Thoughtworks Reports Fourth Quarter and Full Year 2022 Financial Results

• Fourth quarter revenues of $310.7 million and full year revenues of $1.3 billion
• Reported revenue growth of 8.3% for the fourth quarter and 21.1% for the full year
• Constant currency growth of 14.7% for the fourth quarter and 26.8% for the full year
• Provides guidance for the full year and first quarter of 2023

Thoughtworks Holding, Inc. (NASDAQ: TWKS) ("Thoughtworks" or the "Company"), a leading global technology consultancy, today reported results for the fourth quarter and full year ended December 31, 2022 and provided its financial outlook for the full year and first quarter of 2023.

Guo Xiao, Thoughtworks' Chief Executive Officer, said, "We are pleased with our performance in the fourth quarter and our clients continue to look to us to help them navigate these uncertain times and tackle their biggest technology challenges. Our revenues were $310.7 million for the fourth quarter, up 8.3% year over year and 14.7% in constant currency¹, and $1.3 billion for the full year 2022, up 21.1% or 26.8% in constant currency¹."

Fourth quarter 2022 summary

• Revenues of $310.7 million, a year-over-year increase of 8.3%; 14.7% in constant currency¹
• Net income of $16.1 million compared to net loss of $(16.9) million for the fourth quarter of 2021; net income margin of 5.2% compared to net loss margin of (5.9)% for the fourth quarter of 2021
• Adjusted EBITDA of $58.2 million compared to $51.7 million for the fourth quarter of 2021; Adjusted EBITDA Margin of 18.7% compared to 18.0% for the fourth quarter of 2021
• Diluted earnings per common share of $0.05 compared to diluted loss per common share of $(0.06) for the fourth quarter of 2021
• Adjusted Diluted EPS of $0.10 compared to $0.09 for the fourth quarter of 2021
• Stock-based compensation of $21.6 million compared to $51.0 million for the fourth quarter of 2021

Full year 2022 summary

• Revenues of $1,296.2 million, a year-over-year increase of 21.1%; 26.8% in constant currency¹
• Net loss of $(105.4) million compared to $(0.6) million for the year ended December 31, 2021; net loss margin of (8.1)% compared to (0.1)% for the year ended December 31, 2021
• Adjusted EBITDA of $256.8 million compared to $223.2 million for the year ended December 31, 2021; Adjusted EBITDA Margin of 19.8% compared to 20.9% for the year ended December 31, 2021
• Diluted loss per common share of $(0.34) compared to $(0.24) for the year ended December 31, 2021
• Adjusted Diluted EPS of $0.43 compared to $0.46 for the year ended December 31, 2021
• Stock-based compensation of $249.9 million, which includes $46.7 million related to the approval of China SAFE during the first quarter², compared to $128.3 million for the year ended December 31, 2021

Financial review of fourth quarter 2022 results

Revenues for the fourth quarter were $310.7 million, a year-over-year increase of 8.3%; 14.7% in constant currency. Revenues for the quarter reflect a foreign currency translation impact of negative 6.4%, compared with the negative 8.6% impact previously assumed. Adjusting for the actual foreign currency translation impact, our guided range for fourth quarter revenues was approximately $309.3 million to $315.3 million. Acquisitions completed in the last twelve months contributed approximately 3% to revenue growth in the quarter.

Gross margin for the fourth quarter was 33.7% compared to 29.3% in the fourth quarter of 2021, impacted by $15.0 million and $35.7 million, respectively, of stock-based compensation recorded in cost of revenues.

Adjusted Gross Margin for the fourth quarter was 39.7% compared to 42.9% in the fourth quarter of 2021.

Selling, general and administrative (“SG&A”) expenses for the fourth quarter were $77.0 million, or 24.8% of revenues, compared to $87.6 million, or 30.5% of revenues, for the fourth quarter of 2021.

Adjusted SG&A for the fourth quarter was $68.8 million, or 22.1% of revenues, compared to $70.6 million, or 24.6% of revenues, for the fourth quarter of 2021.

Net income and net income margin for the fourth quarter was $16.1 million and 5.2%, respectively, compared to net loss and net loss margin of $(16.9) million and (5.9)%, respectively, for the fourth quarter of 2021, impacted by stock-based compensation of $21.6 million and $51.0 million for the fourth quarter of 2022 and 2021, respectively.

