Hello, everyone, and welcome to Thoughtworks Earnings Call for the Second Quarter of 2022. We will be recording today's call. [Operator Instructions]. Joining us today will be Thoughtworks President and CEO, Guo Xiao; and CFO, Erin Cummins.

The earnings press release was issued earlier today and is also available on our Investor Relations page at 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 annual report on Form 10-K, our quarterly reports on Form 10-Q 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 were made only as of the date when they were 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 thoughtwords.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..

Digital transformation, cloud, platforms, data and AI, customer experience, product and design. Strong themes are prevailing. Let me share some examples. We continue to see elevated demand around new digital products and services, enhancing customer experience, remove friction and bring customer-facing services together.

We're seeing higher demand from clients for Thoughtworks' expertise in enterprise modernization and reimagining operations. Demand for our data and AI services continue to be strong with especially high interest from clients in data mesh. We're also excited to see client interest around developer experience platforms.

According to Spotify, only around 30% to 40% of a software developer's time is spent writing code. We help our clients improve developer productivity and satisfaction through self-service platforms to access cloud infrastructure, security services, API events and data, to name a few.

For these reasons, we believe that Thoughtworks is well positioned in the market. Now let me share the details of our growth strategies. At the core, our revenue growth is from deepening relationships with existing clients and winning new logos. We then supplement this with focused strategies around M&A, partners and geographic expansion.

Turning first to M&A... In the second quarter, we continued with our strategy of undertaking targeted acquisitions. I'm delighted to announce our second acquisition of 2022 is with Handmade, a strategic design consultancy specializing in product strategy and design and accelerating value from innovation for their clients.

Handmade has more than 50 employees in Brazil. I would like to welcome Handmade to the Thoughtworks family. I'm looking forward to the impact they will have on our business, both in growing our CX and digital products and services, and supporting our business in Latin America and North America. Now let me turn to partners as a growth strategy.

Our primary focus is developing go-to-market partnerships with the hyperscale cloud providers. First, let me update you on Amazon Web Services, AWS. I'm pleased to share that in the second quarter of 2022, Thoughtworks became an Amazon AWS Premier Services Partner.

This is the highest tier of partnership and less than 3% of AWS partners achieve this status. This recognition underscores Thoughtworks' deep technical expertise with AWS cloud technologies and our ability to demonstrate success working with a large number of clients at scale. We're partnering with AWS at our client, Gilead Science.

Gilead Sciences is a biopharmaceutical company that has achieved breakthroughs in medicine with the goal of creating a healthier world for all people. Thoughtworks and AWS are working with Gilead Sciences to support their ambitious cloud journey.

Gilead has a vision to evolve to a more data-driven culture and drive greater innovation, including the adoption of data mesh at scale. Now let me share some more details on our client portfolio.

The depth of our expertise and breadth of our capabilities means that we can help clients address all their challenges from strategy right through to business outcomes. Our clients appreciate the value we create with them, and remain confident in our ability to sustain our premium position and pricing.

In 2021, the average tenure across our top 10 clients by revenue was 7 years, and we'll continue to grow our relationships. For example, at our client, PayPal, one of the world's leading payment platforms, we're working together to design, architect and deliver a new omnichannel platform in content management capability.

We aim to meet regulatory requirements and set a new gold standard for customer engagement. We're selective in our approach to new clients, looking to work with clients with long-term ambitions for digital transformation. We continued the momentum from the first quarter, and we have contracted with 26 new clients in the second quarter.

Now let me provide some examples of new clients that we have been working with. In May, we announced an agreement with new client, Cielo, a leading electronic payments company in Brazil and Latin America. We're working together to build a digital technology platform that improves the developer experience.

The platform is named Thor because of the power it will bring to delivery. Thor will streamline the creation of new technology features and components, streamline the process of applying architectural standards and infrastructure processes.

A key aspect for Cielo choosing Thoughtworks was our expertise in digital platform strategy, specifically our expertise around the evolution of the developer experience. We expect to improve developer productivity by cutting red tape and helping Cielo development teams build more secure and reliable digital products.

