Thoughtworks Holding, Inc. - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For transition period from ______ to _____
Commission File Number 001-40812
THOUGHTWORKS HOLDING, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 82-2668392 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
200 East Randolph Street, 25th Floor
Chicago, Illinois 60601
(312) 373-1000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.001 par value | TWKS | Nasdaq Global Select Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒
As of May 4, 2023, there were 317,248,201 shares of the registrant's common stock outstanding.
THOUGHTWORKS HOLDING, INC. | ||||||||
QUARTERLY REPORT ON FORM 10-Q | ||||||||
TABLE OF CONTENTS | ||||||||
| Page | ||||||||
Part II. Other Information | ||||||||
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q (the “Quarterly Report”) contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” "strive," “will,” “would” or similar expressions and the negatives of those terms but the absence of these words does not mean that the statement is not forward-looking. The forward-looking statements are contained principally in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements may include information concerning our possible or assumed future results of operations, client demand, business strategies, technology developments, financing and investment plans, competitive position, our industry, macroeconomic and regulatory environment, potential growth opportunities and the effects of competition.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report. You should read this Quarterly Report and the documents that we have filed as exhibits hereto, completely and with the understanding that our actual future results may be materially different from what we expect.
Important factors that could cause actual results to differ materially from our expectations include:
•our business has been, and may continue to be, adversely affected by volatile or uncertain operational, geopolitical, regulatory, legal and economic conditions;
•our business, financial condition and results of operations may be adversely affected by fluctuations in foreign currency exchange rates;
•increases in wages, equity compensation and other compensation expenses could prevent us from sustaining our competitive advantage and increase our costs;
•our results of operations have been adversely affected and could in the future be materially adversely affected by the COVID-19 pandemic;
•our effective tax rate could be materially adversely affected by several factors;
•we may not be successful at attracting new clients or retaining and expanding our relationships with our existing clients;
•we generally do not have long-term commitments or contracts with our clients;
•we face risks associated with having a long selling and implementation cycle for our services;
•our cash flows and results of operations may be adversely affected if we are unable to collect on billed and unbilled receivables from clients;
•our profitability could suffer if we cannot accurately price our solutions and services, maintain favorable pricing for our solutions and services, are unable to collect on receivables from clients or fail to meet our contractual and other obligations to clients;
•we may be unable to implement our growth strategy;
•our ability to generate and retain business depends on our reputation in the marketplace;
•our business and operations may be harmed if we cannot positively evolve and preserve our Thoughtworks culture;
•if we fail to manage our acquisition strategy, our culture and growth plans could be materially adversely affected;
•we must successfully attract, hire, train and retain skilled professionals to service our clients’ projects and we must productively deploy our professionals to remain profitable;
•if we fail to adequately innovate, adapt and/or remain at the forefront of emerging technologies and related client demands, we could be materially adversely affected;
•we face intense competition and operate in a rapidly evolving industry, which makes it difficult to evaluate our future prospects;
•if we cause disruptions to our clients’ businesses, provide inadequate service, or breach contractual obligations, our clients may have claims against us, which our insurance may not adequately protect against, and our reputation may be damaged;
•we face risks associated with security breaches as well as privacy and data protection regulations, and we may incur significant liabilities if we fail to manage those risks;
3
•a significant failure in our systems, telecommunications or IT infrastructure could harm our service model, which could result in a reduction of our revenues and otherwise disrupt our business;
•changes in privacy and data protection regulations could expose us to risks of noncompliance and costs associated with compliance;
•we are subject to laws and regulations in the U.S. and other countries in which we operate, compliance with these laws requires significant resources and non-compliance may result in civil or criminal penalties and other remedial measures;
•we may become subject to disputes or legal or other proceedings that could involve significant expenditures by us, which could have a material adverse effect on us, including our financial results;
•our existing indebtedness could adversely affect our business and growth prospect;
•we may face intellectual property infringement or misappropriation claims that could be costly to defend or if we do not protect our brand through our intellectual property rights, our business may be harmed;
•we may not be able to prevent unauthorized use of our client's intellectual property and our business and competitive position may be damaged as a result;
•our stock price may be volatile, and the value of our common stock may decline;
•our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans, or otherwise will dilute all other stockholders;
•if securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, the market price and trading volume of our common stock could decline;
•we do not intend to pay dividends for the foreseeable future and, as a result, the ability of the holders of our common stock to achieve a return on their investment will depend on appreciation in the price of our common stock;
•investment funds (the "Apax Funds") advised by Apax Partners L.L.P. ("Apax Partners") control us, and such control may give rise to actual or perceived conflicts of interests;
•our status as a “controlled company” grants us exemptions from certain corporate governance requirements; and
•other factors disclosed in the subsection entitled “Risk Factor Summary" and the section entitled "Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2023 (the "2022 Annual Report").
We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, include, but are not limited to, those disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report and in our 2022 Annual Report. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Quarterly Report in the context of these risks and uncertainties.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
4
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
THOUGHTWORKS HOLDING, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data and per share data) | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| (unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 109,268 | $ | 194,294 | |||||||
Trade receivables, net of allowance of $6,715 and $9,531, respectively | 146,322 | 201,695 | |||||||||
| Unbilled receivables | 146,831 | 122,499 | |||||||||
| Prepaid expenses and other current assets | 36,879 | 38,202 | |||||||||
| Total current assets | 439,300 | 556,690 | |||||||||
| Property and equipment, net | 35,460 | 38,798 | |||||||||
| Right-of-use assets | 45,571 | 43,123 | |||||||||
| Intangibles and other assets: | |||||||||||
| Goodwill | 420,394 | 405,017 | |||||||||
| Trademark | 273,000 | 273,000 | |||||||||
| Customer relationships, net | 124,167 | 124,047 | |||||||||
| Other non-current assets | 22,805 | 21,175 | |||||||||
| Total assets | $ | 1,360,697 | $ | 1,461,850 | |||||||
| Liabilities and stockholders' equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 7,320 | $ | 5,248 | |||||||
| Long-term debt - current | 7,150 | 7,150 | |||||||||
| Income taxes payable | 21,128 | 22,781 | |||||||||
| Accrued compensation | 73,536 | 85,477 | |||||||||
| Deferred revenue | 6,180 | 5,167 | |||||||||
| Value-added tax and sales tax payable | 5,460 | 7,526 | |||||||||
| Accrued expenses | 27,848 | 30,227 | |||||||||
| Lease liabilities, current | 16,502 | 15,994 | |||||||||
| Total current liabilities | 165,124 | 179,570 | |||||||||
| Lease liabilities, non-current | 31,533 | 29,885 | |||||||||
| Long-term debt, less current portion | 291,053 | 391,856 | |||||||||
| Deferred tax liabilities | 61,204 | 62,555 | |||||||||
| Other long-term liabilities | 23,926 | 19,762 | |||||||||
| Total liabilities | 572,840 | 683,628 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Convertible preferred stock, $0.001 par value; 100,000,000 shares authorized, zero issued and outstanding at March 31, 2023 and December 31, 2022, respectively | — | — | |||||||||
Common stock, $0.001 par value; 1,000,000,000 shares authorized, 367,496,570 and 366,306,970 issued, 316,884,385 and 315,681,987 outstanding at March 31, 2023 and December 31, 2022, respectively | 367 | 366 | |||||||||
Treasury stock, 50,612,185 and 50,624,983 shares at March 31, 2023 and December 31, 2022, respectively | (624,775) | (624,934) | |||||||||
| Additional paid-in capital | 1,582,854 | 1,565,514 | |||||||||
| Accumulated other comprehensive loss | (38,968) | (39,210) | |||||||||
| Retained deficit | (131,621) | (123,514) | |||||||||
| Total stockholders' equity | 787,857 | 778,222 | |||||||||
| Total liabilities and stockholders' equity | $ | 1,360,697 | $ | 1,461,850 | |||||||
The accompanying notes form an integral part of the condensed consolidated financial statements.
5
THOUGHTWORKS HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (unaudited)
(In thousands, except share and per share data)
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues | $ | 307,056 | $ | 320,940 | |||||||
| Operating expenses: | |||||||||||
| Cost of revenues | 209,522 | 249,765 | |||||||||
| Selling, general and administrative expenses | 86,340 | 104,765 | |||||||||
| Depreciation and amortization | 5,542 | 5,846 | |||||||||
| Total operating expenses | 301,404 | 360,376 | |||||||||
| Income (loss) from operations | 5,652 | (39,436) | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | (6,862) | (4,647) | |||||||||
| Net realized and unrealized foreign currency gain | 1,185 | 4,738 | |||||||||
| Other (expense) income, net | (723) | 88 | |||||||||
| Total other (expense) income | (6,400) | 179 | |||||||||
| Loss before income taxes | (748) | (39,257) | |||||||||
| Income tax expense | 7,359 | 4,328 | |||||||||
| Net loss | $ | (8,107) | $ | (43,585) | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | 242 | (5,471) | |||||||||
| Comprehensive loss | $ | (7,865) | $ | (49,056) | |||||||
| Net loss per common share: | |||||||||||
| Basic loss per common share | $ | (0.03) | $ | (0.14) | |||||||
| Diluted loss per common share | $ | (0.03) | $ | (0.14) | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 316,451,601 | 306,189,816 | |||||||||
| Diluted | 316,451,601 | 306,189,816 | |||||||||
The accompanying notes form an integral part of the condensed consolidated financial statements.
