Q3 2022 Telus International Cda Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good morning, ladies and gentlemen, and welcome to the Telus International third quarter 2022, 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 background noise. After the Speakers' remarks, there will be a question and answer period, if you'd like to ask.
Good question. During this time, please press star one one on your telephone keypad as a reminder, today's program is being recorded.
I'd now like to introduce Jason Meyer Senior Director Investor Relations and Telus Treasurer International Mr. Meyer you may begin your call.
Thank you Jonathan.
Everyone. Thank you for joining us today for Telus International Q3, 2022 Investor call.
Our call today are John Buran, President and Chief Executive Officer, and Vanessa <unk>, our Chief Financial Officer.
As usual, we will begin with some prepared remarks, where Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa who will provide some key financial highlights.
We will then open the line to questions from Prequalified analysts before turning the call back to Jeff for his closing remarks.
Before we begin 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 web site at Telus International Dot Com flashing back here.
The statements made during this call may be forward looking in nature, including all comments, reflecting expectations assumptions or beliefs about future events or performance that do not relate solely to historical periods. These.
These forward looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projection.
We assume no obligation to update any forward looking statements.
Jacqueline 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 issued this morning, and regulatory filings available on SEDAR and Edgar.
I would also like to remind everyone that all financial measures were referencing on this call and in our disclosure are in U S dollars.
Defied 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 Jarrett.
Thank you, Jason and good morning, everyone and thank you for joining US today, it's my pleasure to be speaking with you today, along with Vanessa Lai from our Telus International El Salvador site, we're here to join more than a thousand Ti team members clients and other local stakeholder that of Telus International days of giving volunteer event.
Together, we're kicking off a massive rebuilding project to restore a child development center run by the global nonprofit organization Sos Children's village. This is on the heels of a terrific event in Guatemala City, just a few days ago, where our team finished building a school or <unk> in Guatemala that will benefit more than 2000.
I'll use this opportunity to once again, thank our team members for their passion dedication and hard work and organizing these meaningful and vital events in the regions, where we operate.
Now moving onto our financial and operating results reported earlier. This morning for the third quarter of 2020 to tell US International delivered another 11% year over year increase in revenue or 16% on a constant currency basis, a solid result, given the prolonged geopolitical uncertainties and macroeconomic challenges we continue to operate.
And then.
With a potential global recession looming our retention efforts have remained on the factors within our business that we can control in this regard our teams ongoing diligence and harvesting efficiencies and productivity in our operations helped to deliver strong double digit profitability growth in Q3 with adjusted EBITDA up 15.
Year over year, and an adjusted EBITDA margin of 25, 7%.
Moreover, Ti has continued to successfully deliver robust free cash flow up 56% year over year, enabling our continued rapid deleveraging as we've shared in past quarters Ti partners with more than 600 clients globally, including many tech forward enterprises and digital Disruptors.
We benefited from the tailwind of their growth over the years, which we've helped enable more specifically among our key verticals clients in our tech and games E Commerce, and Fintech sectors accounted for nearly 60% of our total revenue.
While performance within these sectors has been mixed there is no doubt that <unk> been under considerable pressure of late is the same inflationary pressures and fears that businesses are facing have been increasingly impacting their own customers purchasing behaviors. This in turn has further compounded challenges to our clients' revenue growth, which is being reflected.
Through the Q3 earnings cycle with many reporting lower than expected results and calling down their expectations for future growth.
While concerns about a potential recession, we're starting to build last quarter, we did not anticipate the magnitude and the rapidity of the impact to our clients, especially since we engage in regular joined forecasting and capacity planning with them. These joint forecast are typically quite reliable so given what we now see we have accordingly, adjusted our own.
<unk> forecasted expectations for the next quarter, we view this as a short term headwind that will continue to successfully navigate through our demonstrated ability to focus on disciplined cost management to help us through these near term exogenous impacts on a longer term basis. There are several significant factors in our favor.
Although our cooling economy, an unchecked inflation naturally triggers companies to protect their earnings by freezing budgets spending many are doing so to meet earnings expectations in the very short term once the proverbial dust settles in this regard we anticipate that these companies will undoubtedly turned back to longer term planning and <unk>.
<unk> to sustainably manage their cost profile, which typically includes an increase in outsourcing activity to improve the effectiveness and efficiency of their operations.
Is poised to win in this environment with our ability to partner with our clients to streamline optimize and modernize their processes to enable scalable digital solutions. Additionally, the trend towards vendor consolidation is gaining traction as more companies are looking to create trusted and strategic relationships with our suppliers.