And in 2022, we work with KAR Auction Services. a leading operator of digital marketplaces for wholesale used vehicles. Enhanced vehicle condition reports are now part of KAR's BacklotCars platform.

The new features, which include engine audio recordings, are aimed at strengthening the BacklotCars customer experience through more accurate, more consistent and easier to understand condition reports.

Thoughtworks helped combine the best features and functionality of the BacklotCars and CARWAVE inspection frameworks while identifying areas to streamline across the platforms.

The result is a single enhanced condition report framework that accelerates sales for sellers and provides buyers with comprehensive condition information that is easy to understand. The new features help ensure the consistency of information displayed for buyers across a wide range of vehicle conditions, ages and mileages.

You can find details of some of these customer successes on news 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 second quarter, which demonstrate continued broad-based demand across our business. Let me begin by summarizing a few of the highlights for the quarter.

In the second quarter, we saw strong revenue growth of 27.5% compared to the prior year period. Constant currency growth was 33.5%. Our revenue growth in constant currency is 4 points higher compared to the midpoint of the range I guided to in May 2022.

This is primarily due to strong demand and execution and better-than-expected attrition for the quarter. Adjusted EBITDA for the quarter was $58.5 million, representing year-on-year growth of 14.2%. Our adjusted EBITDA margin of 17.6% was 35 basis points higher compared to the midpoint of the range I guided to in May.

Q2 adjusted EBITDA margin decreased when compared to our prior year period but is in line with our full year operating plan.

As I discussed during our earnings call in May, we expected our Q2 adjusted EBITDA margin to be impacted by the seasonality of pay rises, a higher level of annual leave or vacation associated with public holiday schedules, public company-related expenses and several in-person demand and marketing events that took place during the second quarter.

Now let me share some details. Turning to revenue. For the second quarter, revenue growth year-on-year was 27.5% and 33.5% on a constant currency basis. Thoughtworks is a premium brand, evidenced by our high average revenue per employee of $116,000 annualized for the first 6 months of 2022.

We have a diversified business across industry verticals and geographies. In the second quarter of 2022, we continued to see clients select Thoughtworks for their digital transformations. Over a trailing 12-month period, we had 35 clients with bookings greater than $10 million compared to 28 clients over the same period last year, an increase of 25%.

Our overall bookings in the trailing 12 months increased by 30.8% year-on-year to $1.5 billion. We saw strong momentum across all our geographies. North America grew by 35%, LATAM by 35.1%, Europe by 21.9% and APAC grew by 22.4%. Given the strengthening of the U.S.

dollar in recent months, we want to provide a deeper view into its effect on our reported results. Our primary revenue-generating currencies alongside the U.S. dollar are the euro, Great British pound and Australian dollar. I am pleased with the underlying strength of the business this quarter.

For example, on a local currency basis, our revenue contracted in euros grew by 24.6%, Great British pounds by 41% and Australian dollars by 41.7% compared to the prior year period. Due to the diverse nature of our business on a geographic basis, 62.7% of our year-to-date revenues as of June 30 were contracted in non-U.S. dollar currencies.

We also continued to see good growth across our industry verticals during the quarter. The strongest growth was in financial services, growing at 46.1%. Technology and business services grew at 36.2%. Our retail and consumer vertical grew at 31%. Automotive, travel and transport grew at 20.1%. Energy, public and health services grew at 9.1%.

The quarterly year-over-year growth of the energy, public and health services sector was impacted by the successful completion of a major program at one of our health services clients. Energy, public and health services is a strategic focus, and we expect double-digit growth to return in future quarters.

At the end of the quarter, on a TTM basis, around 86.5% of our business came from existing clients. We have a balanced customer portfolio with relative low client concentration. In the second quarter, our top 5, top 10 and top 50 clients generated 15.3%, 25.2% and 66.1%, respectively, as a percentage of our total revenues.

We now have 33 clients with trailing 12-month revenues greater than $10 million, 8 more than the second quarter of 2021, representing a 32% increase. Moving down the income statement.

