Q3 2021 Telus International Cda Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the Telus International third quarter 2021, Investor call. My name is Jonathan and I will be your conference facilitator today at this time all lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question. During this time.
Please press Star then the number one on your telephone keypad, if you'd like to withdraw your question. Please press the pound key I would now like to introduce Jason <unk> Senior Director Investor Relations and Treasurer at Telus International Mr. Meyer you may begin the call.
Thank you Jonathan Good morning, everyone. Thank you for joining us today for Telus International Q3, 2021, Investor call hosting our call today are Jeff <unk>, President and Chief Executive Officer, and Vanessa <unk>, our Chief Financial Officer.
As usual, we will begin with some prepared remarks, Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa who will provide some key financial highlights. We'll then open the line to questions from pre qualified analysts before turning the call back to Jeff for his closing remarks.
Before I turn the call over to Jeff I'd like to direct your attention to slide two of the supplementary presentation available for download on this webcast and also available on our website Telus International Dot Com slash investors.
The statements made during this call may be forward looking in nature, including all comments, reflecting expectations assumptions or beliefs about future events or.
Or performance that do not relate solely to historical periods.
These forward looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections.
We assume no obligation to update any forward looking statements.
And Vanessa will also discuss certain non-GAAP measures that the management team considered to be useful in assessing our company's underlying business performance.
An explanation of these non-GAAP measures and a reconciliation to the comparable GAAP measures can be found in the appendices of today's supplementary presentation, along with the earnings news release, and MD&A available on SEDAR and on Edgar with the SEC.
I'd also like to remind everyone that all financial measures were referencing on this call and in our disclosure are in U S dollars unless specified otherwise and relate only to Telus international results and measures.
With that I'll now pass the call over to our President and CEO, Jeff here.
Thank you, Jason and good morning, everyone and thank you for joining us today.
Third quarter, Telus International delivered a solid 30% year over year increase in revenue as we continue to win more business with existing and new clients alike.
This growth was achieved both organically and with the benefit of contributions from prior acquisitions, particularly related to our AI data solutions Division as.
As Vanessa will outline shortly in more detail our strong performance this quarter should be considered in the context of our resilient execution in the same period of last year. Indeed, Telus International was posting impressive growth from an already solid baseline established a year ago as we continue to successfully navigate the operational challenges of the pandemic.
While we continued to deliver meaningful revenue growth. We're also achieving exceptional profitability with a 23% year over year increase in adjusted EBITDA and an adjusted EBITDA margin of $24, 6%.
Our deliberate strategy of developing and acquiring higher value digital capabilities, including premium content moderation in AI services enable us to design build and deliver differentiated digital customer experiences on behalf of our over 600 global clients.
I think strategically focused our investments and resources in key sectors of the digital economy, we continued to derive significant benefits such as revenue diversification as well as growth across each of our targeted verticals. In addition to our continued strength in second games. We're also experiencing increasing traction within e-commerce and <unk>.
Tech.
To highlight some of our sales teams multi year multimillion dollar contract wins this quarter, we welcomed a leading north American financial institution of the new clients. We also expanded our scope with Barclays. One of the first clients and our new North Charleston, South Carolina location.
Tech and games, we welcomed a rapidly growing gains company is one of them as well as one of the fastest growing startups in the world focused on event. The technology. We also had a key win from an existing client and consumer electronics that entails program expansion into a new geography.
Notably, we also secured new programs from our largest client by revenue the world, leading social media network and an expanded mandate of our AI data solutions team.
One of our projects for this client is enabling a more customized and targeted delivery of digital advertising to their different audiences. This is more critical for brands than ever before given the proliferation of online content available to consumers as well as their heightened expectations to only be served content that is both useful and contextually <unk>.
<unk> to them as a result brands must have a strategy in place and the right people to execute upon it in order to remain relevant and competitive.
<unk>, our industry, leading AI capabilities Telus International reviews over 1 million ads per month for this client our team recruit educate and manages over 4000 evaluated in more than 10 geographic markets with our proprietary people and project management platform, we are able to ensure the diversity and high quality of AI <unk>.
<unk> data for the clients algorithm in order to boost AD relevance on a global scale.
Our team also provides custom reporting which includes detailed statistics about evaluated performance output quality and more through continuous process improvement our team a project manager because worked closely with the client to assemble teams of Annotators in new markets as well as improve their in house evaluation tools the geographic.
Demographic diversity of our evaluated pool has proven invaluable to our clients' AI trading model are over $1 million strong globally scaled AI community enables the delivery of highly personalized region specific ads, which directly contribute to this client commercial success.
This is also a great example of our approach to combining our AI data solutions with our content moderation expertise at scale to create a powerful and differentiated go to market offering our highly effective AI solutions provide a digital first line of identification and help enable a robust content moderation framework for our clients the AI.