6
THOUGHTWORKS HOLDING, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(In thousands, except share data)
| Common Stock | Treasury | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Deficit | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 305,132,181 | $ | 356 | 50,985,571 | $ | (629,424) | $ | 1,359,149 | $ | (10,844) | $ | (17,280) | $ | 701,957 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (43,585) | (43,585) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | (5,471) | — | (5,471) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for equity incentive awards, net of withholding taxes | 4,736,820 | 5 | — | — | (28,047) | — | — | (28,042) | |||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury shares for equity incentive awards | 155,806 | — | (155,806) | 1,940 | (1,796) | — | — | 144 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 100,183 | — | — | 100,183 | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | — | — | (841) | (841) | ||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | 310,024,807 | $ | 361 | 50,829,765 | $ | (627,484) | $ | 1,429,489 | $ | (16,315) | $ | (61,706) | $ | 724,345 | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 315,681,987 | $ | 366 | 50,624,983 | $ | (624,934) | $ | 1,565,514 | $ | (39,210) | $ | (123,514) | $ | 778,222 | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (8,107) | (8,107) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | 242 | — | 242 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for equity incentive awards, net of withholding taxes | 1,189,600 | 1 | — | — | (180) | — | — | (179) | |||||||||||||||||||||||||||||||||||||||
| Reissuance of treasury shares for equity incentive awards | 12,798 | — | (12,798) | 159 | (159) | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 17,679 | — | — | 17,679 | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2023 | 316,884,385 | $ | 367 | 50,612,185 | $ | (624,775) | $ | 1,582,854 | $ | (38,968) | $ | (131,621) | $ | 787,857 | |||||||||||||||||||||||||||||||||
The accompanying notes form an integral part of the condensed consolidated financial statements.
7
THOUGHTWORKS HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | (8,107) | $ | (43,585) | |||||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization expense | 9,089 | 8,582 | |||||||||
| Bad debt expense (recovery) | 1,452 | (100) | |||||||||
| Deferred income tax benefit | (4,485) | (2,434) | |||||||||
| Stock-based compensation expense | 17,679 | 100,183 | |||||||||
| Unrealized foreign currency exchange gain | (948) | (5,640) | |||||||||
| Non-cash lease expense on right-of-use assets | 4,525 | 4,153 | |||||||||
| Other operating activities, net | 1,413 | 314 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade receivables | 56,674 | (1,130) | |||||||||
| Unbilled receivables | (23,238) | (35,314) | |||||||||
| Prepaid expenses and other assets | (1,393) | (4,962) | |||||||||
| Lease liabilities | (4,705) | (2,358) | |||||||||
| Accounts payable | 1,975 | 1,613 | |||||||||
| Accrued expenses and other liabilities | (16,884) | (25,417) | |||||||||
| Net cash provided by (used in) operating activities | 33,047 | (6,095) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property and equipment | (1,657) | (5,134) | |||||||||
| Proceeds from disposal of fixed assets | 91 | 136 | |||||||||
| Acquisitions, net of cash acquired | (15,989) | — | |||||||||
| Net cash used in investing activities | (17,555) | (4,998) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Payments of obligations of long-term debt | (101,788) | (1,788) | |||||||||
| Payments of debt issuance costs | (99) | — | |||||||||
| Proceeds from issuance of common stock on exercise of options, net of employee tax withholding | 2,169 | 704 | |||||||||
| Withholding taxes paid on tender offer | — | (15,469) | |||||||||
| Withholding taxes paid on dividends previously declared | — | (5,903) | |||||||||
| Withholding taxes paid related to net share settlement of equity awards | (2,348) | (7,307) | |||||||||
| Other financing activities, net | 25 | (29) | |||||||||
| Net cash used in financing activities | (102,041) | (29,792) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,548 | 182 | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (85,001) | (40,703) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of the period | 195,564 | 394,942 | |||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | 110,563 | $ | 354,239 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Interest paid | $ | 6,645 | $ | 4,355 | |||||||
| Income taxes paid | $ | 6,856 | $ | 2,383 | |||||||
8
THOUGHTWORKS HOLDING, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Supplemental disclosures of non-cash financing activities: | |||||||||||
| Withholding taxes payable included within accrued expenses | $ | — | $ | 4,575 | |||||||
| Withholding taxes payable included within accrued compensation | $ | — | $ | 21,930 | |||||||
| Option costs receivable included within other current assets | $ | — | $ | 635 | |||||||
| Reconciliation of cash, cash equivalents and restricted cash: | |||||||||||
| Cash and cash equivalents | $ | 109,268 | $ | 339,638 | |||||||
| Restricted cash included in other current assets | — | 13,376 | |||||||||
| Restricted cash included in other non-current assets | 1,295 | 1,225 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 110,563 | $ | 354,239 | |||||||
9
THOUGHTWORKS HOLDING, INC.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Business and Summary of Significant Accounting Policies
Thoughtworks Holding, Inc. (together with its subsidiaries, the “Company”) develops, implements, and services complex enterprise application software, and provides business technology consulting. The Company conducts business in Australia, Brazil, Canada, Chile, China, Ecuador, Finland, Germany, Hong Kong, India, Italy, the Netherlands, Romania, Singapore, Spain, Thailand, the United Kingdom, the United States and Vietnam. Thoughtworks Holding, Inc. is the ultimate parent holding company of Thoughtworks, Inc. among other subsidiaries.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Thoughtworks Holding, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s 2022 Annual Report.
Certain amounts in the prior period consolidated financial statements and notes have been reclassified to conform to the 2023 presentation. These reclassifications had no effect on results of operations previously reported.
Preparation of Financial Statements and Use of Estimates
The preparation of these condensed consolidated financial statements is in conformity with generally accepted accounting principles in the United States (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, the Company evaluates its estimates, including those related to allowance for credit losses, valuation and impairment of goodwill and long-lived assets, income taxes, accrued bonus, contingencies, stock-based compensation and litigation costs. The Company bases its estimates on current expectations and historical experience and on other assumptions that its management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities when those values are not readily apparent from other sources. Actual results can differ from those estimates, and such differences may be material to the condensed consolidated financial statements in the future. Operating results for interim periods are not necessarily indicative of results that may be expected to occur for the entire year. In management’s opinion, all adjustments considered necessary for a fair presentation of the accompanying unaudited condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature.
Restricted Cash
Restricted cash is included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Restricted cash is restricted as to withdrawal or use. The Company has restricted cash held on deposit at various financial institutions. The amounts are held to secure bank guarantees of amounts related to government requirements and as collateral for a corporate credit card.
Allowance for Credit Losses
The Company analyzes its historical credit loss experience and considers current conditions and reasonable and supportable forecasts in developing the expected credit loss rates. Interest is not generally accrued on outstanding balances as the balances are considered short-term in nature.
10
Activity related to the Company’s allowance for credit losses is as follows (in thousands):
| Three Months Ended March 31, 2023 | |||||
| Allowance for credit losses, beginning balance | $ | (9,531) | |||
| Current provision for expected credit losses | (1,452) | ||||
| Write-offs charged against allowance | 4,566 | ||||
| Changes due to exchange rates | (298) | ||||
| Allowance for credit losses, ending balance | $ | (6,715) | |||
Recently Adopted Accounting Standards
In October 2021, the FASB issued ASU 2021-08, which amends ASC 805 to require acquiring entities to apply ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to recognize and measure contract assets and contract liabilities in a business combination. The guidance is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities should apply the ASU’s provisions prospectively to business combinations occurring on or after the effective date of the amendments. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The optional amendments are effective as of March 12, 2020 through December 31, 2024, and upon adoption may be applied prospectively through December 31, 2024. The Company is currently assessing the impact of this ASU on the consolidated financial statements.
Concentration of Credit Risk and Other Risks and Uncertainties
Revenue generated from the Company's operations outside of the United States for the three months ended March 31, 2023 and 2022 was 66% and 63%, respectively.