To drive long term benefits of digital transformation, we believe our integrated end to end digital capabilities make Ti a one stop shop solutions provider, giving us a significant edge in the market. While also opening the door for us to cross sell complementary services that further support our clients' digital transformations.
The projected growth of the global digital transformation market is expected to continue to expand as businesses across all industries streamline operations and amplify workforces through automation migration of applications to the cloud modernization of products services and systems with AI and delivering differentiated customer experiences.
That are seamless personalized and secure Ti is very well positioned to be the net beneficiary here as well given we can compete successfully with a rather diverse set of industry players across sectors, including globally diversified it consulting companies digital transformation providers CX players and single threaded data.
Annotation companies our agreement to acquire a willow tree only further amplifies <unk> unique value proposition in this regard unlocking exciting net new areas of opportunity. The impressive end user experiences that they already design and build for clients like Anheuser Busch Inbev thoughts Manulife Marriott.
Pepsico and synchrony to name just a few will be game changers for our existing and new clients.
Turning back to our Q3 results our sales funnel as of September 30th remained robust. However in line with my prior comments, we're seeing longer than typical ramp timelines on our new projects and an existing program expansions, resulting from our clients more extensive due diligence processes in the face of the more challenging macroeconomic.
Environment.
To provide some color on Ti's new logo wins in Q3, we on boarded a new multinational banking and financial services Corporation, a leader in conversational commerce, and a leading provider of trucking roadside assistance in the United States. Each of these new clients across a diverse mix of industries rely heavily upon digital solutions to serve their customers.
<unk> enable their businesses and generate incremental revenue and Ti is delivering the solutions that they need to level up their businesses within our existing client base Q3 highlights include winning incremental business with an online game platform and creation system. This allowed us to.
To expand our service volumes in a specific geography, notably by replacing a vendor that couldnt match <unk> High service standards.
We also grew our service contract with one of North America's largest energy energy services providers are.
AI team secured more business with a German car parts maker, and we increased our share of wallet with an American luxury retailer. Furthermore, our work with the world's largest E. Commerce company continues to grow due to our exceptional track record of exceeding Kpis and the trust. We've earned over the course of this partnership in all of <unk>.
Engagements, our ultimate goal is to understand our clients' businesses their needs and challenges in order to drive value in both the near and long term with this in mind allow me to share with you. Some recent indepth examples of our team in action.
And this first case.
Excuse me Telus International implemented a comprehensive intelligent automation solution for a U S based financial services company that provides title insurance protection and professional settlement services. Our client was looking for a digital automation solution that could provide their team with 24 by seven support when responding to customer queries.
This included guiding staff to accurate knowledge based information handling refunding claim adjustments and utilizing deescalation techniques among other capabilities using our intelligence Telus International assistant platform, we implemented digital coworkers that enabled the client support team to easily access the right information stored.
And their internal knowledge base this significantly reduce search times from six minutes to 60 seconds, while decreasing the average handle time of customer inquiries by 9% overall, our solutions decreased employee effort and increased service quality and transaction efficiency as well as customer.
And employee satisfaction for this financial services client.
Since then the company's customer sat scores jumped by 40% while escalation requests or queries received by Supervisors is dropped by 80% in conjunction with the implementation of Ti Chatbot solution. The client also adopted our unique intelligent insights platform to manage all of the client's digital workforce needs.
More effectively.
And the next case study one of our clients are U S. Based wearable fitness tracker brand asked us to help streamline their operations and enhance customer experience by automating tasks that previously required extensive time and effort from employees. The specific task at hand here was to develop an efficient solution to convert more than 60.
And Salesforce data files for storage in the cloud within two weeks due to the sheer amount of manual work required by team members. This kind of project could typically take up to two months, if relying on humans alone instead Ti designed and implemented bots, specifically robotic process automation or RPE.
<unk> in total 17, RPI bought logged into our client Salesforce platform operating $24 7 million to successfully convert all files in just four days with zero defects RPI technology as an increasingly common solution available to help companies address operational inefficiencies while <unk>.
<unk>, enabling employees to focus on more creative and complex work in fact research and markets estimates that the global <unk> market will reach more than $25 billion by 2027, expanding at a compound average growth rate of approximately 41% over this period, our expertise in intelligent automation.
Favorably positions <unk> to gain share in this exciting space.
Moving onto another example, our AI data solutions team continues to work closely on new projects with one of our most tenured clients a global Tech giant whose services include online advertising cloud computing and more this client needed an experienced partner to analyze data on merchant quality and validate risk assessment.
