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'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 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're 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 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 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 obligation to update or revise the information presented on this conference call. I will now hand over to Xiao.

Thank you, Michael. 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're new to the market, I like to start the call by giving you an overview of Thoughtworks and then Erin would take you through our Q3 financial results in more detail. I'll 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 of 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 that just the EBITDA margin of 23%. At the end of September, we were over 10,000 Thoughtworkers strong in 17 countries across five continents.

I like to thank every Thoughtworker around the world for extraordinary impact they create through our technology excellence and culture.

The Thoughtworks 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 mega trends 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 to track the wide spectrum of clients from Fortune 500 type enterprises, transforming their global businesses to up and coming disruptors with hyper growth 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 was 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 SaxoBank. SaxoBank is one of the largest online investment banks in Europe. Our UK and Indian teams are partnering with SaxoBank across data governance, data platforms and data mesh architecture. We're 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 Architecture 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 that was integrated the OptUP web experience within the Kroger online ecosystem, amplifying customer reach and impact, before sunsetting the standalone app.

And we're also collaborating with Lenovo, a global technology leader by multi-year 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're 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'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 are 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 $20 million.

We deliver this margin expansion with an execution focus 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% 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 the 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, at 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 as SG&A as a percentage of revenue was 22% for the quarter compared with 21% for the third quarter of 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 employer 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 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 the 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 100,000 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 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're 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 some reason achievements, and what we have done to drive impact in the market. First, let me start with the technology radar.

First published in 2010, in October this year, we published our 25th edition has become a de facto standard in the industry based on hundreds of real client engagements, and 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 also 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 advanced practices to help software developers be more effective by removing roadblocks so that their 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 a 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're 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 Backstage developer portal called Simplify that is improving the developer experience for their 8000 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 STGs 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 a report on our Investor Relations site.

Thoughtworkers continue to do transformation of social impact projects around the world. Let me share two examples. The first is in Houston, Texas, where we’ve 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 counselling, and after school 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 surveillance 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 yearend 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 are recorded to adjusted measurements in the fourth quarter. Stock based compensation expenses 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 1.68 billion to 1.70 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 are seeing increases in the value of the average client contract size from a year ago. We plan to provide a detailed review of 2022 guidance in February on our fourth quarter earnings call. Now, let me hand back to Michael..

Thanks, Aaron. 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, could you please give instructions for those on the call..

[Operator Instructions] Our first question comes from Dan Perlin. Your line is open. .

Thanks. Good morning, everyone, and congratulations on a great first quarter out of the box, makes it easy for us.

I wanted to just start at kind of a higher level and talk maybe about what you're 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 kind of translate as you think about your pipeline heading into FY ’22?.

Thanks Dan. We do continue to see this customer or consumer expectation, and then this next gen technology continue to evolve. And this definitely requires 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 across all verticals and geographies in the coming years. I mean, growth might eventually and gradually slow down at some point to more normal level, to look normal level, like those 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 growths coming especially from a service perspective from data, AI and cloud and infrastructure..

That's great. It looks like it was pretty broad based in the quarter. Erin, I just had a quick follow up for you in relation to investments. So you called out as you were providing kind of 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 talents and our capability. And what I should say is the investments are pretty broad.

And so we've got some talent and capability investments, we are continuing to up skill our talent and have a lot of focused 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're investing in growth, we do see strong growth continuing in ’22, which Xiao mentioned. And so certainly, as we think about the fourth quarter, we're ramping up for a good ’22.

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

Great, thank you very much. Congrats. .

Thanks Dan. .

Our next question comes from Maggie Nolan with William Blair. Your line is open..

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 offerings, and then how you expect them to develop over time kind of contributing to that high growth you're expecting..

Sure.

The 44 new clients the 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 product they – most of the work we do with these clients tend 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 name a reference order for 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 the potential to build long-term strategic relationships. Or they're 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 talk 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 a 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 bound, but it has normalized since then and certainly is operating within a healthy range. And then for attrition. And I think we're 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 eased certainly earlier in the year, so if we're looking at the trends we're 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're confident it'll 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 and 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 really good hiring momentum in Q3.

And in general, we're very comfortable with the utilization and attrition.

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

Our next question comes from Brian Essex with Goldman Sachs. Your line is open..

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 a near-shore and offshore considering shortage of talent attrition, wage inflation in local markets? And are you seeing them moving more work towards offshore or – and if so, are you able to maintain premium revenue per head? Thanks..

Thanks for the question. So from an onshore to retro ratio perspective, we have seen a reasonably stable trend and may be just a little bit more offshore than we used to do. It’s mostly because now remote working is kind of the new norm.

