Hello, everyone, and welcome to Thoughtworks Earnings Call for the Fourth Quarter of 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 it's also available on the Investor Relations page on thoughtworks.com if you want to review or download a copy.

Some of the matters we will 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, in our annual report on Form 10-K to be filed with the SEC, 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 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 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, everyone, to our fourth quarter earnings call. I'd like to start the call by sharing an overall update on the business and then Erin will take you through our Q4 financial results in more detail. I will then share with you some of the highlights in the quarter before Erin shares our 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 disruptors to thrive as modern digital businesses.

I'm pleased to report that our fourth quarter closed on a strong note, driven by the continued market demand for our digital transformation services. We delivered revenue of $287 million in the fourth quarter of 2021, reflecting year-on-year growth of 39% and 39.2% at constant currency.

In the fourth quarter, we achieved adjusted EBITDA of $52 million, reflecting a 45.2% growth compared to the fourth quarter 2020. And coming to the full year, I'm delighted to share that our revenues now exceed $1 billion. We grew 33.2% year-on-year, resulting in 2021 reported revenue of $1.07 billion.

And our adjusted 2021 EBITDA was $223 million, a 45.7% year-over-year growth. Thoughtworks has established a reputation for thought leadership and fostering a unique and cultivating culture. The diverse and global culture continues to track and retain what we believe to be the best talent in the industry.

At the end of December 2021, we were 10,642 Thoughtworkers strong in 17 countries across five continents. This represents a net headcount increase of 33.4% year-on-year. I would like to thank every Thoughtworker around the world for the extraordinary impact they create through our technology excellence and culture.

Looking at the market, a PwC survey highlighted that close to 50% of CEOs globally expect to increase their rate of digital investment through 2023, and also expect high market demand to be a multiyear cycle. MarketsandMarkets expect spending on digital transformation services to more than double to around $1.2 trillion by 2026.

For Thoughtworks, we see evidence of this growth across our services, digital transformation, cloud, platforms, data and AI, digital products and customer experience. And we're excited by the growing client interest in emerging technologies like augmented and virtual reality, sustainable tech and defi, decentralized finance technology.

We continue to see our key growth opportunities coming from deepening relationships with existing clients, establishing new client relationships, developing new technical capabilities and client solutions, developing and growing our strategic partnerships, focused geographic expansion, and undertaking strategic targeted acquisitions.

Strong themes are prevailing in the market. Let me share a few examples. Digital transformation remains a top strategy for our clients.

Continued movement to the cloud with a focus on enterprise modernization and platforms, launching new digital products and services, enhancing customer experiences, removing friction, and bringing customer facing services together under one platform, data governance to improve quality and access to data, scaling of data platforms, and a move to distributed data architectures like data mesh to enable business domain agility.

The depth of our expertise and breadth of our capabilities means that we can help clients address all of these challenges from strategies right through to business outcomes and accelerate their time to impact. And we are seeing larger longer term client deals. Many clients have ambitions to scale their digital transformations at a faster pace.

In 2021, the average tenure across our top 10 clients by revenue is seven years and we continue to grow our relationships. For example, Thomson Reuters, the world's leading provider of news and information-based tools to professionals.

We are collaborating with Thomson Reuters on their digital transformation journey, including strategy and enterprise architecture, to support their ambitions as a content driven technology company. We are selective in our approach to new clients, looking to work with clients with long-term ambitions for digital transformation.

We continued the positive momentum from Q3 and we have contracted with 36 new clients in Q4. I'm delighted that we have some excellent new client wins to share this quarter. The first I want to mention is John Deere. John Deere is a world leader in providing advanced products, technology and services for the agriculture and construction industries.

John Deere has signed a multiyear agreement with Thoughtworks. We will work together on new digital technology and micro services intended to deliver a seamless and enriched digital experience for their customers, dealers and other stakeholders across traditional and digital channels.

And in Asia-Pacific we have entered a multiyear relationship with Standard Charter to develop their strategic next-generation program, a cloud-based digital banking proposition for their retail and wealth customers.

This collaboration will support Standard Charter's ambition to expand the reach and scale of their digital first strategy, to elevate banking experiences for retail and wealth customers. And in the UK, we are working with our new client ITV.

ITV is an integrated producer/broadcaster who creates, owns and distributes high quality content on multiple platforms globally. Consumer viewing behavior is constantly evolving and we are working with AWS to help ITV further leverage their significant data assets to create brilliant customer experiences and to better serve their commercial partners.

In North America, we are working with our new client, Workrise, whose mission is to empower the people and get work done. Workrise is a leading workforce management platform for the skilled trades across industries including wind, solar and construction.