As of March 31, 2023 and December 31, 2022, 73% and 69%, respectively, of trade receivables and unbilled receivables was due from customers located outside the United States. At March 31, 2023 and December 31, 2022, the Company had net property and equipment of $26.9 million and $30.0 million, respectively, outside the United States.
Change in Accounting Principle - Stock-Based Compensation
In the fourth quarter of 2022, the Company changed its stock-based compensation policy for recognizing expense for graded vesting awards with only service conditions from the accelerated attribution method to the straight-line attribution method. The Company believes the straight-line attribution method for stock-based compensation expense for awards solely subject to time-based vesting conditions is the preferable accounting policy in accordance with ASC 250, Accounting Changes and Error Corrections, because it more accurately reflects how the award is earned over the service period and is the predominant method used in its industry. The Company applied the change retrospectively adjusting all periods presented resulting in a decrease to net loss of $16.3 million and a decrease to basic and diluted loss per share of $0.06 for the first quarter of 2022.
11
Note 2 – Revenue Recognition
The Company disaggregates revenues from contracts with customers by geographic customer location, industry vertical and revenue contract types. Geographic customer location is pertinent to understanding the Company's revenues, as the Company generates its revenues from providing professional services to customers in various regions across the world. The Company groups customers into one of five industry verticals. Revenue contract types are differentiated by the type of pricing structure for customer contracts, which is predominantly time-and-materials, but also includes fixed price contracts.
Disaggregation of Revenues
The following table presents the disaggregation of the Company’s revenues by customer location (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| North America (1) | $ | 112,314 | $ | 121,949 | |||||||
| APAC (2) | 100,162 | 102,206 | |||||||||
| Europe (3) | 83,050 | 82,926 | |||||||||
| LATAM | 11,530 | 13,859 | |||||||||
| Total revenues | $ | 307,056 | $ | 320,940 | |||||||
(1)For the three months ended March 31, 2023 and 2022, the United States represented 35.3%, or $108.4 million, and 35.9%, or $115.1 million, respectively, of the Company’s total revenues. Canadian operations were determined to be immaterial given revenue as a percentage of total North America revenues was less than 10% for the three months ended March 31, 2023 and 2022.
(2)For the three months ended March 31, 2023, revenue in Australia as a percentage of the Company’s total revenues was less than 10%. For the three months ended March 31, 2022, Australia represented 11.3%, or $36.3 million, of the Company’s total revenues.
(3)For the three months ended March 31, 2023 and 2022, the United Kingdom represented 11.4%, or $35.1 million, and 11.7%, or $37.7 million, of the Company's total revenues. For the three months ended March 31, 2023, Germany represented 10.7%, or $32.8 million of the Company's total revenues. For the three months ended March 31, 2022, revenue in Germany as a percentage of the Company’s total revenues was less than 10%.
Other non-U.S. countries were determined to be immaterial given the revenues as a percentage of the Company’s total revenues was less than 10% for the three months ended March 31, 2023 and 2022.
The following table presents the disaggregation of the Company’s revenues by industry vertical (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Technology and business services | $ | 74,133 | $ | 85,349 | |||||||
| Energy, public and health services | 84,039 | 77,110 | |||||||||
| Retail and consumer | 47,912 | 62,435 | |||||||||
| Financial services and insurance | 55,155 | 58,464 | |||||||||
| Automotive, travel and transportation | 45,817 | 37,582 | |||||||||
| Total revenues | $ | 307,056 | $ | 320,940 | |||||||
12
The following table presents the disaggregation of the Company’s revenues by contract type (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Time-and-material | $ | 257,250 | $ | 271,363 | |||||||
| Fixed-price | 49,806 | 49,577 | |||||||||
| Total revenues | $ | 307,056 | $ | 320,940 | |||||||
Contract Balances
The following table is a summary of the Company’s contract assets and contract liabilities (in thousands):
As of March 31, 2023 | As of December 31, 2022 | ||||||||||
| Contract assets included in unbilled receivables | $ | 40,112 | $ | 39,941 | |||||||
| Contract liabilities included in deferred revenue | $ | 6,180 | $ | 5,167 | |||||||
Contract assets primarily relate to unbilled amounts on fixed-price contracts. Contract assets are recorded when services have been provided but the Company does not have an unconditional right to receive consideration. Professional services performed on or prior to the balance sheet date, but invoiced thereafter, are reflected in unbilled receivables.
Contract liabilities represent amounts collected from the Company’s customers for revenues not yet earned. Such amounts are anticipated to be recorded as revenues when services are performed in subsequent periods. For the three months ended March 31, 2023 and 2022, the Company recognized $3.5 million and $10.1 million, respectively, of revenues that were included in current liabilities at the prior year end.
Costs to Obtain a Customer Contract
The Company incurs certain incremental costs to obtain a contract that the Company expects to recover. The Company applies a practical expedient and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs would primarily relate to commissions paid to our account executives and are included in selling, general and administrative ("SG&A") expenses.
The following table is a summary of the Company’s costs to obtain contracts and related amortization and impairment where the amortization period of the assets is greater than one year (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Balance at beginning of period | $ | 1,588 | $ | 2,039 | |||||||
| Costs to obtain contracts capitalized | 68 | 91 | |||||||||
| Amortization of capitalized costs | (268) | (315) | |||||||||
| Changes due to exchange rates | 3 | (1) | |||||||||
| Balance at end of period | $ | 1,391 | $ | 1,814 | |||||||
Transaction Price Allocated to Remaining Performance Obligations
The Company does not have material future performance obligations that extend beyond one year. Accordingly, the Company has applied the optional exemption for contracts that have an original expected duration of one year or less.
13
Note 3 – Acquisitions
On February 1, 2023, the Company completed the acquisition of ITOC Pty Ltd ("Itoc"), a leading Amazon Web Services Advanced Consulting Partner and Cloud Managed Services Provider in Australia, in an all-cash transaction for a gross purchase price of $17.8 million, or $16.0 million net of cash acquired of $1.8 million. Itoc is now wholly owned by the Company. The acquisition expands Thoughtworks’ capabilities to help modernize and place digital at the center of client operations as they transition to the cloud.
The Company accounted for the acquisition under ASC 805, Business Combinations. The goodwill recognized in connection with the acquisition reflects the benefits expected to be derived from certain operational synergies. The fair value of the net assets acquired for the business was determined using Level 3 inputs, for which little or no market data exists, requiring the Company to develop assumptions regarding future cash flow projections. The results of operations of the acquired business have been included in the condensed consolidated statements of loss and comprehensive loss from the acquisition date. Pro forma results of operations for the acquisition are not presented because the pro forma effects were not material to the Company's consolidated results of operations.
Aggregate acquisition-related costs related to Itoc of $1.1 million for the three months ended March 31, 2023 were included within SG&A expenses in the condensed consolidated statements of loss and comprehensive loss.
The Company's preliminary allocation of the fair value of underlying assets acquired and liabilities assumed as of the acquisition date is as follows (in thousands):
| Total | |||||
| Cash and cash equivalents | $ | 1,788 | |||
| Trade receivables, net of allowance | 1,251 | ||||
| Customer relationships, net (1) | 3,500 | ||||
| Goodwill | 13,766 | ||||
| Accounts payable | (110) | ||||
| Accrued compensation | (363) | ||||
| Accrued expenses | (927) | ||||
| Deferred revenue | (235) | ||||
| Income taxes payable | (178) | ||||
| Lease liabilities, current | (173) | ||||
| Deferred tax liabilities | (1,050) | ||||
| Other assets/liabilities, net | 508 | ||||
| Total gross purchase price | $ | 17,777 | |||
(1)The weighted average amortization period is four years.
Goodwill represents the excess of the purchase price over the fair values of assets acquired and liabilities assumed. The changes in fair value allocated to goodwill, tangible and intangible assets are not deductible for tax purposes.
As additional information is obtained about the assets and liabilities of the acquisition during the measurement period (not to exceed one year from the date of acquisition), including the completion or finalization of asset appraisals, the Company will refine its estimates of fair value to allocate the purchase price including finalizing the impact on taxes.
In connection with the acquisition of Connected Lab Inc. ("Connected") in the second quarter of 2022, the Company recorded a liability of $14.0 million of contingent consideration, which is included within the total purchase price and classified within accrued expenses in the condensed consolidated balance sheet. The present value of the contingent consideration liability was determined using a Monte Carlo Simulation that calculated the average present value of the earnout payment. The fair value measurement of the earnout
14
includes a performance metric which is an unobservable Level 3 input. The contingent consideration is payable in cash dependent upon achievement of the performance metric. The liability was remeasured to fair value at each reporting date with adjustments recorded within other income (expense), net in the condensed consolidated statements of loss and comprehensive loss, and the final payout amount of $14.3 million was paid on May 4, 2023.