Adjusted EBITDA for the fourth quarter was $58.2 million, an increase of 12.6% compared to the fourth quarter of 2021. Adjusted EBITDA Margin was 18.7% compared to 18.0% for the fourth quarter of 2021.

Diluted earnings per common share for the fourth quarter was $0.05 compared to diluted loss per common share of $(0.06) for the fourth quarter of 2021.

Adjusted Diluted EPS for the fourth quarter of $0.10 compared to $0.09 for the fourth quarter of 2021, after adjusting for $12.1 million of unrealized foreign exchange gains, $21.6 million of stock-based compensation, $3.4 million of intangibles amortization, $1.1 million of acquisition costs, $0.4 million of non-recurring professional fees, $(0.1) million of employer payroll related expense on employee equity incentive plan, $3.5 million of change in fair value of contingent consideration and $(1.7) million in income tax effects for the aforementioned adjustments.

We saw growth for the quarter across all regions. Revenue growth by customer location was as follows:

• Geographic revenues increased: North America 14.7%; Europe 8.2%; LATAM 4.2%; and APAC 2.1% compared with the fourth quarter of 2021.

We also saw growth across our Automotive, travel and transportation; Energy, public and health services; and Technology and business services industry verticals during the quarter. We experienced a decline in our Retail and consumer; and Financial services and insurance industry verticals. Revenue growth (decline) by industry was as follows:

• Industry vertical revenues increased: Automotive, travel and transportation 27.4%; Energy, public and health services 13.7%; and Technology and business services 10.1% compared with the fourth quarter of 2021.
• Industry vertical revenues decreased: Retail and consumer (4.9)%; and Financial services and insurance (0.1)% compared with the fourth quarter of 2021.

Financial review of full year 2022 results

Revenues for the year ended December 31, 2022 were $1,296.2 million, a year-over-year increase of 21.1%; 26.8% in constant currency. Acquisitions completed in the last twelve months contributed approximately 2% to revenue growth for the year ended December 31, 2022.

Our overall bookings for the trailing twelve months ended December 31, 2022 decreased by (8.7)% year on year to $1.4 billion. For the trailing twelve months ended December 31, 2022, we had 39 clients with bookings greater than $10 million compared to 40 clients for the trailing twelve months ended December 31, 2021.

Gross margin for the year ended December 31, 2022 was 26.7% compared to 37.4% for the year ended December 31, 2021, impacted by $176.0 million and $60.7 million, respectively, of stock-based compensation² recorded in cost of revenues.

Adjusted Gross Margin for the year ended December 31, 2022 was 41.6% compared to 44.2% for the year ended December 31, 2021.

SG&A expenses for the year ended December 31, 2022 were $372.8 million, or 28.8% of revenues, compared to $333.9 million, or 31.2% of revenues, for the year ended December 31, 2021, impacted by $73.9 million and $67.6 million, respectively, of stock-based compensation².

Adjusted SG&A for the year ended December 31, 2022 was $290.3 million, or 22.4% of revenues, compared to $249.3 million, or 23.3% of revenues, for the year ended December 31, 2021.

Net loss and net loss margin for the year ended December 31, 2022 were $(105.4) million and (8.1)%, respectively, compared to $(0.6) million and (0.1)%, respectively, for the year ended December 31, 2021, impacted by stock-based compensation² of $249.9 million and $128.3 million for the year ended December 31, 2022 and 2021, respectively.

Adjusted EBITDA for the year ended December 31, 2022 was $256.8 million, an increase of 15.0% compared to the year ended December 31, 2021. Adjusted EBITDA Margin for the year ended December 31, 2022 was 19.8% compared to 20.9% for the year ended December 31, 2021.

Diluted loss per common share for the year ended December 31, 2022 was $(0.34) compared to $(0.24) for the year ended December 31, 2021.

Adjusted Diluted EPS for the year ended December 31, 2022 was $0.43 compared to $0.46 for the year ended December 31, 2021, after adjusting for $10.1 million of unrealized foreign exchange losses, $249.9 million of stock-based compensation², $13.1 million of intangibles amortization, $4.1 million of acquisition costs, $2.0 million of non-recurring professional fees, $6.4 million of employer payroll related expense on employee equity incentive plan, $0.3 million of final tax assessment for closed operations, $1.0 million of change in fair value of contingent consideration and $(41.6) million in income tax effects for the aforementioned adjustments.