A lot of clients who were a little bit hesitant to go near-shore, offshore, now are more open to the conversation and actually doing 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 on site, they get to work closer with our clients, building a deeper relationship, understanding our context, 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're moving – we're able to do more work distributed to leverage the global talent pool, we don’t expect the onshore component of our portfolio to decrease dramatically. And we do believe we can – and we can continue to maintain a significant portion of work onshore.

Employment talent perspective, it is I think, challenging for any region to recruit top talent at the moment, not just onshore, but also offer as well. So all the investment Erin mentioned, that retention, building a better culture for Thoughtworks to feel at home is efforts 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. 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. So 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.

But one thing that I would also say because I think as we're talking about hiring and talents and how we think about that onshore and offshore, I think I maybe stated that we had 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 question. And congrats on your first public earnings. Thanks..

Our next question comes from Tenzin Wang [ph] with JP Morgan. Your line is open..

Thanks so much and 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 you came in a little bit ahead of where we had modelled.

I'm curious just how do you grade your contract execution, delivery costs, pricing those kinds of areas? Any surprises?.

No surprises. 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 Tenzin as you're pointing out, we saw strong adjusted gross margin in Q3, and that was about three points higher than the same time last year.

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. And then we also increase 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%. Tenzin 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 – excuse me 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 had – continued to have strong client delivery and premium services, of course. And with 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 Tenzin, since you mentioned that on pricing. I just want to add that. We do continue to see a year-over-year increase in our average fill rate and this is just a part of the reason that contributed to the higher gross margin.

I think this is just a good reflection of this strong demand for premium digital services..

Make sense. No, that's all good stuff. My follow up. I just wanted to ask, now with the IPO behind you, and we're going to turn the page of 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 to 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 complimentary small tuck-ins to our core business and more than those transformation of 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 culture alignment and then the capability, premium value proposition, are all important factors we want to consider before we decide to acquire anyone. So we'll continue to explore this area in the coming years.

But it's more important for us to look for the right fit, then trying to target a number or dollar amount for acquisition. Hope that helps. .

It does. Well done. Thank you. .

Thank you Tenzin..

Our next question comes from Bryan Bergin with Cowen. Your line is open..

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 additions, in your view, they can become top 10 clients next year.

How about the current top 10 client base and the expansion plans there?.

Sure. So the current top clients, if I understand it, the question is, for top clients 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 across vertical, across Java phenomena, our so called addressable share of wallet with these clients continue to increase year-over-year. And we believe that we're only scratching the surface of many of the adjustable spending’s with our largest enterprise clients. So we are far from saturated.

We believe we'll 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 topic declines. So some of them rise to the very top sooner – faster than the others.

For example, we have grown 29 clients with TTM revenue of over 10 million and this is eight more than Q3 2020, so from 21 to 29 within the year. That's kind of reason why the very top shuffles middle..

Okay, makes sense. And then just a follow up on supply.

Can you comment on where you're adding headcount the most aggressively? And where is – which countries are you seeing the strongest or the highest competition for talent?.

Sure. 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 near-shore 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 through how our GOs and say that we're hiring. In terms of increased – or competition for talent. And what I would say is there's always a 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're feeling really confident about our ability to recruit and bring in great new Thoughtworkers..

Okay, thank you very much..

Our next question comes from Moshe Khatri with Wedbush Securities. Your line is open..

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 the – your typical year, when do you get – when do we see some of the comp increases during the year, any the specific quarter? And then maybe also talk a bit about pricing increases. We kind of heard from some of your peers that you're seeing some catch up to pricing from pre-pandemic levels.

Some of your peers actually were able to put through pricing increases a couple of times already this year. Thanks a lot..

Okay, so I will get all 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're gearing up for a strong year. And so just like we've 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 do we see in terms of compensation increases, our compensation increases happen across the year. So there isn't one single quarter where everything happens.

On balance, there's 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 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. .

Thanks..

Our next question comes from Darrin Peller with Wolfe Research. Your line is open..

Hey, guys, nice job. And it's great to see 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 yourself 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're seeing right now on that front, the ability to continue to source talent the way you've been doing so albeit it's still a big number albeit a smaller than some of the competitors.

Can you just touch through that in terms of what you see is the right run rate? And if there's something we should think about in terms of normalized rate for the company, longer term or medium term..

Thanks Darrin for the question. I'll take that. So you're absolutely right, we have always wanted to be careful with our growth rate. And then 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.

And we have been growing at 20% plus rate for many years, as you mentioned, and then we're able to maintain and also evolve our culture positively. Now, we are at a phase where we're seeing faster growth. It's not that we haven't seen faster growth before, we have seen faster growth over time throughout 28 plus year history.