The following table presents the change in the contingent consideration liability (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Balance at beginning of period | $ | 14,255 | $ | — | |||||||
| Change due to exchange rates | 12 | — | |||||||||
| Balance at end of period | $ | 14,267 | $ | — | |||||||
Note 4 – Goodwill and Other Intangible Assets
The following is a summary of the changes in the carrying value of goodwill (in thousands):
| Total | |||||
| Balance as of December 31, 2022 | $ | 405,017 | |||
| Additions due to acquisitions | 13,766 | ||||
| Changes due to exchange rates | 1,611 | ||||
| Balance as of March 31, 2023 | $ | 420,394 | |||
The following is a summary of other intangible assets (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Customer relationships | $ | 196,947 | $ | 193,447 | |||||||
| Less accumulated amortization | (62,961) | (59,369) | |||||||||
| Customer relationships, net | 133,986 | 134,078 | |||||||||
| Trademark | 273,000 | 273,000 | |||||||||
| Total other intangible assets, after amortization | 406,986 | 407,078 | |||||||||
| Changes due to exchange rates | (9,819) | (10,031) | |||||||||
| Other intangible assets, net | $ | 397,167 | $ | 397,047 | |||||||
Other than indefinite-lived trademarks, the Company’s intangible assets have finite lives and, as such, are subject to amortization. Amortization expense related to these intangible assets was $3.6 million and $3.0 million for the three months ended March 31, 2023 and 2022, respectively.
As of March 31, 2023, estimated amortization expense for the next five years and thereafter is as follows (in thousands):
| Remainder of 2023 | $ | 11,633 | |||
| 2024 | 15,510 | ||||
| 2025 | 15,510 | ||||
| 2026 | 15,510 | ||||
| 2027 | 14,708 | ||||
| Thereafter | 61,115 | ||||
| $ | 133,986 | ||||
15
The weighted average remaining useful life of the Company’s finite-lived intangible assets was 8.8 years as of March 31, 2023 and 9.2 years as of December 31, 2022.
Note 5 – Income Taxes
Prior to the Company's initial public offering ("IPO") in September 2021, the Company calculated the provision for income taxes during interim reporting periods by applying an estimate of the effective tax rate for the full year to the pre-tax income or loss for the interim period, adjusting the provision for discrete tax items recorded in the period. Upon the IPO, due to the magnitude of transaction related stock-based compensation costs, the Company's forecasted pre-tax income for the year is causing the tax rate to be highly sensitive, whereby minor changes in forecasted pre-tax income generate significant variability in the estimated annual effective tax rate. This is impacting the customary relationship between income tax expense and pre-tax income in interim periods. Beginning in the third quarter of 2021, the Company concluded that it could not calculate a reliable estimate of the annual effective tax rate due to the range of potential impacts for the aforementioned forecast changes. Accordingly, the Company computed the effective tax rate for the three-month period ended March 31, 2023 using actual results, as allowed by ASC 740-270-30-18, Income Taxes-Interim Reporting.
The Company’s effective tax rate for the three months ended March 31, 2023 and March 31, 2022 was (983.8)% and (11.0)%, respectively. The effective tax rate in each period differed from the U.S. statutory rate of 21% primarily due to U.S. corporate state income taxation and the effect of foreign operations, which reflects the impact of higher income tax rates in locations outside the United States, the unfavorable impact of valuation allowances on deferred tax assets of select foreign operations, the non-deductibility of China SAFE restricted stock units ("RSUs"), the unfavorable impact of capitalized research and experimental costs under Internal Revenue Code ("IRC") §174 increasing the Company's net global intangible low tax income ("GILTI") inclusion, impacted by excess tax deficiencies unfavorably and excess tax benefits favorably on stock-based compensation for the three months ended March 31, 2023 and March 31, 2022, respectively. The change in the effective tax rate for the three months ended March 31, 2023, as compared to the prior period, and the negative effective tax rate for the three months ended March 31, 2023 and March 31, 2022, is a result of the aforementioned unique net unfavorable items when compared to the pre-tax loss recorded for the respective periods.
Note 6 – Loss Per Share
The components of basic and diluted loss per share are as follows (in thousands, except share and per share data):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Numerator: | |||||||||||
| Net loss – Basic and diluted | $ | (8,107) | $ | (43,585) | |||||||
| Denominator: | |||||||||||
| Weighted average shares outstanding – Basic and diluted | 316,451,601 | 306,189,816 | |||||||||
| Basic and diluted loss per share | $ | (0.03) | $ | (0.14) | |||||||
The following potentially dilutive securities were excluded from the computation of diluted loss per share because the impact of including them would have been anti-dilutive:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Employee stock options, RSUs and performance stock units ("PSUs") | 20,285,106 | 26,738,377 | |||||||||
16
Note 7 – Stock-Based Compensation
The following is a summary of the components of stock-based compensation expense for the periods indicated (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cost of revenues | $ | 10,530 | $ | 69,909 | |||||||
| Selling, general and administrative expenses | 7,149 | 30,274 | |||||||||
| Total stock-based compensation expense | $ | 17,679 | $ | 100,183 | |||||||
Stock Options
The following is a summary of performance and time vesting stock option activity for the three months ended March 31, 2023 (in thousands, except share and per share data):
| Number of Stock Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | Weighted- Average Remaining Contractual Term (years) | ||||||||||||||||||||
| Balance at December 31, 2022 | 21,607,562 | $ | 3.83 | ||||||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Forfeited | (150,544) | 12.67 | |||||||||||||||||||||
| Exercised | (700,257) | 3.10 | |||||||||||||||||||||
| Cancelled | — | — | |||||||||||||||||||||
| Expired | — | — | |||||||||||||||||||||
| Balance at March 31, 2023 | 20,756,761 | $ | 3.79 | $ | 87,119 | 5.3 | |||||||||||||||||
| Exercisable at March 31, 2023 | 19,918,210 | $ | 3.53 | $ | 86,261 | 5.2 | |||||||||||||||||
As of March 31, 2023, total compensation cost related to time vesting options not yet recognized was $6.1 million, which will be recognized over a weighted-average period of 1.8 years. Unless otherwise prohibited by law in local jurisdictions, time vesting options will continue to vest according to the 2017 Stock Option Plan (the "2017 Plan") and the applicable award agreements.
17
Restricted Stock Units
The following is a summary of RSU activity for the three months ended March 31, 2023:
| Number of RSUs | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested balance at December 31, 2022 | 13,013,946 | $ | 17.37 | ||||||||
| Granted | 103,080 | 8.88 | |||||||||
| Forfeited | (606,049) | 17.64 | |||||||||
| Vested (1) | (709,114) | 23.07 | |||||||||
| Unvested balance at March 31, 2023 | 11,801,863 | $ | 16.94 | ||||||||
(1)Includes 0.2 million shares that were net settled when released and returned to the share pool for future grants.
As of March 31, 2023, total compensation cost related to RSUs not yet recognized was $131.6 million, of which $30.1 million is IPO related or associated with one-time grants and considered non-recurring. The remainder of $101.5 million is primarily related to the annual grant and considered recurring. The total unamortized expense is anticipated to be recognized over a weighted-average period of 2.5 years.
Performance Stock Units
The following is a summary of PSU activity for the three months ended March 31, 2023:
| Number of PSUs | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested balance at December 31, 2022 | 76,697 | $ | 20.11 | ||||||||
| Granted (1) | 737,483 | 8.44 | |||||||||
| Adjustment for PSUs expected to vest as of current period end | (350,969) | 8.78 | |||||||||
| Forfeited | — | — | |||||||||
| Vested | — | — | |||||||||
| Unvested balance at March 31, 2023 | 463,211 | $ | 10.12 | ||||||||
(1)Reflects shares granted at 100%.
For compensation expense purposes, the fair value of the non-market-based PSUs was determined using the closing stock price on the grant date and the fair value for the market-based PSUs was determined using a Monte-Carlo simulation.
As of March 31, 2023, total compensation cost related to PSUs not yet recognized was $9.6 million. The unamortized expense is anticipated to be recognized over a weighted-average period of 2.5 years.
Note 8 – Credit Agreements
Our subsidiaries are party to an amended and restated credit agreement, dated December 9, 2022 (as amended, the “Credit Agreement”), among Thoughtworks, Inc., Turing Acquisition LLC and Turing Midco LLC, Turing Topco LLC (“Holdings”), Credit Suisse AG, Cayman Islands Branch, as administrative agent, the lenders party thereto and the other parties from time-to-time party thereto, which provides for a senior secured term loan (the "Term Loan") of $715.0 million and a senior secured revolving credit facility (the "Revolver") of $300.0 million.