For the quarter, adjusted gross margin was 40.6% compared to 43.5% during the prior year period, impacted by seasonality and the factors I previously discussed with respect to adjusted EBITDA. In the second quarter, our adjusted SG&A as a percentage of revenue was 23.7%, which is consistent with the second quarter 2021.

Adjusted EBITDA was $58.5 million for the second quarter, an increase of 14.2% compared to prior year quarter. Adjusted EBITDA margin was 17.6%, which is in line with our operating plan, a decrease of 210 basis points compared with the second quarter last year. GAAP diluted loss per share was $0.10, impacted by noncash stock compensation charges.

On an adjusted basis, our adjusted diluted earnings per share was $0.11 compared to $0.10 in the second quarter of 2021. Free cash flow for the quarter was $20.2 million compared to $22.3 million in the prior year quarter, and we continue to have good liquidity.

Our cash balance at June 30, 2022, was $275 million compared to $216 million at June 30, 2021. Further, our debt is continuing to go down. We paid down an additional $100 million in July, which brings our current debt balance to $406 million at the end of July 2022.

Now I would like to hand back to Xiao to share additional updates on our business from the second quarter..

The Power of Togetherness, saw industry and client speakers from ITV, Mercedes-Benz, Mondelez and Spotify, among others. We shared ideas around ways to succeed and much change the world.

Over the course of 2 days together, we explored how organizations are blending technologies, products, capabilities and talent to create new opportunities for value creation.

We were delighted to be back in person with our clients and to receive incredibly positive feedback, 100% rated experience excellent, 100% rated the program thought-provoking and inspiring, and 95% said they would absolutely recommend ParadigmShift to a colleague.

I've spoken before about a unique and very special aspect of our cultivating culture, that Thoughtworkers are passionate about sharing their knowledge to revolutionize the technology industry, and Thoughtworkers have published over 100 books.

A recent book, Full-Stack Testing written by a Thoughtworks luminary, provides a new perspective, answering the question how to test software across the full stack, testing across code performance, user interface, unit testing, accessibility and security, to name a few.

Testing is a critical discipline for any organization looking to deliver high-quality software. As software is eating the world, software quality has become a non-negotiable criterion in today's competitive market. Now let me hand back to Erin..

Thanks, Xiao. I would like to update you on some areas of focus within our ESG priorities. Thoughtworkers continue to do transformational social impact projects around the world.

In June, Thoughtworks published our second social impact report as a public company, and we are really proud to share the work that Thoughtworkers are undertaking to address systemic social change.

In the last 12 months, we invested in more than 140 projects in our 17 countries, tackling issues ranging from the rights of domestic workers, reforestation and Thoughtworks' support to the refugee crisis emerging from Ukraine with movements, like Leave No One Behind. You can find our social impact report on Thoughtworks' Investor Relations website.

Now let me turn to our business outlook. While there is uncertainty in the macro environment, our customers are continuing to come to Thoughtworks to transform their businesses. For the third quarter of 2022, we expect revenues to be in the range of $327 million to $329 million.

We expect year-on-year revenue growth at the midpoint of 15.1% or 21.8% on a constant currency basis. We expect acquisitions completed during the year will contribute approximately 3% to third quarter reported revenue growth. We expect adjusted EBITDA margin for the third quarter to be in the range of 17% to 18%.

For the third quarter, we expect adjusted diluted earnings per share to be in the range of $0.10 to $0.11, assuming a weighted average share count of approximately 332 million diluted shares outstanding. Third quarter guidance includes the anticipated impact from onetime events in the quarter impacting both revenue and profitability.

First, funding constraints facing technology scale-ups and the possible effects on a few of our clients. Second, a number of engagements for new and existing clients are now ramping up in Q4 rather than Q3 due to client-related constraints. Third, an impact on Thoughtworks' utilization due to COVID-related impact in countries such as China.

Our third quarter guidance is prudent. We have taken a realistic view. We expect that managing the impact of the challenges I have just shared would most likely negate any overperformance on our third quarter guidance. We remain positive regarding the near-term demand environment, which is broad-based across our geographies.