We will be working with Workrise to reengineer their software development lifecycle, integrating continuous integration, continuous delivery tools into a more seamless and frictionless developer experience. We continue to see good client growth in financial services.

Winning new fintech client Voyager Digital Ltd., one of the fastest growing publicly-traded crypto currency platforms. Voyager offers a secure way to trade over 70 crypto assets and earn rewards using their mobile applications. Voyager engaged Thoughtworks to help scale their platform.

We have worked on the Voyager loyalty program and help to launch the Voyager debit card, which lets Voyager's customers earn rewards and spend crypto everywhere MasterCard debit is accepted. Going forward, we will help Voyager to continue scaling internationally.

You can find details of some of these customer successes on the 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 were very pleased with our results in the fourth quarter, which demonstrated continued robust demand across our geographies and verticals. Let me begin by summarizing a few of the highlights for the quarter.

In the fourth quarter, we saw strong revenue growth of 39% compared to the prior year period. Constant currency revenue growth was 39.2%. Our adjusted EBITDA margin of 18% was 50 basis points higher compared to the midpoint of the range I guided to in our Q3 earnings. This is an increase of 70 basis points compared to the fourth quarter 2020.

We also continue to generate solid free cash flow with $18 million generated in the fourth quarter. Now let me share the highlights for 2021 full year. 2021 reported revenue surpassed the $1 billion mark at $1.07 billion, representing 33.2% of year-over-year revenue growth and 29.3% in constant currency.

For the full year, acquisitions contributed 240 basis points of this growth. These results are in line with the full-year guidance I shared during the Q3 earnings of 33% reported revenue growth at the midpoint of the range, or 29% in constant currency. Adjusted EBITDA for the full year was $223 million, representing year-over-year growth of 45.7%.

Adjusted EBITA margin was 20.9%, 180 basis points higher than the prior year and higher than the midpoint of our guidance of 20.75%. The adjusted EBITDA margin expansion compared to last year was due to higher demand for our services improved pricing and improved staffing leverage. Now let me share some of the details.

Turning to revenue, for the fourth quarter revenue growth year-over-year was 39% and 39.2% on a constant currency basis. Acquisitions completed in January 2021 contributed 230 basis points of growth in the quarter.

Thoughtworks is a premium brand with a diversified business across industry verticals and geographies and we have high demand for our services. In full year 2021 clients accelerated their digital transformations with Thoughtworks. At the end of 2021 we had 40 clients with bookings greater than $10 million compared to 31 clients at the end of 2020.

Our overall bookings at the end of 2021 increased by 60.8% year on year to $1.5 billion with strong momentum across geographies and verticals. We saw strong growth in the quarter in all regions, especially in APAC, Europe and North America. North America grew by 36.3%, APAC by 45.7%, Europe by 36.6%, and LATAM by 28%.

We also continued to see good growth across our industry verticals during the quarter. The strongest growth was in financial services, growing at 68.6%. Our retail and consumer vertical grew by 53.6% and continues to rebound post the global pandemic and we are very pleased with our growth from existing clients.

Energy, public and health grew at 23.7%, technology and business services at 33.5%, automotive, travel and transport grew at 31.3%. For the full year 2021, around 86.5% of our business came from existing clients.

I am pleased to share that we continue to grow our business with our top 10 clients, also achieving another milestone with one of those top 10 clients reaching $50 million in revenues.

We now have 30 clients with trailing 12-month revenues greater than $10 million, seven more than the fourth quarter of 2020, a 30.4% increase from the same time last year. Moving down the income statement, for the quarter adjusted gross margin was 42.9%, a 180 basis points improvement compared to fourth quarter 2020.

This performance rounds off an excellent year of adjusted gross margin expansion with full year 2021 adjusted gross margin of 44.2%, an increase of 230 basis points on full year 2020.

Our adjusted gross margin expansion reflects benefits from improved staffing leverage alongside our differentiated value proposition and premium services driving a higher bill rate.

Adjusted SG&A as a percentage of revenue was 24.6% for the quarter compared to 23.5% for the fourth quarter last year as we continue to invest in our growth while leveraging our global scale. Adjusted EBITDA was $52 million for the fourth quarter, an increase of 45.2% compared to the prior year quarter.

Adjusted EBITDA margin was 18%, up 70 basis points compared to the fourth quarter last year. GAAP diluted loss per share was $0.012, primarily due to non-cash stock compensation charges related to our successful IPO. On an adjusted basis our adjusted diluted earnings per share was $0.09 compared to $0.06 in the fourth quarter of 2020.

Free cash flow for the quarter was $18 million compared to $20 million in the prior year quarter, driven by strong operating profitability offset by acquisition and IPO-related costs. And we continue to have good liquidity. Our cash balance at December 31, 2021, was $368 million compared to $491 million at December 31, 2020.