We saw solid growth for the year ended December 31, 2022 across all regions. Revenue growth by customer location was as follows:

• Geographic revenues increased: North America 27.1%; Europe 18.3%; LATAM 18.2%; and APAC 17.1%; compared with the year ended December 31, 2021.

We also continued to see growth across our industry verticals during the year ended December 31, 2022. Revenue growth by industry was as follows:

• Industry vertical revenues increased: Financial services and insurance 30.1%; Technology and business services 24.7%; Automotive, travel and transportation 21.8%; Retail and consumer 16.5%; and Energy, public and health services 15.0% compared with the year ended December 31, 2021.

We continue to have good liquidity. We had cash and cash equivalents of $194.3 million as of December 31, 2022, along with $300.0 million of borrowing capacity under our revolving credit line. Our total debt outstanding, before deferred financing fees, was $402.5 million at December 31, 2022. Cash flow provided by operations was $32.1 million in the fourth quarter of 2022 compared to $22.8 million in the fourth quarter of 2021 and $89.4 million for the year ended December 31, 2022 compared to $118.3 million for the year ended December 31, 2021. Free Cash Flow in the fourth quarter of 2022 was $27.3 million compared to $18.2 million in the fourth quarter of 2021 and $64.9 million for the year ended December 31, 2022 compared to $92.2 million for the year ended December 31, 2021.

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. Our financial results included within this press release are presented on a basis consistent with the straight-line method. As such, previously reported financial information has been adjusted to reflect the change in accounting principle. The impacts to our financial statements related to the change in accounting principle are as follows:

Income statement:

• Three months ended December 31, 2022 - Net income increased by $2.9 million. Diluted EPS increased by $0.01. There was no impact to Adjusted Diluted EPS.
• Year ended December 31, 2022 - Net loss decreased by $2.7 million. Diluted loss per common share decreased by $0.01. There was no impact to Adjusted Diluted EPS.
• Three months ended December 31, 2021 - Net loss decreased by $18.3 million. Diluted loss per common share decreased by $0.06. There was no impact to Adjusted Diluted EPS.
• Year ended December 31, 2021 - Net loss decreased by $23.0 million. Diluted loss per common share decreased by $0.09. There was no impact to Adjusted Diluted EPS.

Balance sheet:

• December 31, 2022 - Assets - decrease in other non-current assets; Liabilities - increase in deferred tax liabilities; Stockholders’ equity - decrease in additional paid-in capital, increase in accumulated other comprehensive loss, and decrease in retained deficit. Total stockholders’ equity decreased by $6.4 million.
• December 31, 2021 - Assets - decrease in other non-current assets; Liabilities - increase in deferred tax liabilities; Stockholders’ equity - decrease in additional paid-in capital, decrease in accumulated other comprehensive loss, and decrease in retained deficit. Total stockholders’ equity decreased by $6.5 million.

Cash flows: Changes to our operating cash flows were driven by changes in net (loss) income, stock-based compensation expense, deferred income tax benefit and unrealized foreign currency exchange loss. Total cash flows from operating activities were not impacted by the change.

Financial outlook

Thoughtworks provides the following outlook for the first quarter and full year 2023:

First quarter

Thoughtworks expects the following for the first quarter:

• Revenues in the range of $303 million to $305 million, reflecting year-over-year decline of (5.5)% to (5.0)%; or (2.5)% to (2.0)% in constant currency. Acquisitions, including those completed during 2023, are expected to contribute approximately 3% to year-over-year revenue growth;
• Adjusted EBITDA Margin in the range of 9.5% to 10.5%;
• Adjusted Diluted EPS in the range of $0.03 to $0.04, assuming a weighted average of 333 million diluted outstanding shares; and
• Stock-based compensation expense of $19 million.

Full year

Thoughtworks expects the following for the full year:

• Revenue growth in the range of 0.5% to 2.5%; or 0.0% to 2.0% in constant currency. Acquisitions, including those completed during 2023, are expected to contribute approximately 2% to year-over-year revenue growth;
• Adjusted EBITDA Margin in the range of 18.0% to 19.0%;
• Adjusted Diluted EPS in the range of $0.38 to $0.41, assuming a weighted average of 335 million diluted outstanding shares; and
• Stock-based compensation expense of $81 million.