We have a healthy pipeline for the fourth quarter, and we have the talent and demand engine to address future shifts. We believe we are well positioned for long-term growth and value creation. Now turning to full year guidance.

For the full year 2022, we expect revenue growth year-on-year on a reported basis in the range of 24.2% to 25.2%, which includes a negative foreign currency impact of approximately 5.3%. We expect year-on-year revenue growth on a constant currency basis to be in the range of 29.5% to 30.5%, which is consistent with my guidance in May.

We expect acquisitions completed in the year to contribute approximately 2% to full year 2022 reported revenue growth. Since I last provided our full year 2022 outlook in May, the U.S. dollar has continued to strengthen. As such, I am providing a deeper view into the impact of foreign exchange on our guidance.

The full year 2022 expected revenue includes a negative impact of $57 million due to foreign exchange. This negative FX impact comprises $23 million FX impact to the midyear plus an expectation of $19 million negative FX in third quarter and $15 million negative FX for fourth quarter 2022.

For adjusted EBITDA margin, we expect full year 2022 to be 19% to 20%, consistent with my guidance in May. With respect to foreign exchange, because our regional revenue and expenses are to a large extent in the same currencies, there is normally a natural hedge in our operating margin. However, the heightened strengthening of the U.S.

dollar in recent months has led to around a 50 basis point compression on our operating margins. We believe full year adjusted diluted earnings per share for 2022 to be in the range of $0.47 to $0.50, assuming a weighted average share count of approximately 332 million diluted shares outstanding.

Our full year EPS guidance is negatively impacted by foreign exchange and a lower than previously assumed tax benefit from stock-based compensation.

For 2022, we believe our employer brand and customer value proposition are strong, and we continue to stay close to our clients and remain highly vigilant of any potential impact of external factors or emerging global developments. Now let me hand back to Sean..

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 the line of Tien-Tsin Huang with JPMorgan..

I want to, if it's okay, just check on your thinking with the third quarter revenue guidance, which appears to be flattish sequentially on an FX-neutral, organic basis. I know history looks like it would be up sequentially.

So is the difference just the 3 factors, Erin, that you called out? Is there a way to maybe quantify those 3 items for us? I'm especially interested in the first one. I think you mentioned that the funding constraints on some of your tech clients. There could be some, I guess, possible effects is what I wrote down.

So is that something you're anticipating? Or are you seeing that already? Just again, checking your conservatism given your pattern of beating in the last couple of quarters..

Thanks for the question, Tien-Tsin. As you indicated, the factors are what is driving the relative flat Q3 compared to Q2 in terms of revenue growth. To understand how much each one, approximately 1/3, I would account for. They're about equal in size. And so you mentioned the some of the tech funding.

And the funding constraints, we've seen the impact of that come through. We think it's largely settled. We don't see much potential for upside. I don't want to say there's no potential for upside, but not a lot.

That is why I included in my prepared remarks that we would not be in the same position that we typically are in terms of the strong beat, certainly, that we saw in Q1 and Q2.

So some of these onetime impacts, including the funding challenge, means that the funding challenge for technology scale-up, mean that it's a little bit harder for us to have the beat in Q3 that we would expect. What we are seeing for the quarter is that it has impacted utilization, and that's why we have the lower growth.

But I do want to note that we do expect to see stronger growth in the fourth quarter. We are still seeing a very strong pipeline. And if we look at some of the clients where there are delays from the ramp-ups in Q3, ramping up more in Q4. These are important clients.

We were doing the right thing to support our client portfolio, and we do expect some of these to be top 20 clients in 2023..

Got you. That's very clear. Just my quick follow-up then, given what you just stated there and just on the gross margin outlook for the second half, for the third quarter into the fourth quarter.

Any considerations there given the delay, utilization comment that you made?.

Sure. So typically, Q3 for us is a stronger quarter in terms of margin. I've talked about that before in terms of seasonality. However, for the onetime items that I mentioned that are impacting Q3 that is impacting the quarterly growth, as we just discussed. It's also impacting the margin in Q3.

We're seeing about, I would say, around 3 points of lower utilization than what we would target. That impacts gross margin and adjusted EBITDA by a similar amount. But we do expect to see utilization normalize in the fourth quarter.