Further, we paid down $100 million of debt in the fourth quarter, leaving us with a balance of approximately $510 million as of December 31. Now I would like to hand back to Xiao to share additional updates on our business in the fourth quarter..

Thanks, Erin. Let me start with our amazing Thoughtworkers. As I mentioned earlier, we've grown our community of Thoughtworkers to 10,642, 33.4% net increase year on year. With a long-term focus on diversity and inclusion, 40.6% of Thoughtworkers are now women and underrepresented gender minorities.

We are pleased to have been recognized with many awards again this year, including by India's Associated Chamber of Commerce and Industry as the best employer for diversity and inclusion and the best employer for women in our category. Our strong employer brand continues to attract the best talent in the market.

We had over 0.25 million applicants to Thoughtworks during 2021. We continue to innovate our people sourcing and onboarding processes and tools. By leveraging our geographically diversified model and strong candidate pipeline, we're effectively attracting new talent to our business.

Attrition for the full year 2021 was 15.1% compared to 11.5% in 2020, driven by strong market demand for digital talent. Our attrition rate has trended downwards now for five months in a row. We are managing attrition and continue to invest in our people. Let me share a couple examples that highlight our approach to talent retention and development.

For talent retention, we were proud to make every Thoughtworker an equity holder at the time of our IPO in September 2021. Going forward, we will offer equity as part of the total reward package to a broad set of our people. This approach aligns with our inclusive culture and proactive approach to employee retention.

Second, talent and capability development. We hire poly-skilled, high aptitude Thoughtworkers who have the ability to learn new skills quickly. We see this as a competitive advantage in the talent market.

Technology is advancing very fast with high demand for top talent in areas like data and cloud infrastructure, so we plan to scale up our training efforts to around 1,000 Thoughtworkers in 2022. This training will focus on the latest technologies and approaches to data and cloud.

Thoughtworkers are excited about the opportunity to grow and learn, and I see this scale program as an important way to support our growth ambitions and our clients' business goals. Let me share another initiative that Thoughtworkers are very proud of, XConf.

XConf was established in 2014 as a global platform to share Thoughtworks' latest thought leadership.

It's a vibrant community bringing together some of the brightest in the industry to explore topics like how to build a tech stack for billing users; developing ethical, augmented and virtual-reality; and creative sessions like how to operationalize music theory with code.

Our priority is for Thoughtworks to be a place for talented technologies to grow and have impact. Our overall global Glassdoor rating is 4.5 for the quarter, which is, again, higher than the rating for the IT services sector of 3.95. Continuing to focus on enriching our unique cultivating culture is paying off.

We ran our annual employee engagement program in the quarter with feedback from over 7,000 Thoughtworkers. Our overall engagement increased to 8.7, which is in the top 25% for the technology sector. Our diversity and inclusion score increased to 8.9, which puts Thoughtworks in the top 5% in the sector.

Highly engaged Thoughtworkers advocate for the company and help recruit. Around 30% of new hires are sourced through referrals. And based on employee feedback, in the fourth quarter we were awarded Great Place to Work Certified in Ecuador. This means that 12 Thoughtworks 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%. We're known as thought leaders who revolutionize the technology industry, and that's how we've built 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 December we launched our latest edition of Thoughtworks Looking Glass, our annual technology report. It is a critical look at the big technology driven shifts set to shape industry. It's really valued by our clients.

Talented Thoughtworkers have evaluated over 100 technologies and the Looking Glass guides our clients on how to prepare, which technologies to anticipate, analyze and adopt. And I'm often asked how come Thoughtworkers write so many books. With over 100 published books it's something unique and a very special aspect of our cultivating culture.

One recent book, Software Architecture, the Hard Parts, released in November, was written by three Thoughtworks luminaries and an industry veteran. As software continues to eat the world, distributed architectures are increasingly underpinning business success.

And in the fourth quarter we achieved another milestone, our first global brand campaign, Where Extra Overcomes Ordinary. This campaign strongly aligns our external brand to Thoughtworks' company purpose, to create extraordinary impact in the world through our culture and technology. Early results are promising. Thoughtworkers love the new brand.

The campaign is beating industry benchmarks by 14% and scoring highly on the brand recall and engagement with MOAT scores in the top 85% of all advertisers on premium business media. Our focus on building our premium brand is paying off.

And I'm delighted to share that for 2022 the Thoughtworks' brand is now a brand financed top 25 global IT services brand. Now let me get 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 two areas of focus. First, our own carbon reduction strategy including our commitment to the science-based target initiative.