Conference call information

Thoughtworks will host a conference call and webcast at 8:00 a.m. Eastern Time on Tuesday, February 28, 2023, to discuss our financial results. To access the conference call and webcast and the accompanying slide presentation, which has additional information regarding Thoughtworks' operating results, you can visit our investor relations website at https://investors.thoughtworks.com. A replay of the webcast will be made available on our investor relations website at https://investors.thoughtworks.com. Information on Thoughtworks' website is not part of this press release.

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About Thoughtworks

Thoughtworks is a global technology consultancy that integrates strategy, design and engineering to drive digital innovation. We are over 12,500 Thoughtworkers strong across 50 offices in 18 countries. Over the last 25+ years, we've delivered extraordinary impact together with our clients by helping them solve complex business problems with technology as the differentiator.

Thoughtworks uses and intends to continue to use our investor relations website at https://investors.thoughtworks.com and social media, @thoughtworks on Twitter and LinkedIn, as a means of publicly disclosing material information and for complying with our disclosure obligations under Regulation Fair Disclosure. Investors should monitor these channels in addition to following the company’s press releases, SEC filings, public conference calls and webcasts.

Forward-looking statements

This press release includes "forward-looking statements" within the meaning of the "safe harbor" provisions of the United States Private Securities Litigation Reform Act of 1995. In some cases, you can identify these forward-looking statements by the use of terms such as "expect," "will," "continue," or similar expressions, and variations or negatives of these words, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements represent our management's beliefs and assumptions only as of the date of this press release. You should read this press release with the understanding that our actual future results may be materially different from what we expect. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, which include but are not limited to: the statements under "Financial outlook," including expectations relating to revenues and other financial or business metrics; statements regarding relationships with clients and business momentum; and any other statements of expectation or belief. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from results expressed or implied in this press release. Such risk factors include, but are not limited to, those related to: the effects of competition on the future business of Thoughtworks; uncertainty regarding the demand for and market utilization of our services; the ability to maintain or acquire new client relationships; general business and economic conditions (including such conditions related to inflation and foreign currency exchange rates); the current and future impact of the COVID-19 pandemic on Thoughtworks' business and industry; and our ability to successfully execute our growth strategy and strategic plans. For additional information concerning these and other risks and uncertainties, please see Thoughtworks' latest Annual Report on Form 10-K and other filings and reports that Thoughtworks may file from time to time. Except as required by law, Thoughtworks assumes no obligation, and does not intend, to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Non-GAAP financial measures

Certain financial metrics contained in this press release are considered non-GAAP financial measures. Definitions of and the related reconciliations for these non-GAAP financial measures can be found below. We use these non-GAAP measures in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that these non-GAAP measures provide our management and investors consistency and comparability with our past financial performance and facilitate period-to-period comparisons of operations. However, non-GAAP measures 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. For example, many of the non-GAAP financial measures used herein 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.

Certain non-GAAP measures related to our financial outlook included in this press release and the associated webcast were not reconciled to the comparable GAAP financial measures because the GAAP measures are not assessable on a forward-looking basis. The Company is unable to reconcile these forward-looking non-GAAP financial measures to the most directly comparable GAAP measures without unreasonable efforts because the Company is currently unable to predict with a reasonable degree of certainty the type and extent of certain items that would be expected to impact GAAP measures for these periods but would not impact the non-GAAP measures. Such items may include stock-based compensation, acquisitions, income tax effects of adjustments and other items. The unavailable information could have a significant impact on the Company's GAAP financial results. Based on the foregoing, the Company believes that providing estimates of the amounts that would be required to reconcile the range of the non-GAAP measures to forecasted GAAP measures would imply a degree of precision that would be confusing or misleading to investors for the reasons identified above.

Revenue Growth Rate and Revenue Growth Rate at constant currency

Certain of our subsidiaries use functional currencies other than the U.S. dollar and the translation of these foreign currency amounts into U.S. dollars 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 calculated by applying the average exchange rates in effect during the earlier comparative fiscal period to the later fiscal period.