And so while I'm not giving specific guidance for the fourth quarter, it is worth noting that we would expect to see some uplift in fourth quarter margin compared to guidance for third quarter..

Our next question comes from the line of Ashwin Shirvaikar with Citi..

I want to just follow up on Tien-Tsin's question and ask about visibility. So I guess two parts to that.

One is, when might -- when would you have found out about the client-specific 3Q potential outcome? And what's the visibility then, looking at 4Q? What's the confidence level that it might not get pushed out, some of these contract starts and the ramp starts might not get pushed out to next year?.

Thanks for the question, Ashwin. So the onetime factors and the impacts Erin mentioned earlier, we believe is mostly limited to Q3. From a client buying behavior perspective, we haven't seen a clear change in the sales cycle for winning ratios yet.

We have a similar amount of inbound leads coming in, the deals are still flowing through the pipeline at a similar pace. So we feel that we have a similar visibility to Q4 as we probably had previous quarters, looking at the following quarter. We still have a very high win ratio, both in terms of new logos and extensions.

So that's why we feel very good about Q4. The factors mentioned earlier, I think we have tweaked our portfolios a little bit, rotate some of -- out of some of the exposures we had earlier. At this moment, we don't see those impacts continuing to Q4. In terms of the larger programs of work.

The delays Erin that mentioned earlier were due to -- some of this was due to our clients' internal resources not available. Some of the teams are not ready from an organizational structure perspective. And then we have factored that into our planning process. We feel comfortable that the ramp-ups we -- that was delayed to Q4 will ramp up in due time..

Understood. And is the nature of the work that you're getting changing? Other companies have mentioned the change in focus to incorporate more cost-related projects rather than what used to be a lot of growth-focused projects. And I'm asking because you're a premium provider. You mentioned it's evident in your higher bill rates.

So at that premium part of the market, what are you seeing?.

We definitely have heard also talks about businesses changing their focus from growth to cost reduction, and then we are not seeing that reflected in the work we do yet.

I think mostly because the work we do in terms of digital transformation, the premium part of it is addressing -- mostly is addressing both the growth of the business and also the efficiency of that growth. So very often, growth and productivity at the same time. It's a new way of doing business that's transforming the old ways.

The kind of work we do is often important to both growth and cost efficiency. Sometimes, it's called do more with less. So we haven't really seen any significant impact on the work we do coming from this kind of change of thinking yet. I hope that makes sense..

Our next question comes from the line of Maggie Nolan with William Blair..

I'm wondering if you can talk a little bit about talent management, maybe how you look at utilization as a lever to balance fluctuations in demand or your willingness to keep a bench or deploy talent to different clients at an average time to productivity for new hires..

Thanks for the question, Maggie. I'll start, and then Xiao can jump in if I miss anything. So with respect to talent management, we are always, as a professional services business, focused on making sure that we are balancing our supply to our demand.

We have very strong technology capabilities and we have a geographic -- diverse geographic footprint, and this gives us a big advantage in that area. So we constantly are adjusting our hiring targets to what's happening in the business. And certainly, we're doing this now. In general, we do keep a very close watch on our utilization trends.

And if we feel that the demand pipeline of utilization is getting too tight, then oftentimes, we'll see if it makes sense to increase hiring. We did that in the early part of the year. If we see that utilization is a little bit lower than we would like to target, then we would again make adjustments.

I would also mention some positive movement on attrition. Xiao talked about that earlier, but we've seen attrition come down. And so that is another reason that, in general, we manage our talent pipeline. So we keep up the hard work of balancing the supply and demand, as we always have.

Xiao talked earlier about some of the visibility into fourth quarter and the healthy demand pipeline. And so we are managing our talents accordingly. And as I mentioned earlier, we do expect to see an uplift to more normalized or more in-target utilization levels.

Xiao, do you want to add anything else?.

I think just one thing about lower attrition to help us in 2 different ways. One is it give us more supply capacity in the short term than probably we expected. Second, with less attrition, there's definitely less handover; less transition; and more senior people, tenured people to coach and mentor newcomers, new joiners.