Second, we are committed to helping the technology industry reduce its carbon footprint. One example in sustainable technology is the work we've been doing with our client, Tradewater. Tradewater's mission is to reduce the world's carbon footprint. We helped them develop FOM, a fractionalized offset management system, in less than 60 days.

FOM provides Tradewater's customers with web-based tools to measure their carbon footprint across business and personal activities, educates and offers high quality carbon offset credits. In one year, Tradewater has seen its offset credit subscriptions grow by 419%.

And in November, we partnered with Tradewater at AWS Reinvent and achieved our goal of eliminating 2,000 tons of greenhouse gases from participants with our Green Code initiative. So, moving to social within our ESG strategy, social change is deeply ingrained in our culture and in our business.

Thoughtworkers continue to do transformational social impact products around the world. A good example is the work we do in support of the Digital Public Goods Alliance, whose mission is to promote digital public goods to create a more equitable world.

Digital public goods are open source and help attain the United Nations' sustainable development goals. Thoughtworks strongly supports these goals. In 2021 we provided support to open source digital solutions that can play a critical role in advancing the sustainable development goals in areas including energy, education and healthcare.

One example is EpiRust. EpiRust It is an open source fast agent-based simulation framework to model epidemics such as smallpox, H1N1 and COVID-19 in cities. Now let me turn to our business outlook. We expect demand to remain strong and we are confident in our ability to hire the best talent in the market. Our pipeline is very robust.

We are seeing increases in the value and length of the average client contract size from a year ago. For the first quarter of 2022, we expect revenues to be in the range of $303 million to $305 million, reflecting year-over-year growth at the midpoint of 28% or 31% on a constant currency basis.

We expect adjusted EBITDA margin for Q1 to be between 19% and 20%. For the first 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 332 million diluted shares outstanding.

For the full year 2022 we expect revenue growth to be in the range of 25% to 26% year-over-year on a constant currency basis. 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 $0.50 to $0.52, assuming a weighted average share count of approximately 335 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 Michael..

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 Tien-Tsin Huang with JP Morgan. You may proceed with your question..

Thank you so much. Nice results here, everyone. Just – I thought I'd maybe start with gross margin, which was solid and ahead of our view. Can you just comment on pricing and mix contribution and what you're doing – what trends you're seeing there.

I know you commented on it a little bit in the prepared remarks, but if you could expand on that that would be great, and what you're thinking on gross margin for fiscal 2022 as well..

I can take that. Erin, feel free to jump in anytime. Hi, Tien-Tsin. So the gross margin is definitely an outcome of several factors in our business. The first one is, as you mentioned, we have seen a price mix increase across all the markets including both onshore and offshore.

And then the price mix I mentioned, I mean is that we're adding more premium services through our innovation and more higher value add. And these tend to be with higher rate, whether it's indirect modernization and platform and data. The second is the high demand/low supply situation we're in right now creates a better pricing environment as well.

So, we can be more selective on taking deals where we get better pricing. So, that generally drives up our revenue per employee. And that number, by the way, was 108,000 last year and then – I'm sorry, 2020. And for 2021 it's 116,000. So, that gives us a baseline of driving a higher gross margin through pricing increasing.

And then the second factor is that we do see a higher utilization compared with 2020, which was the worst situation caused by COVID. So, that is another factor that drives up the gross margin.

At the same time, we have always been intending to drive more offshore/nearshore work in the Thoughtworks portfolio, and then we have been doing that throughout 2021 as well. So, that, to some extent, offsets the revenue per employee by having more work done at lower rate regions. But still the net result of that is higher revenue per employee.

At the same time, we've seen wage inflation, as everyone else does in this environment. And that somewhat gets offset by better leverage. So, overall adding all the factors together, we have the gross margin where we reported. We're happy with that.

And also we've seen that some of these factors will continue to move up and down a little, but overall we expect pretty stable gross margin going forward as well..

Okay, that was perfect, good stuff right there. So, just my quick follow-up, if you don't mind, just on the first quarter revenue guidance showing some good strong sequential growth here, a little better I guess than the forecast. It seems like you expect a strong start to the digital budget with [indiscernible] from the geopolitical uncertainty.

Just wanted to make sure because in general we're getting questions given what's going on in the Ukraine. Thank you..

Sure. [Indiscernible] Ukraine situation, from a business perspective, Thoughtworks, we don’t have direct exposure, we don't have people based in Ukraine, Russia or Belarus. And then we also don't have clients in Ukraine or Russia.

In addition, our business is highly diversified geographically with North America representing 37% of revenue, APAC 34%, so Europe is only about 25% at the moment. So, we feel pretty comfortable dealing with any potential economic impact caused by geopolitical tension..