On February 24, 2023, the Company made a voluntary prepayment of $100.0 million on outstanding amounts owed on the Term Loan. As a result of the prepayment, the Company wrote off $0.9 million of deferred
18
financing fees, which is reflected in other (expense) income, net in the condensed consolidated statements of loss and comprehensive loss for the three months ended March 31, 2023.
The following table presents the Company's outstanding debt and borrowing capacity (in thousands, except percentages):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Availability under Revolver (due March 26, 2026) | $ | 300,000 | $ | 300,000 | |||||||
| Borrowings under Revolver | $ | — | $ | — | |||||||
| Long-term debt (due March 24, 2028), including current portion (1) | $ | 298,203 | $ | 399,006 | |||||||
| Interest rate | 7.3 | % | 6.9 | % | |||||||
(1)The balance includes deferred financing fees. A reconciliation of gross to net amounts is presented below.
The following table presents the carrying value of the Company’s credit facilities (including current maturities) (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Long-term debt, less current portion | $ | 293,550 | $ | 395,338 | |||||||
| Capitalized deferred financing fees | (2,497) | (3,482) | |||||||||
| Long-term debt | 291,053 | 391,856 | |||||||||
| Current portion of long-term debt | 7,150 | 7,150 | |||||||||
| Total debt carrying value | $ | 298,203 | $ | 399,006 | |||||||
The Company estimates the fair value of the Term Loan using current market yields. These current market yields are considered Level 2 inputs. The book value of the Company’s credit facilities is considered to approximate its fair value as of March 31, 2023 as the interest rates are considered in line with current market rates. The fair value of the Term Loan was $392.0 million as of December 31, 2022.
Note 9 – Accrued Expenses
The following is a summary of the Company’s accrued expenses (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Accrued interest expense | $ | 142 | $ | 221 | |||||||
| Accrued employee expense | 1,927 | 2,016 | |||||||||
| Accrued travel expense | 555 | 281 | |||||||||
| Operating lease expenses | 412 | 425 | |||||||||
| Insurance charges | 289 | 198 | |||||||||
| Professional fees | 5,528 | 6,321 | |||||||||
| Other taxes payable | 917 | 1,815 | |||||||||
| Rebates payable | 1,096 | 1,168 | |||||||||
| Contingent consideration | 14,267 | 14,255 | |||||||||
| Other accrued expenses | 2,715 | 3,527 | |||||||||
| Accrued expenses | $ | 27,848 | $ | 30,227 | |||||||
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our 2022 Annual Report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the sections titled “Risk Factors” in our 2022 Annual Report and “Forward-Looking Statements” herein for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Quarterly results reflected herein are not necessarily indicative of our operating results for a full year or any future period.
Overview
We are a global technology consultancy that integrates strategy, design and engineering to drive digital innovation. We are 11,840 Thoughtworkers strong across 51 offices in 18 countries. For almost 30 years, we have delivered extraordinary impact together with our clients by helping them solve complex business problems with technology as the differentiator.
Our revenues are generated from providing professional services based on the mix and locations of delivery professionals involved, the pricing structure, which is predominantly time-and-materials, and the type of services, including: enterprise modernization, platforms & cloud; customer experience, product & design; data & artificial intelligence; digital application management & operations; and digital transformation & operations.
Key Operational and Business Metrics
In addition to the measures presented in our condensed consolidated financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions (in thousands, except percentages):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues | $ | 307,056 | $ | 320,940 | |||||||
| Revenue Growth Rate as reported (1) | (4.3) | % | 35.0 | % | |||||||
| Revenue Growth Rate at constant currency (1) | (0.9) | % | 38.2 | % | |||||||
| Net loss | $ | (8,107) | $ | (43,585) | |||||||
| Net loss margin | (2.6) | % | (13.6) | % | |||||||
| Adjusted Net Income (2) | $ | 10,067 | $ | 43,992 | |||||||
| Adjusted EBITDA (3) | $ | 34,900 | $ | 72,872 | |||||||
| Adjusted EBITDA Margin (3) | 11.4 | % | 22.7 | % | |||||||
(1)Certain of our subsidiaries use functional currencies other than the U.S. dollar and the translation of these foreign currency amounts into the U.S. dollar can impact the comparability of our revenues between periods. Accordingly, we use Revenue Growth Rate at constant currency as an important indicator of our underlying performance. Revenue Growth Rate at constant currency is a Non-GAAP measure and is calculated by applying the average exchange rates in effect during the earlier comparative fiscal period to the later fiscal period.
(2)We use Adjusted Net Income as an important indicator of our performance. See “—Non-GAAP Financial Measures” below for a definition of and reconciliation of Adjusted Net Income to net (loss) income, the most directly comparable GAAP measure, how we use this measure and an explanation of why we consider this non-GAAP measure to be helpful for investors.
20
(3)We also use Adjusted EBITDA and Adjusted EBITDA Margin as important indicators of our performance. See “—Non-GAAP Financial Measures” below for a definition of and a reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable GAAP measure, how we use Adjusted EBITDA and Adjusted EBITDA Margin and an explanation of why we consider these non-GAAP measures to be helpful for investors.
Revenue Growth Rate and Revenue Growth Rate at constant currency
For the three months ended March 31, 2023, revenues decreased 4.3%. Acquisitions completed in the last twelve months contributed approximately 3% to revenue growth for the three months ended March 31, 2023. Had our consolidated revenues been expressed in constant currency terms using the exchange rates in effect for the three months ended March 31, 2022, we would have reported a decrease in revenues of (0.9)%. The negative impact to revenues, from foreign currencies, was due to the appreciation of the U.S. dollar relative to certain principal functional currencies of our subsidiaries.
For more detail regarding our exposure to foreign currency rate fluctuations, see Note 2, Revenue Recognition, to our condensed consolidated financial statements and “Item 3. Quantitative and Qualitative Disclosures About Market Risk.”
Net Loss, Net Loss Margin and Adjusted Net Income
For the three months ended March 31, 2023, the $35.5 million decrease in net loss and 11.0 percentage point decrease in net loss margin as compared to the three months ended March 31, 2022 were driven by decreased stock-based compensation expense of $82.5 million, which includes a decrease of $85.7 million of nonrecurring expense mainly related to option and RSU expense from the IPO, partially offset by an increase of $3.2 million of recurring RSU expense primarily related to the annual grant, partially offset by increased payroll expense (excluding stock-based compensation) of $19.2 million, which includes severance expense, a $13.9 million decrease in revenue and a $3.0 million increase in income tax expense.
For the three months ended March 31, 2023, the decrease in Adjusted Net Income as compared to the three months ended March 31, 2022 of $33.9 million, or 77.1%, was primarily due to increased payroll expense (excluding stock-based compensation), which includes severance expense, a decrease in revenue and an increase in income tax expense, as determined under the discrete method.
Adjusted EBITDA and Adjusted EBITDA Margin
For the three months ended March 31, 2023, the decrease in Adjusted EBITDA as compared to the three months ended March 31, 2022 of $38.0 million, or 52.1%, was driven by higher operating expenses, such as increased payroll expense (excluding stock-based compensation) and a decrease in revenue. The decrease in Adjusted EBITDA Margin as compared to the three months ended March 31, 2022 was primarily due to increased payroll expense (excluding stock-based compensation), which includes severance expense, and lower utilization.
21
Results of Operations
The following table sets forth a summary of our condensed consolidated results of operations for the periods indicated (in thousands, except percentages):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenues | $ | 307,056 | $ | 320,940 | |||||||
| Operating expenses: | |||||||||||
| Cost of revenues (1) | 209,522 | 249,765 | |||||||||
| Selling, general and administrative expenses (1) | 86,340 | 104,765 | |||||||||
| Depreciation and amortization | 5,542 | 5,846 | |||||||||
| Income (loss) from operations | 5,652 | (39,436) | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | (6,862) | (4,647) | |||||||||
| Net realized and unrealized foreign currency gain | 1,185 | 4,738 | |||||||||
| Other (expense) income, net | (723) | 88 | |||||||||
| Total other (expense) income | (6,400) | 179 | |||||||||
| Loss before income taxes | (748) | (39,257) | |||||||||
| Income tax expense | 7,359 | 4,328 | |||||||||
| Net loss | $ | (8,107) | $ | (43,585) | |||||||
| Effective tax rate | NM | (11.0) | % | ||||||||
NM - not meaningful.
(1) Includes stock-based compensation as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cost of revenues | $ | 10,530 | $ | 69,909 | |||||||
| Selling, general and administrative expenses | 7,149 | 30,274 | |||||||||
| Total stock-based compensation expense | $ | 17,679 | $ | 100,183 | |||||||
Summary Comparison of Three Months Ended March 31, 2023 with the Three Months Ended March 31, 2022
Revenues
We have a global footprint with the ability to deliver services from multiple geographic regions. While we continue to derive a substantial part of our overall revenues from existing clients, we maintain relatively low client concentration among our largest clients. We remain focused on acquiring new clients through programs designed to generate new business demand and position us as a trusted partner, and we have dedicated new business teams working with marketing using data-driven approaches to focus on client acquisition efforts.
