Thoughtworks(US:TWKS)2024-05-07 16:14Financial Data and Key Metrics - Q1 2024 revenue was $249 million, a year-over-year decline of 19% in both USD and constant currency [12] - Adjusted EBITDA margin for Q1 was 2.7%, below guidance due to lower-than-expected gross margins impacted by offshore/onshore mix adjustments [15][16] - Free cash flow was negative $20 million in Q1, compared to $31 million in the prior year period [23] - The company expects Q2 2024 revenue to be in the range of $250 million to $255 million, reflecting a year-over-year decline of 13% to 11% [47] - Full-year 2024 revenue is expected to be between $995 million and $1.02 billion, with an adjusted EBITDA margin of 8% to 10% [49] Business Line Performance - Strong demand for AI and data services, enterprise monetization, and DAMO managed services [8] - 57 clients had trailing 12-month bookings of over $5 million at quarter-end, with 49 new clients contracted in Q1 compared to 46 in Q4 2023 [10] - 62% of Q1 bookings came from outbound efforts, reflecting a focus on demand generation [11] - DAMO managed services saw 16 new deals in Q1, with 30% of the top 50 clients now using this service [40][148] Market Performance - Year-over-year revenue declines were observed across regions: 11% in APAC, 21% in Europe, 23% in North America, and 31% in LATAM [12] - APAC showed resilience, with stronger growth in Singapore and India, while Australia saw slower growth due to exposure in the tech sector [112][113] - China's local market is stabilizing and growing, though offshore work in China is constrained due to geopolitical tensions [115] Strategy and Industry Competition - The company is focusing on vertical-based sales models, particularly in energy, public and health services, technology, and business services [17] - Investments in AI and data services are paying off, with over 50 AI-related projects underway at the end of Q1 [33] - The acquisition of Watchful aims to accelerate AI model deployment and enhance Thoughtworks' position as a leading AI transformation partner [34] - The company is diversifying its service portfolio, with a focus on DAMO managed services and system integration [40][102] Management Commentary on Operating Environment and Future Outlook - The macroeconomic environment remains stable but challenging, with elongated sales cycles and smaller deal sizes [8][46] - Clients are focusing on achieving more with less, but no incremental budget pressures were observed in Q1 [46] - The company expects to return to sequential growth in Q2 2024, driven by strong bookings and a vertical-focused approach [7][47] - Management is confident in improving margins through cost management and supply rebalancing, with $87 million in annualized cost savings realized by Q1 [50][52] Other Key Information - Voluntary attrition on a TTM basis was 12.4%, slightly up from 12% in Q4 2023 but improved from 13.1% in Q1 2023 [25] - The company ended Q1 with a cash balance of $73 million and an undrawn $300 million revolving credit facility [24] - Thoughtworks published two new books and the 30th edition of its Technology Radar, with a third of the blips related to AI [42][43][44] Q&A Summary Question: Confidence in sequential growth in Q2 - The company is seeing some opening of discretionary spending, especially where there is a strong ROI case, and expects Q2 to return to sequential growth [63][65] Question: Impact of supply constraints on margins - Supply constraints from Q4 have been addressed, but margin pressure remains due to lower onshore utilization and offshore/onshore mix adjustments [66][67] Question: Pricing dynamics and margin improvement - Pricing declines are stabilizing, with no significant further drops expected, and margin improvement is driven by cost management and supply rebalancing [104][105][81] Question: Demand for AI and GenAI projects - Most AI work is still in the proof-of-concept stage, but the company expects larger-scale projects to emerge by the end of 2024 or early 2025 [135][136][152] Question: Industry-based go-to-market approach - The vertical-focused approach is resonating with clients, particularly in energy, public sector, and financial services, and is expected to drive further growth [126][127] Question: Top client concentration - Top 5 and top 10 client revenue concentration increased slightly, but the company is not overly concerned as it focuses on retaining and expanding relationships with top clients [131][132]