Ratings to better understand the buyer experience and enhance the overall user experience. In addition, the client wanted to support for the detection of counterfeit items and irregular shipping practices to eliminate fraudulent merchants and protect and customers.
First Ti established a data review process to evaluate merchant performance based on a set of defined criteria <unk> experienced remote data evaluated followed this standardized process for each evaluation stage from purchase to refund.
<unk> by a strict playbook with clearly defined guidelines and criteria our crowd community inputs merchant quality data into a dashboard for evaluation.
<unk> also provides benchmark quality data to support and align merchant devaluations on a global scale to date, we've checked and identified more than 20000 fraudulent transactions generating approximately $11 million in savings. We've also flagged a further 9000 suspicious transactions within the program.
And team related news, we announced in late August the appointment of best Holland, as Telus International's Chief transformation Officer, and this newly established role Beth is leading the creation of more defined and robust processes around <unk> product and service development portfolio. He is also supporting the next evolution of how we go to Mark.
Which will enable <unk> to further capitalize on the demand for customer experienced partners with end to end digital service capabilities and expertise with more than 25 years of experience in tech that has held senior leadership roles in large and complex U S government agencies nonprofit and private sector organizations. This considerable.
She brings to Ti will help us continue to optimize and grow our company's expertise in digital automation product management and development customer insights consulting and enterprise transformation solution development and global digital services delivery.
In the third quarter, our global team members continue to receive industry recognition for their unwavering commitment to delivering the best of customer service.
<unk> group, a leading global research and advisory firm released its customer experience management peak matrix assessment for 2022, and which it ranked Ti a leader in the Americas, notably only six of 37 providers received this distinction as a result of Everest group's ranking market success.
Vision and strategy service focus and capabilities digital and technological solutions debate domain investments and client feedback Ti was also named a star performer for this peak matrix in the EMEA region.
During the Clinton Global initiative 2022 meeting in September Telus International was part of Everest group's commitment to action to grow the impact sourcing market from its current level of 350000 full time employees to half a million dollars in three years the commitment to action focuses on connecting marginalized individuals to new jobs work.
Alongside service providers governments, and non governmental organizations and collaborative efforts, which ti has been committed to since our company's inception.
In Q3, our team members around the world volunteered at many events focused on environmental stewardship over 500, Telus International team members took part in the 10th anniversary of Telus days of giving in Bulgaria, assembling 60, Beehive to house excuse me to house, $3 5 million Bes and extracting <unk>.
600 yards of honey to support 50, local beekeepers during eco Telus days of giving events. This past quarter 350 volunteers in Guatemala, and El Salvador installed 200, ecological stoves, and 200 water filters and local homes to provide cleaner air for the community and safe water supplies for more than a 1000 people in all.
August Telus International launched spectrum chapters in Guatemala, and in El Salvador Spectrum is Telus International's LGBTQ, two plus employee resource group to help encourage everyone at Ti to bring their authentic selves to work. We also recently celebrated the launch of a new connections chapter.
In Chengdu, China connections as a team member resource group with a mission to support and inspire women at Ti to pursue career excellence through networking personal and professional growth recognition and community involvement.
Before I hand off to Vanessa I would like to provide some additional context about willow tree and share two case studies for those who were perhaps unable to attend our investor webcast last week. Following our announcement founded in 2008 Willow tree is headquartered in Charlottesville, Virginia and is led by their founder and president to be.
Dangle The company operated 13 global studios across the U S and Canada, as well as in Brazil, Portugal, Spain, Poland and Romania.
There are more than 1000 highly skilled digital strategists designers engineers and project managers partner with more than 50 companies. Many of whom are listed on the Fortune 500 list on mission critical large scale initiatives delivering world class digital products that bridge, the highest quality customer experiences.
With measurable performance the.
The significant growth in our digital capabilities upon closing of the acquisition will help enable Gis mixed shift to faster growing digital services, along with improved diversification of industry verticals and service lines.
<unk> across the current M&A landscape Willow tree stands out as a unique asset in that the company has both high growth and profitable with a global scale that will support a more effective joint speed to market versus if we had made multiple smaller subscale acquisitions, and then try to stitch them altogether.
We also believe the revenue synergies ahead are significant given the very limited client overlap that would indicate.
Excuse me.
That would indicate.
Yes.
Considerable white space in terms of Ti cross selling Willow tree services to our clients and vice versa. More specifically, we have already identified multiple opportunities within our parent company tell us to further enhance and accelerate its digital transformation in.
One to elevating its optic TV offering as well as its Telus health agriculture, consumer goods and energy software as a service businesses to.