So that's also helping us in the short term in terms of capability as well..

And then what do you think drove that better-than-expected attrition pattern? And how is it trending so far in 3Q and your expectations from here?.

Well, it's hard to say exactly what drives attrition. We look at a number of factors. We spend a lot of time with our employees and doing engagement surveys and so on and so forth. And as we talked about on prior calls, we invest a lot in our employee value proposition.

We offer opportunities for career advancement and for understanding continuous learning and building capability, we know that resonates hugely with Thoughtworkers. And we continue to focus on our culture and make sure that Thoughtworks is a destination employer. So there has been a lot of effort and investment going on in these focus areas.

We'll continue to do that. We do believe that has positively impacted our utilization. So far, what we're seeing with respect to Q3 is that it's trending relatively stable. So we're not seeing an increase or a decrease at this point in time. We obviously continue to monitor.

And so for the moment, our outlook is that it's going to stay relatively stable with current levels..

Our next question comes from the line of Brian Essex with Goldman Sachs..

This is Charlotte on for Brian. Can you talk about, I guess, given the environment, I know you just spoke about attrition.

But have you implemented any pricing increases, given the environment, to try to offset inflation and attrition? And would you expect this to be accretive to margins? Or is it more just trying to net even in the end?.

Charlotte, I just want to make sure that I didn't miss it. You said pricing.

Is that right?.

Yes.

Have you implemented any pricing increases given the current environment?.

Okay. Thanks for the question. We have always been focusing on pricing in 2 different ways. One is the pricing mix, where I think that's the main way of us increasing our billing rate, is to continue to innovate and add more premium services offerings. Where we add more value, higher value, we get higher rate very often.

For example, enterprise monetization, data, digital strategy. Earlier, I think, this year and also late last year, in the last 6 to 9 months with a high demand, low supply situation with that macro trend, we're able to be more selective on picking new deals where we have better pricing.

I think that is -- I think it's going to be less of a factor in the next foreseeable 6 months or so. I think our price increase was going to be mostly due to adding more premium services. And then that, as Erin mentioned earlier, is to some extent offset by the wage inflation, especially the lower utilization we're seeing, we're expecting in Q3.

That offset it to some extent. But overall, if you look at our average revenue per employee, it's still about $116,000 for Q2 2022, which is similar than before. And then another factor that lowered that number a little bit is due to we are still moving more work from onshore to offshore.

So overall, I think that allow us -- that's part of the factor that allow us to keep gross margin stable, relatively..

Got you. And can you -- I guess, double-clicking to the continued offshore movement. Just overall, is that moving away from the U.S.? Or I'm just trying to understand exactly. Like is it, essentially, clients are more open to offshore? And overall impact? So I guess your revenue per head in the medium term..

Sure. We have -- I think Thoughtworks has a different history from some of the other firms. We have been doing onshore-only earlier, 20 years ago when we started our journey. Over the years, we've always been gradually increasing the offshore, nearshore delivery to regions like India and China, Latin America, Southeast Asia.

Now our onshore work has gradually moved down to about maybe 40%. We are in the process of continuing to move that down a bit further to perhaps 30%, maybe 20% in the coming years. So that's a long-term strategy we've been following.

And then the COVID situation is definitely made it possible to move more work offshore given the remote working flexibility our clients are offering and joining themselves. So we're seeing that. And this, like you said, it will gradually, but very slowly, bring down our -- this factor alone, revenue per head.

But then with the price increase and utilization, we expect, in the near term, the revenue per head to be kind of stable because of factors offsetting each other..

Our next question comes from the line of Arvind Ramnani with Piper Sandler..

I just wanted to see if you can call out any specific areas of weakness that you are seeing, whether it is by industry or by geo. Just trying to kind of see if there's a specific area that's -- where you're seeing some weakness, or is it just kind of broad based..

