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TH

Thoughtworks Holding, Inc. (TWKS)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 revenue of $248.6M exceeded the company’s prior Q1 guide ($241–$246M); however, adjusted EBITDA margin of 2.7% missed the 3–4% guidance due to timing of offshore/onshore supply rebalancing and lower-than-expected gross margin .
  • Management raised full-year revenue guidance to $995M–$1,020M (from $980M–$1,010M) while reiterating adjusted EBITDA margin of 8–10% and lifting adjusted diluted EPS to $0.02–$0.08 (from $0.01–$0.06) .
  • Sequential growth is expected in Q2 2024, with Q2 guidance for revenue of $250M–$255M, adjusted EBITDA margin of 5.5–7.5%, and adjusted diluted EPS of $(0.01) to $0.01; management also expects positive cash flow in Q2 .
  • TTM bookings were stable sequentially at $1.2B but down 20% YoY on smaller contract sizes and budget caution; pricing declines have stabilized, with increased offshore mix pressuring near-term bill rates and margins .
  • Potential stock catalysts: raised FY revenue guidance, expectation for return to sequential growth in Q2, and CEO transition (effective June 17, 2024) that emphasizes verticalization and systems integration to expand TAM .

What Went Well and What Went Wrong

What Went Well

  • Revenue beat vs. Q1 guidance: “We delivered revenues of $248.6 million in the first quarter, which exceeded our revenue expectations” .
  • Strong bookings and new logos: TTM bookings stable sequentially at $1.2B and 49 new clients signed in Q1; vertical go-to-market gaining momentum .
  • AI and DAMO traction: Over 50 AI-related projects, acquisition of Watchful (IP/tech) to accelerate AI deployment; 16 new DAMO managed services deals launched in Q1 .

What Went Wrong

  • Margin miss: Adjusted EBITDA margin of 2.7% below guided 3–4% due to timing of offshore/onshore supply rebalancing and lower onshore utilization; high single-digit pricing declines YoY on a like-for-like basis .
  • Free cash flow negative: FCF was $(20.0)M in Q1 vs $31.4M prior year; CFO cited timing items and revenue headwinds, with expectation of positive cash flow in Q2 .
  • Continued macro caution: YoY revenue down 19% with regional declines across North America (−23%), Europe (−21%), LATAM (−31%), and APAC (−11%); TTM bookings down 20% YoY .

Financial Results

MetricQ3 2023Q4 2023Q1 2024
Revenues ($USD Millions)$280.2 $252.4 $248.6
Gross Margin (GAAP, %)33.6% 28.3% 28.1%
Adjusted Gross Margin (%)37.4% 33.6% 31.0%
Net (Loss) Margin (GAAP, %)(9.2)% (8.9)% (12.4)%
Adjusted EBITDA Margin (%)12.0% 5.5% 2.7%
Diluted EPS (GAAP, $)$(0.08) $(0.07) $(0.10)
Adjusted Diluted EPS ($)$0.04 $0.02 $(0.02)
Free Cash Flow ($USD Millions)$3.685 $9.864 $(19.974)

Revenue by geography (Q1 YoY):

GeographyQ1 2023 ($000s)Q1 2024 ($000s)YoY Change
North America$115,060 $88,800 (22.8)%
APAC$97,484 $86,713 (11.0)%
Europe$78,784 $62,212 (21.0)%
LATAM$15,728 $10,868 (30.9)%
Total Revenues$307,056 $248,593 (19.0)%

Revenue by industry vertical (Q1 YoY):

VerticalQ1 2023 ($000s)Q1 2024 ($000s)YoY Change
Technology & Business Services$74,133 $65,369 (11.8)%
Energy, Public & Health Services$84,039 $63,022 (25.0)%
Retail & Consumer$47,912 $38,931 (18.7)%
Financial Services & Insurance$55,155 $39,155 (29.0)%
Automotive, Travel & Transportation$45,817 $42,116 (8.1)%
Total Revenues$307,056 $248,593 (19.0)%

Guidance Changes

MetricPeriodPrevious Guidance (Feb 27, 2024)Current Guidance (May 7, 2024)Change
Revenue ($USD Millions)Q1 2024$241–$246 Actual $248.6 Beat vs guide
Adjusted EBITDA Margin (%)Q1 20243.0–4.0 Actual 2.7 Miss vs guide
Adjusted Diluted (Loss) EPS ($)Q1 2024$(0.02)–$(0.01) Actual $(0.02) In line/lower end
Revenue ($USD Millions)Q2 2024—$250–$255 New
Adjusted EBITDA Margin (%)Q2 2024—5.5–7.5 New
Adjusted Diluted EPS ($)Q2 2024—$(0.01)–$0.01 (≈323M diluted shares) New
Revenue ($USD Millions)FY 2024$980–$1,010 $995–$1,020 Raised
Adjusted EBITDA Margin (%)FY 20248.0–10.0 8.0–10.0 Maintained
Adjusted Diluted EPS ($)FY 2024$0.01–$0.06 (≈333M shares) $0.02–$0.08 (≈330M shares) Raised
Stock-Based Compensation ($USD Millions)FY 2024$46 $42 Lowered