To assist in further illuminating exactly what Willow tree does I'll share a couple of high profile project examples.
Top of mind for me is the story of Pepsico and the Super Bowl over the past eight years Willow tree has become a key partner to Pepsico, helping drive pepsi's ongoing market leadership through its digital channels by leveraging their strategy research product design and custom development solutions. Among the recent initiatives Willow tree is.
Reported perhaps the most exciting is the creation of Pepsi Super Bowl 56 halftime App for 10 years now Pepsi has been the title sponsor of the Super Bowl and earlier this year. They partnered with Willow tree to help create a companion digital experience for the Super Bowl that would give consumers unprecedented access to the event the team.
<unk> and App to put Pepsi front and center on a day, where brands compete fiercely for consumer mind share in the lead up to the Super Bowl Pepsi engage fans weekly with more than 30 in app content drops ranging from artist merchandise giveaways to exclusive interactive photo filters that were built in partnership with snap.
Ah gained eight Willow tree and Pepsi launched an in App exclusive that Pepsi Ultra pass the granted fans access to a groundbreaking fully immersive second screen viewing experience effectively putting them on stage with the artists during the live performance. The Super Bowl 56 halftime show was one of the most watched halftime show.
In the events history.
So to reinsure the backend infrastructure was engineered to handle the significant load. The results were impressive 85% of users streamed the full show in the App and Pepsi was the events most talked about brand. Thanks in large part to the digital experience provided by Willow tree.
Another case that illustrates willow trees exciting capabilities comes from their seven year client partnership with Fox, which included developing a highly successful whether app described as precise personal and powerful and developed in close collaboration with the Fox team Willow trees Fox weather App shows users the world's weather and long range.
Casts with beautiful visuals in a straightforward design. Other features include live streaming and video clips of severe weather as well as widgets on user's home screens that display information like Sunrise and Sunset high and low temperatures weather warnings and peek ahead forecast when relevant users can customize their experience.
By selecting locations that matter to them like the homes of family members in other states or countries or favorite vacation spots and setting up long range forecasts are subscribing to severe weather alerts with more than 500000 downloads. The Fox weather App is the number one most downloaded whether app in the App store as you can.
Imagine given the tremendous benefits to be realized by the acquisition of a fast growing profitable scaled and scarce asset like Willow tree. It was an extremely competitive process.
All stirred by our successful M&A track record and underpinned by our infrastructure processes and unique transaction structure that will keep management motivated and focused on delivering profitable growth, we're confident in our ability to surface meaningful incremental value, including rapid deleveraging post closing.
This investment in the long term growth strategy of our business is another exciting milestone in <unk> journey, highlighting how we continue to position <unk> for profitable and sustainable growth and I look forward to updating you on additional details of the transaction post closing in early 2023, and providing progress updates in the quarters ahead.
For those of you that may have not yet had their fill of me sharing my excitement about our Willow tree acquisition. The webcast recording along with presentation slides is available for excuse me on our Investor Relations website with that I'll now invite our chief Financial Officer, Vanessa <unk> to take you through a detailed review of our financial results.
After which I'll return to answer your questions Vanessa over to you.
Thank you, Jeff and good morning, everyone. Thank you all for joining us today.
As usual in my review of financial results I will refer to some items that are non-GAAP measures.
Descriptions and a reconciliation of our GAAP to non-GAAP measures. Please see our earnings release and regulatory filings from earlier this morning.
Now, let me expand upon the components of our financial performance for the quarter.
In the third quarter, we delivered revenue of $650 million up 11% year over year on a reported basis and 16% on a constant currency basis. Despite a challenging macroeconomic environment that has impacted the velocity of spend for some of our large our clients who as Jack mentioned earlier are approaching short term spending decisions with more.
Caution due to cooling demand in their own end customer markets.
We can see this impacting many areas at the global economy with heightened uncertainty driving market volatility and near term budget adjustments as negative headlines exacerbates the art of recession.
In spite of all of that tell US International has stayed true to its strategy of focusing on profitable growth robust free cash flow generation and rapid deleveraging all of which were successfully achieved during the third quarter.
And we will continue to be of critical importance during challenging macroeconomic periods.
Looking more closely at our revenue performance across industry verticals and geographies our reported growth rates were negatively impacted by the weaker euro to U S. Dollar as previously mentioned the overall impact to our topline growth was an unfavorable 500 basis points as I speak to our vertical and geographic revenue performance I will provide constant currency.
And Terry were helpful.
Starting with revenues by vertical and the <unk>.