<unk> enables our content moderation team members to dedicate their time and judgment on higher value aspects of the engagement with clear benefits for both the client and for Telus International.
Scale in both areas amplified through our highly strategic acquisitions position us as having one of if not the largest data annotation platform globally.
In addition to making strategic high impact acquisitions that comp.
Build upon our digital capabilities. We also continue to cultivate nextgen digital CX solutions internally through our innovative <unk> labs team.
Established <unk> labs is a dedicated space, where Telus international innovators, researchers and visionaries could collaborate and co innovate to explore emerging customer experience tech that is poised to disrupt the future.
Our <unk> team our amongst our thousands of team members, who have completed hundreds of project tackling unique challenges that we leverage to accelerate the design and development of customized solutions for our clients that have helped to redefine the human technology relationship in digital customer experience as an example, our eyelab team developed.
And machine learning based accelerators to automate elements of our customer facing team members daily workflows, such as simple repetitive tasks, thereby enabling our team members to focus on higher value and more complex work we.
We developed an intelligent classification tool that automatically sorts incoming tickets or custom emails into relevant categories based on content and sentiment. This tool also is able to provide a precise and meaningful summary for our team members, making reviews much more time efficient and effective we use the same tech.
The analytics engine that sorts these inquiries to help our customer facing team members compose a personalized grammatically correct response to customer inquiries simultaneously. We also have a team member assistant bot that proactively recommend appropriate solutions for our customer inquiry, drawing from a knowledge database powered by semantics.
Search that's easy to navigate and then importantly ensures high accuracy and consistent information that authorized members can access at anytime from anywhere not only do we see improvements to key performance indicators that measure quality of service and customer satisfaction, but this technology also results in a more personalized.
Empathetic customer experience.
The work of our eye labs team is a very important part of our ability to stay ahead in the digital transformation landscape as well as helping to anticipate our clients' demand for disruptive solutions as digital transformation accelerates new technologies are becoming ubiquitous faster than ever take cloud infrastructure. For example, it was not that long ago.
That running systems in the cloud was a novelty today. It represents a key component of most companies digital transformation journeys.
Another example of a recent win I want to highlight it for our clients in the hospitality sector returned to Telus international for support with their existing Amazon Web services cloud environments.
Meyer to partnering with Ti. This client didn't have a managed services provider. They felt they could rely upon to optimize their technology solutions with client needed their technology environment to be secure scalable and cost effective and because the cloud can be complex. They saw it as an experienced strategic partner with reliability freed them up to better focus on their customers.
In this case, our goal was not to implement new technology for the client, but to apply our deep Amazon web services expertise in order to introduce efficiencies and added security. So there was both a consultative design elements as well as an ongoing managed services relationships to start we conducted a thorough review of the client's environment security.
Resulting in the removal of unnecessary access and the introduction of enhanced protocols for data recovery. We then assumed full oversight of their environment with ongoing reviews and regular communications to keep the client well informed of the systems operation Our Telus International team monitors and manages workloads for this client providing strategic recommendations and optimizing <unk>.
Performance, including around the clock support for AWS related requests and issues patching backup infrastructure and security monitoring and reporting.
Digitization not only transformed our commercial world, but also impacts other spheres, including government at all levels. As an example, one of our government clients is working with our digital solutions team on a service now at <unk>.
This management deployment project. The project scope was to design configure and transition this client to a best in class digital platform, providing benefits such as workflow automation standardized processes and extensive integration capabilities.
With approximately 500 administrative and elected officials producing 31000 requests per year, our client needed a service management solution to address process maturity issues AD hoc tools integration challenges all while improving their service management standards. This focus on service quality was a key priority in this clients digital transformation.
<unk>.
Naturally Telus International was the right partner for them.
To meet this ever increasing demand from our existing and new clients. We have continued to recruit and hire new team members to our Telus International family.
With over 2300 net new hires in the third quarter were ferring extremely well and the ongoing challenging global labor market.
Our success in attracting and retaining top talent continues to be driven by the unique and caring culture. We've cultivated over many years undeniably our philosophy and proven approach to building and developing our talented global team is directly contributing to our business growth.
Our ongoing efforts to keep them safe and healthy we continue to leverage our robust infrastructure and cloud technologies to enable approximately 80% of our global frontline team members to work remotely from their homes. We continue to monitor the environment in each region, where we operate taking a science based and methodical approach to inform when.
We can safely reopen offices and return our team members to our inspiring workspaces. Thanks.
Thanks to our team members' relentless efforts and commitment to excellence and innovation Telus International continues to be recognized as a global leader across various aspects of our company.
This past quarter, we were named one of fast company's best workplaces for innovators international for 2021, a prestigious ranking that positions us amongst the top companies globally that are successfully fostering a culture of innovation and empowering employees to improve processes create new products and invent new ways of doing business.