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2023, Q4 2023)Current Period (Q1 2024)Trend
AI initiatives≈30 GenAI projects; 2,300 trained; partnerships (Stripe, hyperscalers) >50 AI projects; acquisition of Watchful; 8 new AI services launched Accelerating
Pricing & mixMid- to high-single-digit like-for-like pricing declines; shift offshore High single-digit pricing declines; pricing stabilizing; offshore mix pressuring bill rates Stabilizing pricing; continuing offshore shift
Restructuring & utilizationDEC launched; $68M annualized savings $87M savings realized; target raised to $100–$115M; utilization improvements underway Savings and rebalancing progressing
Regional trendsAPAC relatively resilient; NA/EU/LATAM headwinds APAC −11% YoY but stabilizing; NA −23%, EU −21%, LATAM −31% YoY APAC green shoots; others pressured
DAMO managed services~30% of top 50 clients using DAMO 16 new DAMO deals in Q1; aim for longer-term contracts and expansion Expanding adoption

Management Commentary

  • “We delivered revenues of $248.6 million in the first quarter, which exceeded our revenue expectations… We expect to return to sequential quarter-over-quarter revenue growth in the second quarter of 2024.” — CEO Guo Xiao .
  • “In Q1, we fell short of our adjusted EBITDA margin guidance. This is primarily due to the timing of our ongoing supply rebalancing program… resulting in a lower-than-expected gross margin.” — CEO Guo Xiao .
  • “Adjusted gross margin was 31%… impacted by lower onshore utilization and high single-digit pricing declines on a like-for-like basis… Free cash flow was negative $20 million… We expect positive cash flow in Q2.” — CFO Erin Cummins .
  • “We are raising our targeted range of total cost savings to $100 million to $115 million… total pretax charges of $26.5 million to $33 million… $21 million recorded through Q1.” — CFO Erin Cummins .

Q&A Highlights

  • Pricing stabilization: Like-for-like pricing declines keyed to year-end renewals; further declines from Q1 to Q2 expected to be “much less significant” as pricing dynamics are reflected in most contracts .
  • Offshore/onshore mix: Offshore mix drives lower average bill rates but supports higher utilization/margins over time; near-term margin headwinds as onshore utilization lags .
  • APAC update: Singapore and India strong; Australia stabilizing; China local market recovering but offshore constrained by geopolitics; offshoring tilting toward India/LatAm/SE Asia/Eastern Europe .
  • Verticalized go-to-market: Early but improving win rates and relevance with domain-specific expertise; supports new logo growth in energy, public sector, auto, financials .
  • Sequential growth confidence: Strong Q1 bookings, pipeline conversion, and restructuring payoffs underpin view for Q2 sequential growth .

Estimates Context

  • Wall Street consensus via S&P Global was unavailable for TWKS this quarter due to a ticker mapping issue; therefore, estimate comparisons are anchored to company-issued guidance. Revenue beat vs. guidance and margin miss vs. guidance are noted accordingly .

KPIs

KPIQ3 2023Q4 2023Q1 2024
TTM Bookings ($USD Billions)$1.4 $1.2 $1.2
Clients ≥$10M TTM bookings (#)37 31 (TTM revenues >$10M in 2023) 32
Clients $5–$10M TTM bookings (#)29 —25
New clients contracted (#)34 in Q3 46 in Q4 49 in Q1
Annualized avg revenue per employee ($)$99k $98k (FY) $92k
Voluntary attrition (TTM, %)12.2% 12% 12.4%
Cash & equivalents ($USD Millions)$87.4 $100.3 $72.6
Total debt outstanding ($USD Millions)$297.1 $295.3 $293.6
Free Cash Flow ($USD Millions)$3.685 $9.864 $(19.974)
Adjusted EBITDA ($USD Millions)$33.6 $14.0 $6.8

Key Takeaways for Investors

  • Revenue execution ahead of guide but margins pressured: Q1 beat on revenue vs. guide while adjusted EBITDA margin missed; near-term margin path hinges on utilization gains and completion of offshore/onshore rebalancing .
  • FY outlook firmed: Raised FY revenue and adjusted EPS guidance with EBITDA margin unchanged; management expects sequential growth in Q2, supported by strong Q1 bookings and pipeline conversion .
  • Pricing backdrop stabilizing: Like-for-like pricing declines appear embedded; new logos often start at higher rates than large renewals with volume discounts, moderating the drag .
  • AI is a tangible growth vector: >50 AI projects, Watchful acquisition, and 8 new AI services broaden offerings; expect more projects moving from POC to production into late 2024/2025 .
  • DAMO managed services expanding: 16 new deals in Q1; strategic lever for longer-term contracts and revenue durability amid budget-constrained environments .
  • Bookings quality vs. quantity: TTM bookings stable sequentially at $1.2B but down 20% YoY; smaller contract sizes, increased offshore mix and budget caution still evident .
  • Trading implications: Near-term stock reactions likely keyed to delivery of Q2 sequential growth, margin inflection, and execution on restructuring savings; CEO transition a potential narrative catalyst toward broader SI/package implementation and vertical expansion .