Thank you. Our next question comes from Ashwin Shirvaikar with Citi. You may proceed with your question..

Hello..

Hi, Ashwin. I can hear you..

Sorry. I was wondering if you could provide some color with regards to cadence.

Anything to look for in terms of typical seasonality, year-over-year comps, client ramps, things like that, as we think of the four quarters of this year? It seems to me as though perhaps just looking at 1Q versus full year that growth should decelerate to a more normalized level by the end of this year, but would love to hear your thoughts..

Sure, I’ll start. Hi, Ashwin. So, from a cadence perspective, we – definitely we believe we are still in this multiyear growth cycle where there’s a bit of a hyper growth. I think this is driven both by the fact that there’s a lot of digital transformation going on at this moment, as well as this post-COVID acceleration, the pent up demand.

So, we are still moving into the year with strong growth. But as we go throughout the year, we feel that some of this hyper growth is going to gradually come down a little and we’re going to end up perhaps with a lower growth rate at a quarter level than we started the year with.

But we still believe it’s going to be a higher level than the pre-pandemic period. And then we’re still in this higher growth cycle even exiting 2022..

Understood, understood. And then you had the comment on including equity as a part of regular comp. It’s quite understandable. It should be a good thing, I think for the retention.

But could you maybe scale that for us in terms of expected financial impact in 2022 and going forward, how should we think of it? And also I should’ve said at the beginning, good quarter. Thanks..

Erin, do you want to comment on that?.

I’m sorry. I realized that I was double muted. Yes, I will definitely comment on that. So, yes, Ashwin, as you noted with respect to stock-based compensation, we still have a higher level of stock-based comp that relates to the IPO. There’s various triggers in any IPO that lead to an outside stock-based comp expense.

And for us this really means that we’ll see a higher level or this dynamic into the 2023 fiscal year. So, as we think about 2022, you should expect to see higher levels of stock-based comp. We also have been waiting to get approvals – the China SAFE approvals for the equity program we have there.

We just heard in the last few days that we’ve received that approval, and so that is also going to factor in to the Q1 expense now that we have that approval. So, in summary, we will have a higher level of stock-based comp expense in 2023 – in 2022, excuse me, and a little bit into 2023 as part of really the IPO program.

And then we’ll start to see normalized levels as we head into 2023. Ashwin, I would also just give maybe a little bit of color around the seasonality question that you asked a few minutes ago. And Xiao already touched on the growth dynamics, essentially that we do expect to see strong growth throughout the year.

And then just a bit on the margins, I would highlight that for 2022 margins, we’ll see similar dynamics that we saw in 2021. And so, for us really it tends to be that Q3 is a strong quarter from a margin perspective. Q4 has the impact of the increased holiday season lower utilization that we saw in Q4.

So, nothing special to note in 2022, but I think 2021 is a reasonable view on how to inform 2022..

Understood. Thank you, both..

Thank you. Our next question comes from Maggie Nolan with William Blair. You may proceed with your question..

Thank you and congrats from me as well.

I’m curious, have there been any changes in your ability to hire or the labor market in the first couple months of this year?.

Hi, Maggie. No changes in our ability to hire. We have a very strong recruiting engine and capability and we are confident in our ability to continue to attract talent. Xiao talked earlier around our sourcing in his prior comments, and we’ve seen that continue in this first quarter.

We’ve been investing in our recruitment as well as our onboarding process over the past years. If we think about our recruiting process, where we’re investing is both the technology side as well as the process side. And what we’re seeing today is that our recruitment teams are more productive than ever.

So, we’re feeling good about hiring in general for 2022 and this is confirmed with what’s happening so far in Q1..

Got it. Thank you. And then how are you thinking about the drivers of growth in terms of the buckets of your kind of top 10 clients and non-top 10 clients? It seems like the non-top 10 was a pretty big driver of the strong growth this year.

Can you comment on where you’re focusing your efforts across those two stratifications?.

Sure. I’ll take that. So, as we mentioned earlier, for 2021 revenue from our top five and top 10 – top 10 clients as a percentage of total revenue was 27%. And so, that continues to be a strong driver for our growth for sure. And then from a smaller client new logo perspective, there was definitely a shift we can see from 2020 to 2021.

Again, 2020, due to COVID, there was just less growth from new logos. A large part of our growth comes from client relationships. And in 2021, we see that new logo pipeline fully recover. We saw 44 new logos in Q3 2021 and then 36 new logos in Q4.

Plus a lot of them are continuing to grow and ramp up even though start as a smaller client relatively to some of the top clients. We see that part of the portfolio growing a lot faster than 2020, but not unexpected in a normal year.