<unk> Telus International was ranked third overall in the 2021 Hff's report and ranking for top digital service providers HFF is a leading global research consultancy firm and they assess been rated the world's largest service providers across a series of capabilities, including execution innovation and voice of the customer.
Notably respected lead analyst Melissa O'brien highlighted our steady investments in technology innovation, including an intelligent assistant in automation and the expansion of our new economy services portfolio, such as content moderation and AI data solutions, if you will.
Also cited the value in our unique approach to digital services, which is organized around our design build delivered construct.
And our ability to undertake end to end digital CX transformation engagements and of course, another key driver of our top ranking with our highly skilled and engaged teams who consistently provide a high quality brand experiences customers demand that.
<unk> heard me say, many times before and I will never tire of repeating it our team members are the driving force behind Telus International success and it is extremely rewarding to see their passion for what they do and there is significant achievements recognized across our industry and even more broadly among the top global brands.
With that let me now pass the call to our Chief Financial Officer, Vanessa <unk> to take you through our detailed financial results and then I'll look forward to answering your questions Vanessa over to you.
Thank you, Jeff and good morning, everyone. Thank you for joining us today.
And my overview I will review, our summarized results for the quarter and as Jason mentioned at the start of the call. Some of these items our non-GAAP measures.
You can view, our more detailed three and nine month financial results, including a reconciliation of our GAAP to non-GAAP measures in the financial statements and MD&A filed earlier this morning.
I'll just summarize we achieved solid revenue and earnings growth in Q3.
Total revenue increased 30% year over year with continued growth across all of our geographic regions and industry vertical.
Adjusted EBITDA increased 23% year over year and adjusted diluted earnings per share was up 13% year over year.
Let me now expand on these components.
Revenues for the quarter were $566 million up 30% driven by solid momentum in our organic business and contribution from acquisition.
Organic growth was $58 million or 14%, reflecting increasing demand and services provided to existing and new clients.
Prior acquisitions contributed $71 million or 16% up year over year growth in the quarter and related to our acquisition of what is now called tell us International AI data solutions.
Our total revenue growth included FX tailwind of under 1% when compared to the same period in the prior year.
Once again it is important to put these results into perspective.
Telus International delivered strong performance in Q3 of last year, when our business model. So we mark couple of resilience and financial performance during the pandemic.
Our results today deals from that very strong prior year compare.
Looking at revenues by geography, we grew in every single one of our region with Asia Pacific posting the highest percentage growth this quarter, 79% followed by Europe at 34% North America, 29% and finally Central America at 11%.
The strong growth across all of our regions was driven by growth in our digital CX solution growth and content moderation and growth in digital services and of course last but not least our AI data solution.
From an industry vertical perspective, we saw this growth reflected across all of our key verticals.
Game, our largest vertical was up 46% year over year with growth attributed to our AI solution and robust demand across all of our service lines.
We continue to see great momentum in our e-commerce, and Fintech vertical with revenue growth of 56% year over year.
Finally, our communications and media vertical showed healthy growth of 11% year over year, while all other vertical including travel and hospitality and health care. Similarly posted strong double digit growth year over year.
Moving on to operating expenses.
Salaries and benefits expense was $309 million up 24% due to growth in our team member base to support increased client demand and higher average employee salaries and wages.
Previously I shared our expectations for our second half cost base to increase diesel plant and merit increases.
These increases have and continues to be an asset and our capture and our full year outlook.
Our goods and services purchased $110 million in the quarter, an increase of 64%. This was.
Largely driven by AI solutions and in particular, the cost related to crowdsource contractors for which the contract that labor costs are recognized and goods and services purchased.
The balance of the increase was due to higher software and other costs to support the continued growth and expansion of our business.
Moving down the P&L share based compensation expense in the third quarter was $21 million, an increase of $16 million year over year.
The increase was due to the vesting of share compensation award and Mark to market adjustment on historical cash settled awards due to the increase in our share price.
Acquisition integration and other charges in the third quarter were $6 million a decrease of $2 million.
Current period costs, primarily related to the integration of Telus International.
And the secondary offering of subordinate voting shares that we successfully completed in September.
While the prior year costs were primarily related to incremental cost incurred in connection with the COVID-19 pandemic as well as integration costs related to the CCC acquisition.
Income tax expense in the quarter was $50 million up $2 million from the same quarter last year.
Our effective tax rate increased from 31, 7% to 39, 5%, primarily due to an increase in withholding and other taxes and an increase in nondeductible items, partially offset by a reduction to the foreign tax differential.
A reminder, that our ETR, which is income tax expense as a percentage of accounting net income before tax and very due to factors, including but not limited to the jurisdictional mix of earnings in any given period and the tax deductibility of certain expenditure items.
Moving on to our profitability performance.
Delivered adjusted EBITDA of $137 million in the quarter, posting strong year over year growth of 23%.