22
The following table presents our number of clients, number of clients generating greater than $10 million in revenues and net dollar retention rate:
| Trailing twelve months ended | |||||||||||
| March 31, 2023 | March 31, 2022 | ||||||||||
| Number of clients (1) | 442 | 384 | |||||||||
Number of clients generating greater than $10 million in revenues | 39 | 31 | |||||||||
| Net dollar retention rate (2) | 106% | 132% | |||||||||
(1) We define clients as those with spend in excess of $25,000 within the preceding twelve months.
(2) The decrease was driven by pauses in ongoing engagements and slower engagement growth due to some clients impacted by budget pressures beginning in the third quarter of 2022, particularly in our APAC region and our retail and consumer and technology and business services verticals.
The following table presents the percentage of revenues from new and existing clients:
| Three Months Ended March 31, | Trailing twelve months ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Existing clients (1) | 97.2% | 95.4% | 89.2% | 88.3% | |||||||||||||||||||
| New clients | 2.8% | 4.6% | 10.8% | 11.7% | |||||||||||||||||||
(1) For the three months ended March 31, 2023 and 2022, we define existing clients as clients for whom we have done work and generated revenues in excess of $25,000 within the preceding fiscal year. For the trailing twelve months ended March 31, 2023 and 2022, we define existing clients as clients for whom we have done work and generated revenues in excess of $25,000 within the preceding twelve months.
During the three months ended March 31, 2023, we contracted with 47 new logos with a higher concentration within the energy, public and health services and financial services and insurance industry verticals.
Revenues by Industry Vertical
The following table presents our revenues by industry vertical and revenues as a percentage of total revenues by industry vertical for the periods indicated (in thousands, except percentages):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Technology and business services | $74,133 | 24.1% | $85,349 | 26.6% | |||||||||||||||||||
| Energy, public and health services | 84,039 | 27.4% | 77,110 | 24.0% | |||||||||||||||||||
| Retail and consumer | 47,912 | 15.6% | 62,435 | 19.5% | |||||||||||||||||||
| Financial services and insurance | 55,155 | 18.0% | 58,464 | 18.2% | |||||||||||||||||||
| Automotive, travel and transportation | 45,817 | 14.9% | 37,582 | 11.7% | |||||||||||||||||||
| Total revenues | $307,056 | 100.0% | $320,940 | 100.0% | |||||||||||||||||||
During the three months ended March 31, 2023, we saw a decrease in revenue in the retail and consumer, technology and business services and financial services and insurance industry verticals of (23.3)%, (13.1)% and (5.7)%, respectively, compared to the three months ended March 31, 2022. The decreases in the retail and consumer, technology and business services and financial services and insurance industry verticals were driven by a reduction or pause in certain projects as some clients faced budgetary pressures. The automotive, travel and transportation and the energy, public and health services industry verticals grew by 21.9% and 9.0%, respectively, compared to the three months ended March 31, 2022. Revenue growth in the automotive, travel and transportation vertical was driven by customer experience, product and design, and
23
growth in the energy, public and health services industry vertical was driven by enterprise modernization, platforms and cloud.
Revenues by Customer Location
Our revenues are sourced from four geographic markets: North America, Asia-Pacific region ("APAC"), Europe and Latin America ("LATAM"). We present and discuss our revenues by the geographic location where the revenues are under client contract; however, the delivery of those client contracts could be supported by offshore delivery locations.
The following table presents our revenues by customer location and revenues as a percentage of total revenues by customer location for the periods indicated (in thousands, except percentages):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| North America | $112,314 | 36.6% | $121,949 | 38.0% | |||||||||||||||||||
| APAC | 100,162 | 32.6% | 102,206 | 31.9% | |||||||||||||||||||
| Europe | 83,050 | 27.0% | 82,926 | 25.8% | |||||||||||||||||||
| LATAM | 11,530 | 3.8% | 13,859 | 4.3% | |||||||||||||||||||
| Total revenues | $307,056 | 100.0% | $320,940 | 100.0% | |||||||||||||||||||
For the three months ended March 31, 2023, we had a decrease in revenue of 7.9% in North America, with the United States contributing revenues of $108.4 million compared to $115.1 million for the same period in 2022. The largest revenue concentration came from the energy, public and health services and technology and business services industry verticals.
For the three months ended March 31, 2023, we had a decrease in revenue of 2.0% in APAC where the top revenue contributing customer location country was Australia with revenues of $29.0 million compared to $36.3 million for the same period in 2022. The largest revenue concentration came from the financial services and insurance and technology and business services industry verticals. We saw a negative impact to revenue from the strengthening of the United States Dollar against the foreign currencies in APAC, particularly the Australian Dollar.
For the three months ended March 31, 2023, we had revenue growth of 0.1% in Europe where the top revenue contributing customer location country was the United Kingdom with revenues of $35.1 million compared to $37.7 million for the same period in 2022. The largest revenue concentration came from the automotive, travel and transportation and the energy, public and health services industry verticals. We saw a negative impact to revenue from the strengthening of the United States Dollar against the foreign currencies in Europe, particularly the Euro and the Great British Pound.
For the three months ended March 31, 2023, we had a decrease in revenue of 16.8% in LATAM compared to the same period in 2022 with Brazil being our largest customer location. The largest revenue concentration came from the financial services and insurance and retail and consumer industry verticals.
Revenues by Client Concentration
We have long-standing relationships with many of our clients. We seek to grow revenues from our existing clients by continually increasing the value we provide and expanding the scope and size of our engagements. Revenues derived from these clients may fluctuate as these accounts mature or upon beginning or completing multi-year projects. We believe there is significant potential for future growth as we expand our capabilities and offerings within existing clients. In addition, we remain committed to diversifying our client base and adding new clients to our client mix.
24
The following table presents revenues contributed by our largest clients by amount and as a percentage of total revenues for the periods indicated (in thousands, except percentages):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||
| Top five clients | $52,590 | 17.1% | $48,120 | 15.0% | |||||||||||||||||||
| Top ten clients | $82,558 | 26.9% | $83,031 | 25.9% | |||||||||||||||||||
| Top fifty clients | $206,577 | 67.3% | $212,012 | 66.1% | |||||||||||||||||||
People Metrics
| Number of employees | Average revenue per employee (1) | Trailing Twelve Months Voluntary Attrition | ||||||||||||||||||||||||||||||||||||||||||
| As of | Three Months Ended | Annualized as of | As of | |||||||||||||||||||||||||||||||||||||||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |||||||||||||||||||||||||||||||||||||
| 11,840 | 11,278 | $25,000 | $29,000 | $100,000 | $116,000 | 13.1% | 14.1% | |||||||||||||||||||||||||||||||||||||
(1) We define average revenue per employee as total revenues for the period divided by the average number of employees in such period.
The decrease in average revenue per employee compared to the three months ended March 31, 2022 was driven by the negative impact from foreign currency translation, geographic mix and decreased utilization. We believe the decrease in voluntary attrition and thus higher retention was due to technology industry hiring trends and our unique, cultivating culture, our focus on career development, our intensive training programs and our interesting work opportunities.
Bookings
We use Bookings ("Bookings") as a forward-looking metric that measures the value of new contracts, renewals, extensions and changes to existing contracts during the fiscal period. We believe Bookings provides a broad measure of useful trend information regarding changes in the volume of our business. We use Bookings to evaluate the results of our operations, generate future operating plans and assess the performance of our company. However, Bookings can vary significantly quarter to quarter due to both timing and demand from our clients and thus the conversion of Bookings to revenues is uncertain. The amount of Bookings involves estimates and judgments and is not a reliable predictor of revenues over time. There is no standard definition or measurement of Bookings thus our methodology may not be comparable to other companies. Bookings were $1.5 billion and $1.5 billion for the trailing twelve months ended March 31, 2023 and 2022, respectively.
Cost of Revenues
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Cost of revenues | $209,522 | $249,765 | (16.1)% | ||||||||||||||
During the three months ended March 31, 2023, cost of revenues (including stock-based compensation) decreased (16.1)% compared to the three months ended March 31, 2022. The decrease was primarily driven by a decrease in stock-based compensation expense of $59.4 million, partially offset by an increase in payroll expense (excluding stock-based compensation) of $18.1 million due to higher headcount and severance expense.