Thank you for the question, Arvind. So I'll start from geography. From a geographic perspective, we definitely feel that North America is doing well, even though there's some general inflation concerns. Given the leading position in digital of many U.S.

companies and the strong economy, we continue to expect strong growth coming from North American market. APAC has, especially for Southeast Asia, some of -- Singapore and other countries over there have not seen a lot of the economic concerns. It grew by 22% in Q2 mostly because of the foreign exchange headwind.

In fact, that if we just look at constant currency only, local currency only, Australian dollar, revenue we saw in Australian dollar, grew by 41%. So we're feeling very confident about APAC in H2 as well. I think Europe, there's a bit of a more of a general inflation, supply chain disruption concerns.

In Q2, even though we saw 22% of growth in Europe, if we look at the currency, Great British pounds, the revenue from that grew by 41% and euro only by 25%. So there's continued risk in Europe we're monitoring. But we're feeling that the tide is turning and then -- and a lot of our clients are starting to ramp up.

So that's from a geographic perspective. Vertical perspective. I think we see some of the different rate of growth across different verticals. And then we definitely intentionally focus on driving more from the financial services intentionally. But generally, we don't run our business from a vertical perspective.

Sometimes, we see a couple of large programs ramp down in one vertical. We don't always replace them with work in the same vertical. So sometimes, they go up and down, they fluctuate a little bit. But generally, we feel that the growth is coming from all verticals. There's no significant impact that we're seeing at this moment from the macros..

Terrific. Just a quick follow-up. I wanted to see just kind of work-from-home or work-from-office type of dynamic, given that Thoughtworks is traditionally a lot of like on-site type of work.

Are you seeing most clients sort of getting back to work? Or are folks still working in a hybrid environment? And has that had an impact in your business?.

We're definitely seeing more and more clients returning to their offices, and they're asking Thoughtworkers to go to their office as well for the on-site work. But the on-site work we do, not just consulting strategy, but also heavy lifting, delivery work.

Overall, in the last, I think, 2 years, after the initial kind of hiccup right after the COVID, where no one couldn't figure out what to do with this yet, I think this hasn't had a major impact to our high value-add onshore on-site work yet..

Our next question comes from the line of Bryan Bergin with Cowen..

Within your 3Q outlook, we're just hoping to dig into the second grouping, the second headwind you had mentioned, Erin.

Is there any common theme among those clients where you're seeing the delay of programs, as far as maybe region, stage of the company, or just the industries those may be from?.

Bryan, no, I wouldn't say there's a common theme. Xiao actually spoke about the common theme. We've talked a lot about it to understand if there is an underlying thread we want to be aware of. Ultimately, what we have found is that there is a lot of demand and big programs of work on our client side.

Our clients are absolutely committed to investing in their digital transformation and driving that strategy. But executing that strategy, it takes work and it takes work on our side and it takes work on the client's side. And so we've just seen some situations where we're -- our clients are not quite as ready to execute and get going on things.

And we've seen that happen in a few places. It's been a couple of different countries, definitely, and it's also been across industries. As we think and look about it, we want to identify ways that we can help our clients be prepared and support our clients because we do acknowledge that change programs take work on both sides.

We also recognize that it just highlights the problem that we know that we're in, that overall, there is just not enough supply of top tech talent on the client side to drive the work that needs to be done. So I think that really is the underlying thread for that second point that I mentioned..

Yes. We ask our clients. Is it -- are you just going to reduce budget at some point? Or is this because of some concerns over the macro economy? We're not getting those answers. We definitely talk to our clients, stay close with them. I did feel like a lot of this is just onetime factors. It doesn't look like there's any general pattern to it..

Okay. And then just a follow-up here.

Have you seen the travel component of business just come back in any notable way as it relates to your operations and delivery?.

Definitely a bit more. We are -- we just have -- we have contract work with a couple of airlines that we were not working before recently. And then we feel that the sector is definitely bouncing back. I think it's probably the latest bouncing back -- to bounce back from COVID.

We're definitely happy for the pattern, but it's still -- the volume is not as significant as it was pre-COVID yet..

Our next question comes from the line of Jason Kupferberg with Bank of America..

This is Tyler DuPont on for Jason. I promise I'll be quick. Just to expand on the vertical trends and expectations you mentioned. It appears that financial services and technology and business have had pretty strong growth.