Our adjusted EBITDA margin was 24, 6%.
Adjusted net income for the quarter was $70 million up 32% year over year.
On a first year basis. This translated into adjusted diluted earnings per share of <unk> 26 up 13% year over year.
Our strong profitability performance reflects our growing top line scale, our shift to higher value and higher margin business lines and our ongoing focus on improving efficiencies.
Additionally, as has been our history, we continue to remain relentlessly focused on driving a healthy balance between top line growth and leading profitability.
While the demand environment continues to be very strong we are making deliberate choices about the types of work that we pursue and deliver.
Lynn that is ever more important in these current market dynamics.
Looking at our year to date results our year to date revenues are up 40% year over year.
Adjusted EBITDA is up 51% year over year and adjusted diluted earnings per share is up 71% year over year.
We are highly pleased with it.
Growth and profitability performance.
Now moving on to the balance sheet.
And cash equivalents were $130 million as of September 30th.
Our total available liquidity grew to approximately $828 million compared to $285 million at year end.
This includes available capacity under our revolving credit facility of $698 million up from $132 million at year end.
This amount of liquidity continues to provide us meaningful flexibility and capacity for potential strategic acquisition to advance our growth objectives at the right time.
We continue to reduce our debt in Q3, lowering our net debt to adjusted EBITDA leverage ratio as defined by our credit agreements to two <unk> as of September 30.
This positions us at the lower end of our communicated steady state target range of two to three X.
While we continue to maintain significant flexibility to go beyond this range for the right type of strategic acquisition.
Now I'll turn it over to cash flow.
Free cash flow, which we define as cash from operations less capital expenditures was $63 million in line with $64 million in the prior year.
Cash from operations of $86 million were up $2 million from the prior year, reflecting higher net income adjusted for noncash items offset in part by higher income tax and share based compensation payments.
Capital expenditures of $23 million were up $3 million from the prior year to support increased capacity and growth across our business.
Capital expenditures as a percentage of revenue was approximately four 1% down from four 7% in the same quarter of the prior year.
Now turning to our key member count.
In Q3, we continued to manage well through global labor supply pressure.
Competition for highly skilled talent has always been tier and in many ways unique by region.
It is a constant feature of our industry more so now than ever.
These challenges and as Jeff mentioned earlier in the third quarter, we welcomed 2356 net new team members, bringing our total number of accounts to 58527, an increase of 21% year over year, reflecting growth across all of our major geographies to meet increased client demands and business expansion.
So echo what Jeff said at the start off the call. We believe our differentiated culture, certainly remains a key competitive advantage, allowing us to attract and retain high quality global talent, especially in the current environment.
Now onto our outlook.
Following an increase in the full year guidance that we shared with you on our prior quarterly call. Today, we are reaffirming our outlook for strong double digit double digit growth this year.
For the full year 2021, we continue to expect revenues in the range of two stood at 107% tier 1 billion, reflecting growth in the range of 37% to 40% over last year.
It is worth noting that compared to our July guidance.
In the U S dollar against the Euro has created a negative FX impact on our top line.
We have absorbed the negative FX impact within our reiterated guidance.
For adjusted EBITDA, We expect the range of 570 to 540 million a growth of 36% to 38% over last year.
We expect to deliver adjusted diluted earnings per share in the range of 92% to 97%.
Which reflects growth of 30% to 37% over last year.
With that we'll now open the lines for questions and as usual I would kindly ask you to keep.
So one question at a time, so that everyone can participate Jonathan over to you.
Certainly ladies and gentlemen, if you do have a question at this time. Please press Star then one if your question has been answered and you'd like to remove yourself from the queue. Please press the pound key once again. Please limit your questions to wanted to tie you may get back in the queue. As time allows our first question comes from line of Paul steep from Scotia Capital. Your question. Please.
Great. Good morning, Jeff just where year on from the acquisition of Lionbridge can we get you to maybe reflect on where you're at in terms of integration of AI into the business and some of the successes that <unk> had with it and then how we think about.
Maybe further doubling down on either AI or another.
Digital service line. Thanks.
Sure. Thanks for the question Paul Nice to hear your voice.
We're making really good progress on the integration I'm always frustrated as you've heard me say before.
Can go faster and do better but.
Here, we are approaching months 11, almost the anniversary as you said of the acquisition.
Im seeing very very exciting realization of the synergy thesis that underpins why we chose to make that investment in the first place.
Not only is the.
Former led by now.
<unk>.
Well integrated into the Ti team in terms of reporting structure, but backend integration is almost complete.
We're planning for and targeting end of calendar year to wrap all of that up but excitingly. We have successfully gone to market together as I mentioned in my comments earlier.
In terms of selling combined content moderation in data annotation solutions, and we've seen terrific traction both selling into former <unk> customer base into Ti.