So, at this moment we feel pretty comfortable with the portfolio overall where we continue to see strong growth from top clients, also this new logo smaller clients ramping up give us a much better chance to continue to diversify our portfolio. So, top 50 – we definitely see that growing faster than top 10.

And additionally, we have now 30 continents with trailing 12-month revenue of over $10 million, I think that’s 7x more than the same time Q4 2020..

Thank you..

Thank you. Our next question comes from Brian Essex with Goldman Sachs. You may proceed with your question..

Hi, good morning and thank you for taking the question and congrats from me on a nice set of results as well. I was maybe wondering if we could start – I think there was some commentary previously about over the long-term driving a bit more of a mix shift to offshore/nearshore.

But maybe could you comment on what your mix is onshore versus nearshore, offshore now, what it’s been in the past? And given the pace of reopening on a global basis, is that view of how that mix should level out changing as we head into fiscal 2022?.

Sure. Hi, Brian. Thanks for the question. So, we’ve always been, even before the pandemic, intentionally pushing for more offshore/nearshore delivery than we have done traditionally. So, our business started more than 20 years ago and then it was 100% onshore.

So, over the years we have slowly, gradually increased our offshore/nearshore delivery to regions like India, LATAM, China, Southeast Asia, a little bit right now in Eastern Europe. The percentage of headcount – I’ll just go from a headcount perspective, doing offshore/nearshore work has increased to about 60% of our total headcount.

And then post-pandemic and, as you mentioned, remote working will just give us more opportunity to deliver work in different locations, especially offshore/nearshore region, because the clients are getting more comfortable and open to it.

So, we do expect this percentage to further increase, perhaps to the 70% range in the next few years and maybe even higher.

But that said, we don’t intend to move to an extreme position where, for example, 90% of our headcount offshore/nearshore regions, because we do believe that the outside presence is a strategic advantage and differentiating Thoughtworks gives us the ability to be co-located with our clients. So, we’ll continue to have a strong presence there.

But number wise it’s going to continue to shift hopefully to 70% and beyond..

Got it, that’s very helpful. I appreciate that.

And maybe just to follow-up, financial services strength, is there anything there to call out in terms of building explicit domain expertise around a particular set of technologies or reference ability such as payments or user experience or anything really notable that’s driving that strength?.

It is a – I think an interesting aspect at Thoughtworks. We have historically not organized our organization in a vertical manner. So, we never had a strong domain specific go-to-market approach.

Now – and then there’s a lot of reasons to that, mostly because we believe technology should be able to move from vertical to vertical, from tech stack to tech stack so that they can become poly-skilled and more innovative.

Now in the recent years we have been adding more and more domain expertise, specifically around finished services, retail, so that we can have not both just better conversation with the client, but also frame our offerings, which is generally horizontal by technology and by capability.

But we can frame them better and make it more relevant for clients. In financial services, as you point out, that’s one area we’ve been doing probably more than the other domains. And then we’re definitely seeing this paying off with the strong growth.

But it’s not just domain obviously, it’s also the fact that we’re intentionally investing in this area. And that’s why I think we are seeing very strong growth from this on financial services. It’s just a sector where there’s a lot of new things going on besides the general digital transformation.

There’s always third-party payment, neo-bank and then crypto currency. So, we’ll continue to add more domain expertise in this area, but probably never going to switch to a domain oriented organization structure.

Does that make sense?.

Very helpful color, thank you..

Thank you. Our next question comes from Matthew Roswell with RBC Capital Markets. You may proceed with your question.

Yes, good morning and thank you for taking the question. And congratulations on a nice quarter. You’ve mentioned a couple times that you’re – the contract length and tenure all seem to be increasing and the amounts are increasing.

Do you think that’s specific to Thoughtworks, or is it something in the industry overall? And if it is specific to Thoughtworks, is it a sign that you’re sort of going deeper in clients, meaning that the clients are just giving you more and more work and that’s separating you from the competitors? Thank you..

I’ll take that. So, it’s definitely both. For one, there is a strong momentum in the industry from a digital transformation perspective. There’s also pent-up demand. So, that generally drives up the pipeline – the strength of the pipeline in terms of larger contracts, longer-term contracts.

A lot of clients understand now we have to sign a bigger deal to secure some key resources, so that’s an industry trend. From Thoughtworks’ perspective, we definitely see – we go a lot further into the engagement, into the relationship with our clients.

And over time what we tend to see, that especially the ones who are just got through the first wave or so-called maybe the first second inning of digital transformation, they are convinced about the value of digital transformation and then they start to invest heavily – more heavily into – beyond just, for example, leadership in cloud.