Can you maybe touch on what contributed to that specifically in the quarter? And if you expect those verticals to continue to drive outsized growth for the rest of the year..

Thank you, Tyler, for the question. Erin, I think you have -- probably have the numbers on how they contributed to this quarter from a percentage of revenue perspective. I have -- I think from a growth perspective, financial service sector grew by 46%, and then technology business services grew by 36%. No, I got the number.

I think as overall, I think retail -- technology business service is about 28% of our business. Retail is about 19%. Energy, public health, 24%. Sorry. Retail, financial services -- our retail is 19%; financial services, 18%. Travel is still low, it's 12%.

As I mentioned earlier, we wish that one will grow faster and then the size of the pie getting bigger. So overall, we believe that these -- the growth from across these sectors in our line of business will continue throughout the rest of the year.

And then we're intentionally investing in financial services because we believe that there's definitely more revenue than we're capturing right now. We hope that -- we believe that the size of the share of revenue from fin serv will continue to increase in our business later this year..

Okay. Perfect. Great. And then just super fast follow-on.

From an M&A perspective, are there any specific verticals or geographies that you're trying to target? Or is it more, whenever you see a strategic opportunity, you go for it?.

We're not looking at M&A from a vertical perspective, but mostly looking from a capability perspective, where we believe it can enhance our core capability. And from a geography perspective, North America, Europe and then Australia are the top places that we're looking at from a demand perspective.

And we definitely have a lot of offshore locations where we continue to scan the horizon. If there's a good fit, good, small, tuck-in, complementary acquisition, we will go for it. But that's kind of the landscape..

Our next question comes from the line of Dave Koning with Baird..

A couple of numbers questions just quick. I know, based on the way you're guiding now for the year, we're going to take some out of Q3 and probably put a little more constant currency revenue in Q4.

Does the little bit higher almost Q4 revenue create -- was there anything in there that's a little more onetime that creates anything different into Q1 now? Like is there going to be a little inflated impact in Q4 due to what's kind of being pulled out of Q3?.

Dave, no, there isn't anything that we have assumed in the annual guide with respect to Q4 that would be more onetime in nature. So nothing surprising or to note about there and no impact on 2023..

Okay. And then on EBITDA margins. I know historically, the last couple of years, Q4 has been the low point of margins, and that's because of utilization late in the year with the holiday season. This year, it seems like based on the guidance, there's going to be a big ramp.

And I know you already said part of that is just the natural utilization is a little low in Q3 now and it's going to reramp. But is the bottom half of the full year range more likely? It just seems like too big of a ramp in Q4 to get the higher parts of the full year margin range..

Thanks, Dave. Yes, as you're pointing out. So I've maintained the adjusted annual EBITDA margin guide of 19% to 20%. And so firstly, I would say we were really pleased with our results in the first half of the year. We were just on the top -- we were just above 20% for the first half. What we've seen so far this year is we've executed very well.

We've already talked on the call about managing our wage pressure effectively through our price increases as well as increased leverage and offshore capacity. So to your point, the third quarter guidance, it does mean there's increased potential of being on the low end to the midpoint of the guide.

The challenge to profitability, as I mentioned already, is in Q3, and it's around lower-than-targeted utilization. And we do expect that to normalize. It is affecting the third quarter, but we do see that as an asset because there is just strong capability and growth potential there.

And importantly, the underlying drivers of our profitability are very strong. So to answer your question directly, at this point in time, it is more challenging to be at the top end or even exceed that EBITDA margin guide, but we continue to focus on strong execution in the third quarter, and we're going to do the same in the fourth quarter..

That concludes today's question-and-answer session. I'd like to turn the call back to Guo Xiao for closing remarks..

Thank you all for joining the call today. Apologies for the delay at the beginning of the call due to technical issues. I'd like to just acknowledge the continued support of our Board and shareholders. And in closing, I want to thank all Thoughtworkers, clients and partners, for the extraordinary impact we're delivering every day together.

So stay well, everyone. We look forward to catching up with you next quarter. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..