Incoming customer <unk> customer base, and together, winning new customer opportunities and thats sort of exactly what we were anticipating.
As we look into much as balance of this year, but 2022 and beyond.
The appetite the thirst for these kinds of AI driven solution seen near insatiable.
So we're very very pleased with the almost prescient timing of our investment there.
In terms of what you should expect from us prospectively.
Not only just made further investments in July a bit of a tuck in acquisition of claimants and the.
Our computer vision enabled capabilities that they brought to our AI portfolio, but prospectively I think you should expect that we will continue to look for extended capabilities in order to meet the growth opportunity that exists there.
Thank you.
Thank you.
Our next question comes from the line of Stephanie price from CIBC. Your question. Please.
Hi.
Talk a little bit about your delivery footprint. So the company opened its third delivery center in the U S. In Q2.
Just curious how you see that clearly footprint evolving and whether the pandemic is generating more demand for near shore operation.
Hey, Stephanie nice to hear your voice as well thanks for the question.
So there has certainly been sort of yoyo ing onshore offshore nearshore over my 16 years in this industry and interesting pressures that underpin that whether it's traditional economic cost pressures and or geopolitical pressures tax driven.
<unk> et cetera.
I think there was certainly.
Recognition at the onset of the quarantine lockdown.
Off the back of the pandemic.
Certain jurisdictions simply didn't have the same level of robust infrastructure.
Cross the at home landscape of frontline team members and so there was.
Perception that in the long run maybe we need to reduce our footprint our exposure to those markets as a consequence I can tell you for Telus International whilst there was a bit of a scramble admittedly in March and April of 2022, Virtualized support and in many cases, we do.
Absolutely need to.
Bolster support.
Extend the connectivity infrastructure for the at home ecosystem that we've now 1920 months into this with over 80% of our global footprint successfully enabled at home environment.
With no diminution in performance productivity, nor concerns around privacy and confidentiality so.
Our perspective is that we can continue to successfully deliver for our clients from anywhere and everywhere, but specifically to your question I think there are still some residual.
<unk> that suggest we probably would prefer to have a little more of our delivery footprint closer to home so to speak but obviously there are tradeoffs one.
When one thinks about those considerations in terms of the operating cost structure.
Just labor rates, but certainly not as well as the other operating costs.
Think we've got a really good balance today of the onshore nearshore and offshore, but having said that there's always room for growth there continues to be robust.
Appetite for more.
So we certainly have a willingness to meet our customers, where they want us to be whether it's additional U S onshore delivery capabilities more near shore and more offshore.
I would say the one thing to be.
Cognizant of the Ti, we have never pursued a build it and they will come strategy in terms of delivery.
We want to be.
Thoughtful and disciplined and responsive as we extend our footprint in.
When.
Where and how we have existing or prospective demand. That's when we will make the capital investments.
In order to extend our delivery footprint.
Does that mean, we're going to have more sites in the U S. In the mid to longer term, perhaps but I think you should expect that we'll continue to look for areas of opportunity to meet that customer demand and get closer to deeper broader talent pools as well.
Maybe just a quick follow up on that you mentioned the cost structure in the U S versus other regions can you talk a bit about the pricing environment and whether you can pass those additional costs on to customers.
Sure. So I wish I could give you a more perhaps.
This factory Anthos definitely but the answer quite candidly is it depends.
Depending on the nature of the relationship that we enjoy with our customer.
Depending on the nature of the services were providing there are absolutely some circumstances, where we have been successful in encouraging our customers to help us share the burden of wage inflation.
In other cases, it just simply hasnt been.
Available to us and again this is not new although admittedly excuse me the wage inflation dynamic we're all seeing around the world of late is sort of the.
A heightened level of this dynamic than we've experienced previously but the job is has been will always be in my view to find a way to mitigate those inexorable cost pressures, whether it's wage inflation or other cost inflation and eating our own gourmet cooking drinking our own champagne.
Heard me say before bringing automation and process efficiency into our business again, that's not new that has been job one from day one and.
And we continue to quite effectively mitigate much of the labor inflation impacts in our business through the use of that automation and efficiency discipline.
But we will continue to look for areas of opportunity to share that inflation with our customers I mean interestingly many of the customers most of the customers. We support in many cases are employing the very same labor that very same skills that we are and as a consequence here not only is notional competitive.
Dynamic in that regard, but they are acutely aware of the very same labor wage inflation dynamics that we are in so it creates a bit of I don't know.
Sensitivity acceptance.
And in many cases, thanks to the strength of our relationship.
Our willingness to help us underwrite some of that cost inflation because we're in this together prospectively.
Great. Thanks for the color.
My pleasure quest.
Question comes from the line no Ramsey.
From Barclays. Your question please.
Morning, Jeff and Vanessa Thanks for taking my question.
I wanted to ask about revenue it came in a bit lower in the quarter than we were anticipating.