Adjusted Gross Profit and Adjusted Gross Margin

We define gross profit as total revenues less cost of revenues. We define Adjusted Gross Profit as gross profit excluding stock-based compensation expense, employer payroll related expense on employee equity incentive plan and depreciation expense. We calculate Adjusted Gross Margin by dividing Adjusted Gross Profit by total revenues. Our management uses Adjusted Gross Profit to assess overall performance and profitability, without regard to the aforementioned adjustments, which are unrelated to our ongoing revenue-generating operations. We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business.

Adjusted SG&A and Adjusted SG&A Margin

We define Adjusted SG&A as selling, general and administrative expense excluding stock-based compensation expense, employer payroll related expense on employee equity incentive plan, acquisition costs, certain professional fees that are considered unrelated to our ongoing revenue-generating operations, tender offer compensation expense that is considered one-time in nature and IPO-related costs. We calculate Adjusted SG&A Margin by dividing Adjusted SG&A by total revenues.

Our management uses Adjusted SG&A and Adjusted SG&A Margin to assess our overall performance, without regard to items such as stock-based compensation expense and other items that are considered to be unique or non-recurring in nature or otherwise unrelated to our ongoing revenue-generating operations. We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business.

Adjusted Net Income and Adjusted Diluted EPS

We define Adjusted Net Income as net (loss) income adjusted for unrealized (gain) loss on foreign currency exchange, stock-based compensation expense, employer payroll related expense on employee equity incentive plan, amortization of acquisition-related intangibles, acquisition costs, certain professional fees that are considered unrelated to our ongoing revenue-generating operations, tender offer compensation expense that is considered one-time in nature, IPO-related costs, the change in fair value of contingent consideration, final tax assessment for closed operations and income tax effects of adjustments.

We define Adjusted Diluted EPS as diluted earnings (loss) per common share, with the numerator adjusted for the aforementioned adjustments to Adjusted Net Income. In other words, the numerator for Adjusted Diluted EPS utilizes Adjusted Net Income. We calculate Adjusted Diluted EPS by dividing Adjusted Net Income, after adjusting for preferred stock dividends, resulting in Adjusted Net Income attributable to common shareholders, by diluted weighted average shares outstanding.

Our management uses Adjusted Net Income and Adjusted Diluted EPS 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 effects of adjustments.

Our management uses Adjusted Net Income 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. We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business.

Adjusted EBITDA and Adjusted EBITDA Margin

We define Adjusted EBITDA as net income (loss) adjusted to exclude income tax expense; interest expense; other expense (income), net, excluding the gain from the sale and settlement of trade receivables; unrealized (gain) loss on foreign currency exchange; stock-based compensation expense; employer payroll related expense on employee equity incentive plan; depreciation and amortization expense; acquisition costs; certain professional fees that are considered unrelated to our ongoing revenue generating operations; tender offer compensation expense that is considered one-time in nature; IPO-related costs and final tax assessment for closed operations. We calculate Adjusted EBITDA Margin by dividing Adjusted EBITDA by total revenues.

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 that 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 EBITDA and Adjusted EBITDA Margin 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. We also believe this information will be useful for investors to facilitate comparisons of our operating performance and better identify trends in our business.

Free Cash Flow

We define Free Cash Flow as net cash provided by operating activities less cash used for purchases of property and equipment. We believe that Free Cash Flow is a useful indicator of liquidity for investors and is used by our management as it measures our ability to generate cash, or our need to access additional sources of cash, to fund operations and investments. There are a number of limitations related to the use of free cash flow as compared to net cash from operating activities, including that Free Cash Flow includes capital expenditures, the benefits of which are realized in periods subsequent to those when expenditures are made.

Stock-based compensation expense included in the consolidated statements of (loss) income and comprehensive (loss) income was as follows:

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¹ Revenue Growth Rate at constant currency, Adjusted EBITDA, Adjusted Diluted EPS and certain other measures in this release, are non-GAAP financial measures. See “Non-GAAP financial measures” for how we define these measures and the financial tables that accompany this release for reconciliation of these measures to the closest comparable GAAP measures.

² During the first quarter, the Company recorded stock-based compensation expense for equity awards that were previously awarded to participants but were contingent upon the successful and active registration with the State Administration of Foreign Exchange of the People's Republic of China (“China SAFE”), which occurred on February 25, 2022.

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