They want to invest in modernizing their legacy systems, so they can move not just to the cloud but also re-architecture to become a cloud native architecture to take advantage of the scalability of the cloud. And then they also want to modernize their development practices across the board so their team becomes more productive.

There’s just a huge amount of work to keep doing in this journey to become more and more digital oriented. So, we tend to be able to – in the later stage there’s also – the work will be even more difficult, complex and in return higher value add.

So, as a premium service provider, I think from a Thoughtworks perspective, we definitely believe that the total addressable market continues to grow and expand for Thoughtworks.

And then the right to win in this sector of high-end premium, high-value add digital services, Thoughtworks is very unique – uniquely positioned to take advantage of this sector. That’s why we believe the fundamental reasons why we’re seeing a strong demand for our services..

Okay. Thank you very much..

Thank you..

Thank you. Our next question comes from Bryan Bergin with Cowen. You may proceed with your question..

Hi, all. Thank you. I wanted to dig into the comments about selectivity in your approach to new clients, and how to think about how that may impact your growth potential. So, understanding the elevated industry demand, can you talk about levels of growth at which you’re comfortable operating? You just grew headcount at over 30% year-over-year in 4Q.

Just curious, is that a level of growth your operations are able to operate over a sustainable timeframe?.

Sure. So, first of all from a selectivity perspective, we do – we’re very careful selecting our clients from a qualification perspective.

It’s both for growth, but also it’s for to make sure that we can build a long-term strategic relationship with them having – making sure that there’s a strong support from the client sector and then they appreciate the high value proposition of Thoughtworks.

And then from a gross, how can we sustain that, from that perspective there’s no doubt that the overall demand is outpacing supply in the market. And then with the premium value proposition there’s even higher demand for that.

With a premium value proposition it also takes more investment and longer time to onboard people, train them and integrate them into the Thoughtworks culture. So, we always want to make sure our growth rate is compatible with this premium value proposition, and so that we can maintain the secret sauce and the high quality of the work.

And then, as Erin mentioned earlier, in the last few years, we have been experimenting with many new techniques and processes for recruiting, onboarding, training and integrating people into our business. And then that allows us to grow at a faster pace without diluting the premium value proposition in culture.

This did help us during this hyper growth phase so we were able to capture a bit more growth than we did pre-pandemic. Now we’re confident now we can do this well at a higher level than we historically have done at just 20% – slightly above 20%. We’re very careful not pushing this too high for too long to the point that it is not sustainable anymore.

I hope that explains and answered the question..

Yes, definitely. That was very helpful. My follow-up is around margins.

Can you talk about just the puts and takes in the 2022 margin outlook? How should we be thinking about the ongoing SG&A optimization versus growth investments this year?.

Sure. So, Xiao talked about gross margin a little bit already. So, some of the points that he touched on and, of course, are relevant is that we do expect a strong gross margin to continue in 2022. What we are seeing of course is a higher level of competition for talent. We know this. This was true in 2021 and also true in 2022.

But our clients understand that and we’ve been able to drive price increases to offset. So, if we think about gross margins and the dynamics of pricing and wages, we think we’ll keep pace with wages. And then, as Xiao mentioned earlier, we have other things at our disposal in terms of leverage and onshore/nearshore, so on and so forth.

So, that helps us maintain that gross margin. Now one of the things that we know is that travel has been very low in both 2020 and 2021. So, if we think about the guidance that I’ve given for 2022 and the margin profile, we do anticipate an increase in travel expense compared to the very low 2021.

We would see this come through gross margins, so non-client travel and maybe just a little bit of client travel as well as SG&A. And then the other thing I talked about before and just will mention again is what 2022 is for us, which is our first full year operating as a public company.

And so, we do have additional costs that have come into our business both in Q4 and Q1 as it relates to that. But with that said, there’s opportunities to continue to drive efficiencies in our business as we scale. We have an operational efficiency program that geared up both to operational effectiveness as well as driving cost efficiencies over time.

So, the travel cost and the public company cost are something that we anticipate coming in 2022. But over the medium-term, we definitely see opportunities to continue to drive operating leverage in SG&A..

Okay. Great. Thank you for all the detail..

Thank you. Our next question comes from Moshe Khatri with Wedbush Securities. You may proceed with your question..

Thanks and congrats on strong numbers. Two things. First, you gave us some color on bookings, very strong numbers in terms of growth.

Can I get some more feedback in terms of where the growth is coming from in terms of verticals? And then is there a way to split it between renewals and then new logos? And then I have a follow-on?.

Sure. So, from a growth perspective we have seen it coming from a very broad range in terms of geographies and verticals and service offerings. I mentioned earlier – Erin mentioned earlier geography wise we have very wide base of revenue coming from all continents. Vertical wise similarly.