Did the quarter play out as you expected it would or were there any other incremental headwinds that emerge I don't know macro environmental or client specific or anything like that.
Hey, Ramsey Fair question.
We're we're sort of right in the middle of our guidance and Youll remember, we didn't really guide specifically by quarter right.
Guidance for the year, given we're still relatively new with this and want to make sure that we're getting things right.
I think it's fair to say and I'll invite even that's going to provide a little bit more color here.
That we could have we hoped to do slightly better than where we landed on the revenue front, but still very pleased with <unk>.
<unk>, 30% growth.
14% on a constant currency basis organically.
We have to make tradeoffs right. That's part of the job everyday is balancing growth and profitability and we're running this business for the long term not for the first or next quarter.
And so.
There have been.
Further upside on the revenue front in the quarter certainly.
But at.
Some 0.1 has to decide what's more important.
Mid near longer term.
And so I'm pleased with the discipline that we demonstrated the choices we made the business we pursue on the business opportunities that we turn away.
In order to ensure that we're continuing to have our eye on the prize longer term and as I said balancing those competing considerations as is the job is the challenge and the opportunity that we have here.
So do you want to top up a little bit there.
I think you've covered it well Jeff the only.
The thing I would add to your question ramping in terms of were there any surprises I would say probably the only other surprise, but the only surprise was probably from an FX perspective.
As I mentioned earlier in my prepared remarks.
You guys have seen this in our financials. So about 36, 37% of our revenues are euro denominated and we started to see a softening of the euro shortly after we issued guidance in July so that would be the.
The negative surprise there but.
As Jeff mentioned in totality considering the.
The demand supply dynamics, and everything else and the choices that we're making to pursue profitable long term business, we're quite pleased with where things land.
Obviously still solid underlying organic growth and how much of an FX headwind is baked into guidance.
So in fact in Q4, we are expecting a headwind.
Full year.
We werent.
We will end up with a tailwind just because we had a tailwind in the first half of the year. So for the full year will end up with a tailwind of about two 5%.
But certainly in Q4, there is a headwind that offsets what we signed the first half and as I mentioned earlier the impact to Q3, we're frankly being material.
Alright terrific. Thanks, so much for your answers are very helpful. Thank you.
Thanks Ramsey.
Thank you. Our next question comes from the line of Janssen Huang from Jpmorgan. Your question. Please.
Hey, Thanks, sorry, good morning.
Thanks for all the details here just on the.
Inflation front I'll ask it differently on acquisitions.
With all these digital assets sort of getting marked up here in the public markets.
I'm curious if that changes your.
Youre thinking or philosophy on M&A has it changed your appetite or the pipeline in any way in terms of the deals you might be looking at.
And Jim Nice to hear your voice as well thanks for the question.
So again as I know you've heard me say before I don't want to overpay ever because I think when one overpay for an asset. It immediately leads you want to start to do perhaps unnatural things around integration and in order to try and compensate some makeup as quickly as one can for having overpaid on the headline purchase price at first instance.
And Youre right there.
There continues to be some very lofty valuation expectations from sellers out there, having said that our pipeline for shopping opportunities is as robust as ever as a consequence I suspect of the opportunity that this digital transformation landscape represents an so.
My appetite my ambition to continue to.
Leverage inorganic growth activity to complement our strong organic growth continues to be as healthy as ever I think there is lots and lots of opportunities there is no.
Deals to be had deals to be made and just requires again part of our heritage at Telus International the requisite discipline creativity and innovation to identify the right asset at first instance to secure it in a fashion that.
Doesn't.
Unnecessarily inflate the overall cost to purchase and that can indeed realize are.
On accretive growth and value ambitions in the near to longer term.
And you should absolutely expect as we've telegraphed in the past when we went public in part to how they public.
Transaction currency available to us to support our ambitions in this regard.
You just you should count on us to continue to be really thoughtful about how we will leverage that opportunity perspective.
I appreciate the discipline. Thank you.
Thanks.
Thank you. Our next question comes from the line of Keith Bachman from Bank of Montreal. Your question. Please.
Hi, many thanks I wanted to go back to the labor situation and perhaps I'll direct this to you Vanessa if I could.
As you think about.
The weighted average wage inflation what is it currently running and how.
How is that how is it different from historic norms. In other words is inflation running for employees about 5% of installing them running at 3% and Jeff you mentioned that.
To work really hard to offset those dynamics.
How are you thinking about not just in the current quarter the December quarter, but as we look out over the horizon.
Into 'twenty two.
Do you think the labor situation impacts your margins or are there enough.
Variables or levers so to speak that you can offset the incremental wage inflation that you are currently experiencing many thanks.
So thanks for the question and perhaps I'll start and then.
It was a mini part question some for me some for Jeff I'll start and pass it over to Jeff.