25
Gross Profit and Gross Margin
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Gross profit | $97,534 | $71,175 | 37.0% | ||||||||||||||
| Gross margin | 31.8% | 22.2% | |||||||||||||||
Our gross margin increased by 9.6 percentage points for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to a decrease in stock-based compensation of $59.4 million, partially offset by an increase in payroll expense (excluding stock-based compensation) of $18.1 million, which includes severance expense, and decreased utilization.
SG&A Expenses and SG&A Margin
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| SG&A expenses | $86,340 | $104,765 | (17.6)% | ||||||||||||||
| SG&A margin | 28.1% | 32.6% | |||||||||||||||
For the three months ended March 31, 2023, SG&A expenses decreased 17.6% compared to the three months ended March 31, 2022. SG&A expenses for the three months ended March 31, 2023 includes severance expense. The decrease was primarily due to a decrease in stock-based compensation expense of $23.1 million. The decrease in SG&A margin for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was driven by decreased stock-based compensation expense as noted above.
Depreciation and Amortization
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Depreciation and amortization | $5,542 | $5,846 | (5.2)% | ||||||||||||||
There was not a material change in depreciation and amortization for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Income (Loss) from Operations and Income (Loss) from Operations Margin
| Three Months Ended March 31, | |||||||||||||||||
| (in thousands, except percentages) | 2023 | 2022 | % Change | ||||||||||||||
| Income (loss) from operations | $5,652 | $(39,436) | (114.3)% | ||||||||||||||
| Income (loss) from operations margin | 1.8% | (12.3)% | |||||||||||||||
The increase in income from operations was primarily driven by a decrease in stock-based compensation expense of $82.5 million, as previously discussed, which includes $46.7 million related to the approval of China SAFE during the first quarter of 2022, partially offset by an increase in payroll expense (excluding stock-based compensation) of $19.2 million, which includes severance expense, and a decrease in revenues of $13.9 million driven by decreased utilization.
26
Interest Expense
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Interest expense | $6,862 | $4,647 | 47.7% | ||||||||||||||
Interest expense is primarily related to our Term Loan and Revolver. The increase for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the increased interest rate on our borrowings, partially offset by decreased borrowings due to certain prepayments under our Credit Agreement.
Income Tax Expense and Effective Tax Rate
| Three Months Ended March 31, | |||||||||||||||||
| 2023 | 2022 | % Change | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Income tax expense | $7,359 | $4,328 | 70.0% | ||||||||||||||
| Effective tax rate | NM | (11.0)% | |||||||||||||||
NM - not meaningful. See Note 5, Income Taxes, for additional discussion around forecasting uncertainties related to our income tax rate.
The Company’s income tax expense increased by $3.0 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 primarily due to the unfavorable impact of excess tax deficiencies on stock-based compensation and provision for uncertain income tax positions, offset by valuation allowances on deferred tax assets of select foreign operations and net GILTI inclusion.
The effective tax rate in each period differed from the U.S. statutory tax rate of 21% principally due to U.S. corporate state income taxation and the effect of foreign operations which reflects the impact of different income tax rates in locations outside the United States, the unfavorable impact of valuation allowances on deferred tax assets of select foreign operations, the non-deductibility of China SAFE RSUs, the unfavorable impact of capitalized research and experimental costs under IRC §174 increasing the Company's net GILTI inclusion, impacted by excess tax deficiencies unfavorably and excess tax benefits favorably on stock-based compensation for the three months ended March 31, 2023 and 2022, respectively. The change in the effective tax rate for the three months ended March 31, 2023 as compared to the prior period, and the negative effective tax rate for the three months ended March 31, 2023 and 2022 is a result of the aforementioned unique net unfavorable items when compared to the pre-tax loss recorded for the respective periods.
Foreign Currency Exchange Gains and Losses
See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” included elsewhere in this Quarterly Report as well as “Item 1A. Risk Factors—Risks Related to Our Global Operations—Our business, financial condition and results of operations may be adversely affected by fluctuations in foreign currency exchange rates" as included in our 2022 Annual Report.
Non-GAAP Financial Measures
We define Adjusted Net Income as net loss adjusted for unrealized gain on foreign currency exchange, stock-based compensation expense, amortization of acquisition-related intangibles, acquisition costs, certain professional fees that are considered unrelated to our ongoing revenue-generating operations, employer payroll related expense on employee equity incentive plan and income tax effects of adjustments.
We define Adjusted EBITDA as net loss adjusted to exclude income tax expense, interest expense, other expense (income), net, unrealized gain on foreign currency exchange, stock-based compensation expense, depreciation and amortization expense, acquisition costs, certain professional fees that are considered
27
unrelated to our ongoing revenue-generating operations and employer payroll related expense on employee equity incentive plan. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by total revenues.
We use Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted Net Income as measures of operating performance and the operating leverage in our business. We believe that these non-GAAP financial measures are useful to investors for supplemental period-to-period comparisons of our business and in understanding and evaluating our operating results for the following reasons:
•Our management uses Adjusted Net Income to assess our overall performance, without regard to items that are considered to be unique or non-recurring in nature or otherwise unrelated to our ongoing revenue-generating operations, net of the income tax effect of the adjustments;
•Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and securities analysts to measure a company’s operating performance without regard to the aforementioned adjustments which can vary substantially from company to company depending upon their financing, capital structures, and the method by which assets were acquired or costs that are unique or non-recurring in nature or otherwise unrelated to our ongoing revenue-generating operations;
•Our management uses Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin in conjunction with financial measures prepared in accordance with GAAP for planning purposes, including the preparation of our annual operating budget, as a measure of our core operating results and the effectiveness of our business strategy, and in evaluating our financial performance; and
•Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin provide consistency and comparability with our past financial performance, facilitate period-to-period comparisons of our core operating results, and also facilitate comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin have limitations as analytical tools, and you should not consider these measures in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are, or may in the future be, as follows:
•Although depreciation and amortization expense is a non-cash charge, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA and Adjusted EBITDA Margin do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin exclude stock-based compensation expense, which has recently been, and will continue to be for the foreseeable future, a significant recurring non-cash expense for our business and an important part of our compensation strategy;
•Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin do not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted EBITDA and Adjusted EBITDA Margin do not reflect (i) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (ii) accruals or tax payments that may represent a reduction in cash available to us;
•Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin do not reflect transaction costs related to acquisitions; and
•The expenses and other items that we exclude in our calculations of Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from similarly-titled non-GAAP measures when they report their operating results, and we may, in the future, exclude other significant, unusual or non-recurring expenses or other items from these financial measures.
Because of these limitations, Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other financial performance measures presented in accordance with GAAP.
28
The following tables present a reconciliation of Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA Margin to their most directly comparable financial measure prepared in accordance with GAAP, for the periods indicated (in thousands, except percentages):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss | $ | (8,107) | $ | (43,585) | |||||||
| Unrealized foreign exchange gain | (948) | (5,640) | |||||||||
| Stock-based compensation | 17,679 | 100,183 | |||||||||
| Amortization of acquisition-related intangibles | 3,591 | 2,992 | |||||||||
| Acquisition costs (a) | 1,706 | 20 | |||||||||
| Certain professional fees (b) | 225 | 803 | |||||||||
| Employer payroll related expense on employee equity incentive plan (c) | 242 | 3,622 | |||||||||
| Income tax effects of adjustments (d) | (4,321) | (14,403) | |||||||||
| Adjusted Net Income | $ | 10,067 | $ | 43,992 | |||||||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss | $ | (8,107) | $ | (43,585) | |||||||
| Income tax expense | 7,359 | 4,328 | |||||||||
| Interest expense | 6,862 | 4,647 | |||||||||
| Other expense (income), net (e) | 793 | (88) | |||||||||
| Unrealized foreign exchange gain | (948) | (5,640) | |||||||||
| Stock-based compensation | 17,679 | 100,183 | |||||||||
| Depreciation and amortization | 9,089 | 8,582 | |||||||||
| Acquisition costs (a) | 1,706 | 20 | |||||||||
| Certain professional fees (b) | 225 | 803 | |||||||||
| Employer payroll related expense on employee equity incentive plan (c) | 242 | 3,622 | |||||||||
| Adjusted EBITDA | $ | 34,900 | $ | 72,872 | |||||||
| Net loss margin | (2.6) | % | (13.6) | % | |||||||
| Adjusted EBITDA Margin | 11.4 | % | 22.7 | % | |||||||
(a)Reflects costs for certain professional fees and retention wage expenses related to certain acquisitions.
(b)Adjusts for certain transaction expenses, non-recurring legal expenses, and one-time professional fees.
(c)We exclude employer payroll related expense on employee equity incentive plan as these expenses are tied to the exercise or vesting of underlying equity awards and the price of our common stock at the time of vesting or exercise. As a result, these expenses may vary in any particular period independent of the financial and operating performance of our business.
(d)Adjusts for the income tax effects of the foregoing adjusted items.