This is definitely a – what I would 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, integrate into our business.

But this is definitely something that we have done in different countries in different parts of the organization, to have a – to be able to have a faster growth pace and then without feeling that we're diluting our culture with a premium value proposition. Now, can we sustain a higher pace? We believe we can, given all the things we're working on.

Now, would this go back to – would this have to come down because of the concern about culture? We don't think so. We're also very careful to make sure that we're going to monitor this so that we don't drive engine too hard over a long period of time, and lose sight of the stretch to the core business. So we'll continue to watch it.

We're not concerned right now with the current growth phase..

Alright, that's really helpful. And just one follow up. When we think about the actual use of capital going forward versus sort of the just the trade-off you guys want to think about in terms of M&A and investments organically.

You've really, I think Thoughtworks has been known among others, probably among the best in the industry is 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'll take that. Definitely, we plan to use the proceeds, and then the cash flow that we generate to invest more into M&As. Again, today, we feel that as a premium service firm, we're leading in many areas in terms of capability, technology, thought leadership, as a service provider for our clients and will.

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’re also feeling the pressure that there's just a lot more new tech’s 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're focusing on. I mentioned earlier, from a fit perspective, we're 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 there 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 transformation or acquisition near-term.

In the long-term, as we continue to our M&A muscle, we think we definitely look for potentially even bigger deals that help us to build capabilities faster..

Alright, that's really helpful. Congrats guys. Thank you..

Thank you..

Our next question comes from Arvind Ramnani with Piper Sandler. Your line is open..

Hi, thanks for taking my question. And congrats on a great quarter. Yeah, I just had a question on the sort of operational impact you're seeing from folks getting back to work.

Are you seeing sort of increased activity from folks getting back to work or – and is that is that changing how you're like selling your offerings or even how you're 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 then 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 our office is really optional at this moment for a lot of people. So we continue to have a lot of people who prefers to work remotely in a country where we're operating.

Now, from a client perspective, we do see requests from some of our clients, for people our people to go on site back to their office and work together. And we definitely be able to cope with that in most of the countries, again, depends on a 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 overtime, we do also expect more work to return to the client to on site 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. Hope that helps..

Definitely. Just a quick follow up. Certainly the last 18 months has been quite fluid where things were changing kind of real time. But given that we are – I guess, I mean, while it's localized as stable in an environment as we have been in the last like 18 months.

So with that backdrop as you look at the next year or a 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 on it. So 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 give us great visibility into the future.

We're also seeing more urgent and 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 use the word early indicators that we can see as positive signs.

One of them is that we're seeing a shorter sales cycle from initial pursuit to contract signing, papers we have seen before. Our bookings are also very robust. We're also seeing an increase in the value of average client contract, SOW size, and also the average length of this SOWs that we're seeing today are longer than before.

So these are the kind of early indicators will say, give us more confidence about the visibility of the pipeline, without putting a number around it. Hope that answers your question..

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

Thank you..

Our next question comes from Jason Kupferberg with Bank of America. Your line is open..

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 and maybe on the margin side. It looks like you're going to exit the year at about for the full year 20% plus adjusted EBITDA margins.

Can you just help us think through some of the fact that is 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 focus 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 costs, 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 costs.

And we also expect higher costs associated with operating as a public company. And both of those you alluded to, so that'll 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'll 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 as a quick follow up about vertical trend expectations, obviously financial services and retail and consumer you guys called out so outperformance.

Could 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 kind of a specific – we don't have like M&A boost in those sectors from our perspective. Previously, that two acquisitions only contribute 2% of inorganic growth.

And when we look at these three sectors, in particular financial services, retail consumer and public energy, public health care services, which would group together, we do believe this fast growth trend will continue. And then we also feel strongly that our ability to capture them organically 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 then we definitely expect this rebound to sustain and probably even grow faster post-COVID, given the digital needs from the consumers..

Okay, thanks, guys. Very helpful. Thanks. .

Thank you, Charlotte. .

Our last question comes from Dave Koning with Baird. Your line is open..

Yeah. 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 longest we can find across the years we have. I just – I'm wondering about when we kind of look at that.

And then we look at Q4 guidance, which is kind of 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've 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're 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're 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 add backs other than stock comp going forward? I mean, certainly a lot of companies add back IPO costs.

Yours were super small, I think couple of 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 add backs going forward. What we expect to have is to – the continued stock based compensation of course, and then intangibles amortization, so clean add backs and good numbers..

Sounds great. Thank you..

Thank you..

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

Just want to thank everyone for joining us today for our first earnings call. I 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 Thoughtworkers, clients and partners for the extraordinary impact we're delivering everyday together.

I look forward to catch up with you all next quarter..

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