So we haven't probably I don't think we will disclose.
For sensitive reasons, what the overall average wage inflation is as you would expect it does vary by country.
The wage inflation in certain countries like U S and Canada is a very different.
Number than the wage inflation in a country like India, let's say right.
So but from an overall.
We are seeing higher wage inflation in 2021, then we happened in the past and Thats across the board and that's even on a weighted average basis.
So youre absolutely right there.
I have mentioned on previous calls that we did actually see.
Feedback coming into the year. So when we built our initial budgets for last year for 2021 and give our initial guidance for 2021, we have already built in increased wage inflation. So what we're seeing now this year is actually very much in line with what we expected to see.
I Wouldnt say, we are we.
Got it perfect in every country, but on the whole.
The weighted average has been within the same ballpark that we had built into our own models for this year and we're tracking to that.
And then maybe I'll quickly touch on next year before before passing it on to Jeff for the second part of your question.
We do think that the current dynamic will continue into next year, we will it continue long term and beyond that I think thats.
For debate that at some point things will normalize at some point as Jeff mentioned, even as it pertains to our.
Inflation is impacting our clients as well so we think it's going to get to a point where things do start to normalize but we do expect this dynamic to continue into next year and when we get to our guidance for 2022, we certainly will factor that in but that's not something that was the case when say around October November last year. When we were talking to you guys about.
Longer term models, and that's definitely something that will be built into our models for next year, but as we said already certain clients. We're working with in terms of getting them. Some of the cost pass throughs to them and in other cases, we're looking at ways to mitigate that obviously in our own internal operations.
Okay. Okay. Thank you.
Keith.
It keeps the only thing I would add in terms of longer term is.
This has been and will continue to be the challenge and the opportunity for a technology services provider and finding a way to go.
<unk>.
Surface that unique balance of technology and talent to deliver business outcomes of consequence to our customers. So as we continue to evolve the mix of services that we're providing to our clients. There is an area of opportunity for <unk> to mitigate some of the wage inflation implications.
The current and prospective market that we anticipate will continue as Vanessa I think rightly just just highlighted.
I've heard some folks hey, let's get the March and then everything is going to normalize and others thing who knows when.
When the labor market starts to.
Stabilize for lack of a better word and I'm not sure exactly when this is going to happen, but I do know that it is the ongoing responsibility of our leadership community.
A way to mitigate these inexorable inflationary cost in our business.
So I think talented people have a legitimate expectation of being well rewarded and rewarded more as they become more tenured and capable of contributing more value to the business. It's our responsibility to be able to do that and so a combination of working with customers that recognize the value of what we're providing to them and are willing.
Pay appropriately for that and then in conjunction with that leveraging this technology capability to complement to support these talented team members to assist them in being more productive.
To deliver more value such that in return our customers are willing to pay enough to cover.
Cost inflation in totality and for <unk> to continue to derive sort of a healthy margin.
I think there tends to be.
Preoccupation, perhaps in the near term around <unk>.
Top line revenue growth, but I can tell you my personal bias in our heritage from tell US revenue is vanity and profit is sanity.
And in the fullness of time.
We're generating profitable revenues.
Delivering meaningful free cash flow growth that can ensure that we can service our debt.
To access the markets appropriately to take advantage of M&A activity to complement our growth extend our reach so that we have more available to share with our customers over time.
That will prove in the in the <unk>.
Near mid and long term to be the more prudent sustainable approach to running the business.
<unk>.
As here already.
I think most people are anticipating that interest rates are going to start to climb in the not too distant future.
Cost of capital is going to start to change.
I think those of us that have the requisite discipline and focus on profit and free cash will be rewarded appropriately. So as I said before finding that elusive balance between top line revenue growth of consequence, and I believe we are already there given our size and scale together with focus on profitability and free cash.
That is the secret sauce for sustained success in my view.
Alright, Thanks, Jeff and Vanessa.
Thanks Keith.
Thank you. Our next question comes from the line of Jason Kupferberg from Bank of America. Your question. Please.
Yes. Thanks, I just wanted to ask a follow up also on the people front, just starting with the hiring piece. It sounds like hiring were strong in the quarter can you talk about what kind of experience level that the new hires were concentrated in and any other color around the hiring next and then anything you can share around.
Larry attrition.
Where does that go in right now Directionally what are you expecting there in the in the near term.
Thanks, Jason So as you know we have not yet started to provide detailed attrition data and.
I'm not sure where it will land on that for next year I'll leave it to Vanessa.
To comment.
In terms of the talent level.
Vanessa highlighted we grew across all aspects of our business Tech and games E Commerce and Fintech until the skills continue to be.
University graduate level. This is a technology savvy.
Folks that are capable of contributing meaningfully to the digital economy.
So these are expensive resources for the most part and as we've just discussed and as Youre hearing reading seeing across our peer group.
