety Disclosures This item is not applicable to the company - Not applicable[202] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with no anticipated cash dividends as earnings are retained for growth and debt repayment - The company's common stock trades on the Nasdaq Global Select Market under the symbol "TWKS"[205] - The company does not anticipate paying cash dividends in the foreseeable future, as it intends to retain earnings to fund business growth and repay debt[207] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Thoughtworks' revenue decreased by 13.1% to $1.13 billion, with net loss improving due to reduced stock-based compensation, while Adjusted EBITDA fell 56.5% amid a structural reorganization Key Operational and Business Metrics For 2023, revenues decreased 13.1% to $1.13 billion, net loss improved due to lower stock-based compensation, and Adjusted EBITDA significantly declined 56.5% Key Financial Metrics (2023 vs. 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $1,126.8 M | $1,296.2 M | (13.1)% | | Revenue Growth (Constant Currency) | (12.6)% | 26.8% | N/A | | Net Loss | $(68.7) M | $(105.4) M | (34.8)% | | Adjusted Net Income | $37.3 M | $139.9 M | (73.3)% | | Adjusted EBITDA | $111.7 M | $256.8 M | (56.5)% | | Adjusted EBITDA Margin | 9.9% | 19.8% | (990 bps) | - The decrease in net loss was primarily driven by a $184.9 million reduction in stock-based compensation expense, partially offset by a $169.4 million decrease in revenue[223] Results of Operations In 2023, revenue declined across most verticals and regions, but gross margin improved due to lower stock-based compensation, despite $18.9 million in restructuring charges Client Metrics (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Number of clients | 502 | 416 | | Clients > $10M revenue | 31 | 35 | | Net dollar retention rate | 87% | 109% | - Bookings decreased by 14.3% to $1.2 billion in 2023 from $1.4 billion in 2022, reflecting macroeconomic caution and smaller contract sizes[257] - Gross margin increased by 4.7 percentage points to 31.4% in 2023, primarily due to a decrease in stock-based compensation expense as a percentage of revenues[260] - The company incurred $18.9 million in restructuring charges in 2023, consisting of $17.2 million in wage-related expenses and $1.7 million in non-wage expenses[263] Liquidity and Capital Resources As of December 31, 2023, the company had $100.3 million in cash and $300.0 million available under its revolver, with $293.2 million in total long-term debt Liquidity Position (as of Dec 31, 2023) | Item | Amount (in millions) | | :--- | :--- | | Cash and cash equivalents | $100.3 | | Availability under Revolver | $300.0 | | Long-term debt, net | $293.2 | Cash Flow Summary (Year Ended Dec 31, 2023) | Cash Flow Activity | Amount (in millions) | | :--- | :--- | | Net cash from Operating activities | $49.1 | | Net cash used in Investing activities | $(24.6) | | Net cash used in Financing activities | $(120.2) | - In February 2023, the company made a voluntary prepayment of $100.0 million on its outstanding Term Loan[494] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgments in revenue recognition, stock-based compensation, and business combinations, particularly for fixed-price contracts and PSU valuations - Revenue from fixed-price contracts is recognized over time using input methods, which requires significant estimates of total costs to completion[306][372] - Stock-based compensation expense is measured at grant date fair value, with rTSR Performance Stock Units (PSUs) valued using a Monte-Carlo simulation[308][315] - Business combinations are accounted for using the acquisition method, requiring allocation of the purchase price to the fair value of assets and liabilities, with goodwill tested for impairment annually[316][318] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate fluctuations and foreign currency exchange rates, impacting interest expense and revenues respectively - A hypothetical 100 basis point increase or decrease in interest rates would result in a $2.9 million increase or $3.4 million decrease, respectively, in annual interest expense[321] - In 2023, 65% of total revenues were denominated in currencies other than the U.S. dollar, where a hypothetical 10% change in the U.S. dollar's value would impact revenues by approximately $72.4 million[322][323] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021-2023, including balance sheets, statements of loss, equity, and cash flows, with accompanying notes Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,327,236 | $1,461,850 | | Total Liabilities | $554,106 | $683,628 | | Total Stockholders' Equity | $773,130 | $778,222 | Consolidated Statement of Loss Highlights (Year Ended Dec 31) | Account | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | Revenues | $1,126,816 | $1,296,238 | | Loss from operations | $(20,312) | $(47,312) | | Net loss | $(68,661) | $(105,393) | | Basic and Diluted loss per share | $(0.22) | $(0.34) | - The independent auditor's report identified Revenue Recognition for Fixed-Price Contracts as a Critical Audit Matter due to the significant judgments and estimates involved in determining the total estimated costs to completion[334][335] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[504] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with a previously identified material weakness successfully remediated - Management concluded that internal control over financial reporting was effective as of December 31, 2023[507] - A material weakness previously identified in prior periods related to the misclassification of cash flows for a contingent consideration payment was remediated as of December 31, 2023[509][510] Other Information No directors or executive officers adopted, terminated, or modified Rule 10b5-1 trading arrangements during the fourth quarter of 2023 - No directors or executive officers adopted, terminated, or modified a Rule 10b5-1 trading plan during the three months ended December 31, 2023[513] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[514] Part III Part III of the report, covering Items 10 through 14, incorporates information by reference from the company's definitive proxy statement to be filed for its annual meeting of stockholders Directors, Executive Officers and Corporate Governance Information for this item will be incorporated by reference from the company's definitive proxy statement Executive Compensation Information for this item will be incorporated by reference from the company's definitive proxy statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item will be incorporated by reference from the company's definitive proxy statement Certain Relationships and Related Transactions, and Director Independence Information for this item will be incorporated by reference from the company's definitive proxy statement Principal Accounting Fees and Services Information for this item will be incorporated by reference from the company's definitive proxy statement Part IV Exhibits and Financial Statement Schedules This section lists financial statements from Item 8 and all exhibits filed or incorporated by reference into the Annual Report on Form 10-K - This item lists the financial statements, financial statement schedules (omitted), and all exhibits filed as part of the annual report[522][523] Form 10-K Summary This item is not applicable and contains no information - None[527]