(e)Excludes a gain, which was included within Other (expense) income, net in the condensed consolidated statements of loss and comprehensive loss for the first quarter of 2023, related to the mark to market adjustment on shares received in relation to the sale and settlement of trade receivables in 2022.
29
Liquidity and Capital Resources
The following table summarizes certain key measures of our liquidity and capital resources (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Cash and cash equivalents | $ | 109,268 | $ | 194,294 | |||||||
| Availability under Revolver | 300,000 | 300,000 | |||||||||
| Borrowings under Revolver | — | — | |||||||||
| Long-term debt, including current portion (1) | 298,203 | 399,006 | |||||||||
(1)The balance includes deferred financing fees. A reconciliation of gross to net amounts is presented in Note 8, Credit Agreements.
Our cash generated from operations and financing activities has been our primary source of liquidity to fund operations and investments. Our capital investments focus on our technology solutions, corporate infrastructure and strategic acquisitions to further expand into new business sectors and/or expand sales in existing sectors. The Company generates sufficient cash flows for working capital and expects to do so for the foreseeable future.
As of March 31, 2023, our principal sources of liquidity were cash and cash equivalents of $109.3 million and $300.0 million of available borrowings under our Revolver.
In the future, we may enter into arrangements to acquire or invest in complementary businesses, services and technologies, or intellectual property rights. To fund these acquisitions or investments, we may seek to access the debt or capital markets. Our ability to obtain additional funding will be subject to various factors, including general market conditions, our operating performance, the market’s perception of our growth potential, lender sentiment and our ability to incur additional debt in compliance with our contractual restrictions, including those in our Credit Agreement.
Our Credit Facilities
Our subsidiaries are party to the Credit Agreement. The Credit Agreement provides for a Term Loan and the Revolver. See Note 12, Credit Agreements, in the notes to our consolidated financial statements included in the 2022 Annual Report for a discussion of our Term Loan and Revolver as well as Note 8, Credit Agreements, with respect to this Quarterly Report. As of March 31, 2023, we had $300.7 million outstanding under our Term Loan with an interest rate of 7.30% and no borrowings outstanding under the Revolver.
The Credit Agreement requires compliance with certain covenants customary for agreements of this type. As of March 31, 2023, we were in compliance with our debt covenants.
Cash Flows
The following table shows a summary of our cash flows for the periods indicated (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 33,047 | $ | (6,095) | |||||||
| Investing activities | (17,555) | (4,998) | |||||||||
| Financing activities | (102,041) | (29,792) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 1,548 | 182 | |||||||||
| Net decrease in cash and cash equivalents | $ | (85,001) | $ | (40,703) | |||||||
30
Operating Activities
Net cash provided by operating activities during the three months ended March 31, 2023 was $33.0 million compared to cash used of $6.1 million for the comparable period in 2022. The increase in cash provided was primarily due to a decrease in trade receivables attributable to lower revenue growth and a decrease in accruals compared to the three months ended March 31, 2022 driven by the payment of IPO related expenses in the first quarter of 2022.
Investing Activities
Net cash used in investing activities during the three months ended March 31, 2023 was $17.6 million compared to $5.0 million in the same period in 2022. The increase was primarily attributable to the acquisition of Itoc in the first quarter of 2023.
Financing Activities
Net cash used in financing activities during the three months ended March 31, 2023 was $102.0 million driven by the repayment of long-term debt of $101.8 million.
Net cash used in financing activities of $29.8 million during the three months ended March 31, 2022 was driven by withholding taxes paid related to the following: net share settlement on equity awards of $7.3 million, tender offer of $15.5 million and dividends previously declared of $5.9 million.
Contractual Obligations and Future Capital Requirements
Contractual Obligations
We recorded an acquisition purchase price liability of $14.0 million for contingent consideration related to the acquisition of Connected. The final payout amount of $14.3 million was paid on May 4, 2023.
Refer to Note 3, Acquisitions, and Note 8, Leases, of the notes to our consolidated financial statements included in Part II, Item 8 of the 2022 Annual Report for further detail regarding the aforementioned contingent consideration and additional information related to our lease commitments.
There were no other material changes in our contractual obligations and commitments during the three months ended March 31, 2023 from the contractual obligations and commitments disclosed in the 2022 Annual Report.
Except as disclosed in “—Our Credit Facilities” and those mentioned above, we did not have other material contractual obligations for cash expenditures.
Future Capital Requirements
We believe that our existing cash and cash equivalents combined with our expected cash flow from operations will be sufficient to meet our projected operating and capital expenditure requirements for at least the next twelve months and that we possess the financial flexibility to execute our strategic objectives, including the ability to make acquisitions and strategic investments in the foreseeable future. However, our ability to generate cash is subject to our performance, general economic conditions, industry trends and other factors, and due to our global operations, the value of cash generated may be adversely affected by fluctuations in foreign currency exchange rates. To the extent that existing cash and cash equivalents and operating cash flow are insufficient to fund our future activities and requirements, we may need to raise additional funds through public or private equity or debt financing. If we incur new debt, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity or convertible debt securities, existing stockholders may experience dilution, and such new securities could have rights senior to those of our common stock. These factors may make the timing, amount, terms and conditions of additional financings unattractive. Our inability to raise capital could impede our growth or otherwise require us to forego growth opportunities and could materially adversely affect our
31
business, financial condition and results of operations. There is no assurance that we would be able to raise additional funds on favorable terms or at all.
Commitments and Contingencies
Certain conditions may exist as of the date of the condensed consolidated financial statements which may result in a loss to the Company but will only be resolved when one or more future events occur or fail to occur. Such liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources, are recorded when the Company assesses that it is probable that a future liability has been incurred and the amount can be reasonably estimated. Recoveries of costs from third parties, which the Company assesses as being probable of realization, are recorded to the extent of related contingent liabilities accrued. Legal costs incurred in connection with matters relating to contingencies are expensed in the period incurred. The Company records gain contingencies when realized.
Off-Balance Sheet Arrangements
We did not have during any of the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Recent Accounting Pronouncements
See Note 1, Business and Summary of Significant Accounting Policies, in the notes to our condensed consolidated financial statements included in Part I, Item I of this Quarterly Report for a discussion of recent accounting pronouncements.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report are prepared in accordance with GAAP. In preparing the condensed consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, stockholders’ equity, revenues, expenses and related disclosures. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions.
There have been no material changes to our critical accounting policies and estimates as compared to those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our 2022 Annual Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks in the ordinary course of our business. These risks primarily result from changes in concentration of credit, interest rates and foreign currency exchange rates. In addition, our international operations are subject to risks related to differing economic conditions, civil unrest, political instability or uncertainty, military activities, broad-based sanctions, differing tax structures, and other regulations and restrictions.
There were no material changes to the information on market risk disclosure from our 2022 Annual Report.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as
32
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the "Exchange Act"), as of the end of the period covered by this Quarterly Report.
Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (identified in management's evaluation pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations and businesses that cover a wide range of matters, including, among others, intellectual property, data privacy and cybersecurity, contract and employment, personal injury, product liability and warranty. Currently, there are no claims or proceedings against us that we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, the results of any current or future litigation cannot be predicted with certainty and, regardless of the outcome, we may incur significant costs and experience a diversion of management resources as a result of litigation.
Item 1A. Risk Factors
The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the 2022 Annual Report in Part I, Item 1A. “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. There have been no material changes to the Company’s risk factors since those set forth in the 2022 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of the Company's equity securities during the first quarter of 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
34
Item 6. Exhibits
| Exhibit Number | Description | ||||||||||||||||
| 10.1+* | |||||||||||||||||
| 10.2+* | |||||||||||||||||
| 10.3+* | |||||||||||||||||
| 31.1* | |||||||||||||||||
| 31.2* | |||||||||||||||||
| 32.1** | |||||||||||||||||
| 32.2** | |||||||||||||||||
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||||||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | ||||||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||||||||
| 104* | Cover Page Interactive Data File - (formatted as inline XBRL and contained in Exhibit 101) | ||||||||||||||||
| + | Indicates management contracts or compensatory plans or arrangements | ||||||||||||||||
| * | Exhibits filed herewith | ||||||||||||||||
| ** | Exhibits furnished herewith | ||||||||||||||||
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 9, 2023
| THOUGHTWORKS HOLDING, INC. | ||||||||||||||
| By: | /s/ Guo Xiao | |||||||||||||
| Guo Xiao | ||||||||||||||
| Chief Executive Officer and Director | ||||||||||||||
| (Principal Executive Officer) | ||||||||||||||
| By: | /s/ Erin Cummins | |||||||||||||
| Erin Cummins | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer and Principal Accounting Officer) | ||||||||||||||
36