They are in high demand everywhere because there is just such a recognition of the criticality of digital transformation virtualization automation.
So we have to continue to fish and the same pond with all the rest of these folks and as I mentioned in my earlier comments I believe the reason why we are continuing to.
Our fair share of that talent to this platform because of our unique and carrying culture being a destination of choice for talent based on respectful workplace and inspiring workspaces and benefits programs that are focused not just on the team members, but their families including their parents. The list goes on and on and on.
I think.
What we saw this quarter in terms of attrition just directionally not surprisingly certainly higher than this time last year is still in the zenith of the pandemic not meaningfully higher than this time in 2019.
Which I think is a good sign because of the fact that.
Most would agree that the labor market is certainly more competitive this time 2021 than it was this time 2019, so that we're not hugely inflated on attrition is that two year over year profile is.
Again, a source of comfort for my leadership team at <unk>.
The reality is this is not going to get easier. This is going to get harder everyday and so again the responsibility we have as they continue to find ways to mitigate those challenges. It's not just attracting our fair share of talent to the platform. At first instance, as you say on attrition, it's retaining them and finding a way to retain them it doesn't break the bank.
You start inflating your cost structure on a onetime basis, and then there's a bit of a potential floodgates argument and so again, that's the challenge is to balance those those dynamics in the fullness of time, So we continue to attract and retain and engage the right talent at the right levels.
And continue to deliver on our promises to our shareholder and stakeholder to like in terms of growth and profitability.
Thanks, Jeff I appreciate that.
My pleasure.
Thank you. Our next question comes from line of Richard Safe.
Thank you.
Your question please.
Yes. Thanks.
These inflation questions I have.
Longer term view like you've made these acquisitions as you look out let's say two three years from now how many points do you think you can pick up from let's say deploying technology.
To sort of augment the workforce.
Well good question Richard.
Based on history I think it's.
Fair to say that there is.
Several hundred bps of efficiency that are available to us through automation and process efficiency.
We've had every single year of our existence, we set targets for ourselves in terms of efficiency gain savings productivity improvements.
And it is the collective responsibility as a leadership community across Telus international to realize those efficiencies. So it's not just our operations teams and have to go and find ways to do more with less but our HR team. Similarly sold. So for example, you know of.
The start of the quarantine orders in the pandemic, we were able to successfully virtualized, our recruiting process a 100% so literally in less than a 120 hours. We can go from reviewing receipt of a resume.
To onboarding that individual like in less than three days.
And this is the case.
Scale.
Process that is hyper hyper efficient to now off the back of we employing our own AI to do the first line of evaluation on these hundreds of thousands of unsolicited resumes that we receive and meaningfully improves our cost structure in our ability to get to the right talent match to the right skill set required.
<unk> for the the customer we want to serve so finances equally responsible for helping to do.
Efficiency projects, leveraging tools and technology. There is no part of our business. It is viewed from these go yet.
And so prospectively again, whether it's these AI informed capabilities.
More automation more broadly I mean, we probably have as many bots deployed inside Telus international as we have on behalf of our customers.
New joiners when they join our no longer responded to in terms of their inquiries how do I Register for my benefit when we might pay first payroll run be that's all automated now for us are meaningfully improves the pace and progress productivity and mitigate the cost of historically having to address those.
These issues manually.
Going forward I think we will continue to be looking for that same level of cost take out if you will in order to be able to mitigate these traditional other labor inflation impacts.
Okay, great. Thank you.
Pleasure.
Thank you. Our next question comes from the line of Daniel Chan from TD Securities. Your question. Please.
Hi, Good morning can you talk to the mix of business in the pipeline, whether youre seeing more content moderation data data annotation customer experience, especially with the changing market backdrop.
Kris and criticism of social networks, and maybe as a follow on what is the impact on margins as that pipeline mix converts to revenue. Thank you.
Thanks, Dan.
So we are absolutely seeing continued strong demand for content moderation in particular and I think.
Not surprisingly right I mean, I forget the last statistic I saw it looks like two and a half quintillion bytes of data being produced daily around the world now and.
So content moderation is and you've heard me say before not just for our social media clients and moderating.
Yes.
Objectionable content write content moderation as anything and everything on the web in terms of helping to ensure a more predictable reliable transaction between buyer and seller.
And so today, we are already seeing fantastic growth in our content moderation practice post speculatively. Our expectation is that we'll continue certainly for the next two to three years and longer still I think the.
The news that talks about the <unk>.
Tinsley evolving regulatory landscape.
Is only a net positive for us because that increased complexity means not just the social media giants, but everybody needs to have a higher level of sensitivity to the demands the expectations that our.
Our politicians or regulators our communities have.
How these platforms how these ecosystems operate safely predictably reliably and that means they need to work with experts like us.
Have both the experience expertise and scale and global footprint to be able to support those ever.