And then if your specific question is about renewals versus extensions versus new opportunities from existing customer perspective, we’ll have about 86%, more than 86% of revenue coming from existing customers. Definitely a large amount of that is renew. And then we get pretty high win rate on renewals in general.

But at the same time, even with the existing relationships, we tend to move across business functions, different types of products and then we’re also pursuing a lot of new opportunities and winning them as well. So, it does come from a broad base from a growth perspective..

Great. And then it was really helpful when you provided the headcount mix by offshore to on-site. I think you said 60-40 and the objective is to potentially get to 70, maybe a bit higher than that.

Is there sensitivity in that also that we can use in terms of what happens to margins as you expand your offshore mix – I don’t know, 100 bps expansion results in X amount of basis points, just for us to get a feel on how that actually helps you offset some of the other headwinds including wage inflation? Thanks..

That’s a great question. I don’t know whether I know exactly how to calculate that. But like you said, it will help to offset some of the wage inflation.

Erin, do you know – is there any way to calculate that?.

I wouldn’t say any specifics. I would say that in general it tends to be margin positive. At the same time, we do invest in offshore and nearshore, and so there are puts and takes even in that equation. So, I would just say broadly that it tends to be somewhat margin beneficial.

But in order to make that happen successfully for our clients, we do make sure that we invest so it’s a good experience for them..

Understood. Thanks for the color..

Thank you. Our next question comes from Andrew Estes with Wolfe Research. You may proceed with your question..

It’s Andrew on for Darrin. I just wanted to ask about – if you could elaborate on your strategy to address cross-selling and any trends around the investments you’re making in the internal sales force? Thanks..

From a cross-selling perspective our goal is really to make sure that all the four main service lines we have are offered properly to our clients. And then we’re still early in that journey. A lot of times we’ll enter a engagement one particular service offering, whether it’s enterprise modernization or data or customer experience product and design.

And as we go along the journey with a client on their digital transformation journey, we do feel strongly that the other service offerings are highly relevant.

And then from a sales force perspective, we have both invested in teams to develop new business in the market, but also invested heavy into business development teams that focus on upselling/cross-selling with existing customers. In fact that size – the size of the business development team for that is even bigger than the new business team..

Great. That’s all for me. Appreciate it..

Thank you..

Thank you. Our next question comes from Arvind Ramnani with Piper Sandler. You may proceed with your question..

Hi. Thanks for taking my question. I just want to ask, where are you seeing the strongest interest in your capabilities and pipeline for the next 12 to 18 months? And if you can categorize that both in terms of the geos as well as the verticals..

Sure. So, from interest in our capability perspective, the strongest growth we are going to see, we believe, will be in enterprise modernization and data in these two areas.

Enterprise modernization because once companies get into further deep into the digital transformation there’s a lot of modernization that needs to be done as opposed to just moving thanks to the digital infrastructure or the digital platform. They have to re-engineer, re-architect a lot of the legacy systems they have.

From a data perspective, that we have seen the wave of big data in the last few years. But then it’s really getting into a lot of challenging situations with the quality of the data and the way they can make sense of it.

Now those two service lines where we see strong growth come from is pretty much in all the geographies and also in all the verticals. So, there is no specific geography or vertical where we see one service line grows faster than the other. It’s pretty broad based and pretty universal as well..

Terrific. And just in terms of my follow-up, certainly you have – Thoughtworks has more of an on-site operating model.

But as you look out over the next couple of years with teams being more dispersed and working from home or working remotely, do you see a change in the operating model? Or do you think it’s going to be stabilizing in terms of the operating model of how you deliver your services?.

Yes. We do believe that there will be some changes, specifically the amount of time our people spend with the client co-located or sometimes in their own office. A lot of this collaboration will be done remotely. But we also think that it will most likely to be a hybrid work moving forward, meaning that a team could work remotely for a while.

And then, during specific milestones of a project, whether it’s key cards or showcase, they will travel and get together. And then that’s most effective way to solve certain problems. And then – so, we believe that even with our current operating model with people on-site, that a lot of them will work remotely.

But they will still need to travel and get co-located from time to time. That kind of hybrid model as opposed to the – everyone fly to the same location all the time pre-pandemic..

Terrific. Thank you..

Thank you, Arvind..

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Xiao for any further remarks..

So, first of all, thank you all for joining us today. I just want to acknowledge the continued support of our Board and our shareholders. And I also want to just thank our Thoughtworkers, our clients and partners for the great achievements. Stay well, everyone, and we look forward to seeing you again next quarter..

Thank you. This concludes today’s conference call. Thank you for participating, you may now disconnect..