Third quarter, our largest vertical second games grew 15% year over year on a reported basis on a constant currency basis. This vertical grew by a very healthy 23% in the third quarter.
Our second largest client globally, a leading social media network, whose revenues fall within the second game is vertical.
Software revenues in Q3 on a reported basis, but was up 6% on a constant currency basis.
Strong double digit growth from many other notable clients in this vertical helped to moderate the impact of this one clients to still achieve 23% year over year constant currency organic growth.
And our e-commerce, and Fintech vertical revenues declined 4% on an as reported basis, but grew 8% year over year in constant currency terms.
This traditionally fast growing vertical has recently experienced moderation in the rate of growth from certain fintech clients, even though we continue to expand our share of wallet with other e-commerce clients within this vertical including the world's largest E Commerce company.
Growth in our communications and media vertical remains strong with quarterly revenues, increasing 10% year over year, driven principally by higher revenues from calix preparation our parent company.
Banking financial services and insurance <unk> continues to grow rapidly with revenues, increasing 68% year over year fueled by ongoing growth with leading institute financial institutions in North America and globally.
And finally to round out the top five verticals clients in our travel and hospitality vertical grew by 19% year over year.
And looking at our revenues by geography revenues from Europe , which comprised 34% of our overall revenues were down 9% year over year on a reported basis, while on a constant currency basis, we saw growth up 4% in Europe as that region as a whole continues to experience increased macroeconomic softness as compared as compared to other.
Regions.
Revenues in North America on the other hand, which comprised 26% of our total revenues grew by an exceptional 27% year over year, while revenues in Asia Pacific and Central America, which comprise 24% and 16% of our total revenues respectively. Each grew by a very healthy 23% year over year on an organic basis.
Moving down the income statement.
On to operating expenses.
Salaries and benefits expense in the third quarter was $346 million up 12% due to higher team member counts to support business growth and higher average employee salaries and wages, partially offset by the lower exchange rates across a variety of currencies relative to the U S. Dollar.
As a percentage of revenue salaries and benefits for the quarter was steady at 56% compared with the same quarter a year ago.
Our goods and services purchased for $111 million in the quarter, an increase of 1% as higher crowdsource contractor costs from our AI business were partially offset by spend efficiencies during Q3, and the lower average exchange rates across a variety of currencies relative to the U S. Dollar.
Share based compensation expense in the third quarter was $6 million, a decrease of $15 million or 71% year over year, primarily due to the lower average share price during the quarter tied to recent market conditions.
Acquisition integration and other charges in the third quarter were $7 million, an increase of just $1 million.
Versus the same time last year.
Our interest expense in the third quarter was also steady year over year at 10 10 million as lower average debt balances on our credit facility were offset by higher average interest rates during the period.
As interest rates have risen steadily over the course of this year. We have continued to benefit from floating to fixed rate hedges that have fixed about half of our debt at very attractive negative LIBOR levels.
Income tax expense in the third quarter was $26 million compared with $50 million in the same quarter last year at the same time, our effective tax rate decreased from 39, 5% to 36% primarily due to a decrease in non deductible items and a decrease in withholding and other taxes as a percentage of net income before taxes, partially offset by an increase in adjusted.
That's recognized in the current period for income tax of prior periods.
Looking at overall profitability, our adjusted EBITDAR was $158 million in the third quarter, our year over year increase of 15% driven by higher revenue earned from existing and new customers, partially offset by the higher salaries and goods and services purchased that I just spoke about.
Adjusted EBITDA margin in the quarter was 25, 7% expanding not only quarter over quarter, but also by a 110 basis points year over year.
The year over year expansion in margin was primarily achieved through cost containment measures in the quarter, along with certain retroactive pricing adjustments during the quarter, which helped us to maintain our best in class margins. During this volatile period.
Adjusted net income for the quarter was $87 million up 24% driven primarily by higher revenues from existing and new customers, partially offset by the higher cost I just spoke to.
And higher income tax expense on a per share basis. This translated into adjusted diluted earnings per share of the quarter of 32.
A very strong and healthy 23% year over year.
Now turning to our cash flow and balance in the third quarter, we generated free cash flow of $98 million up 56% year over year, driven by higher operating profit higher net inflows from working capital and lower share based compensation payments as a percentage of revenue.
Cash flow was $15, 9% of revenue in Q3 compared to 11, 3% in the year ago period, an increase of 460 basis points year over year.
Our capital expenditures in the quarter were $26 million, an increase of $3 million year over year, primarily attributed to facility build outs in the Philippines as we grow as we grow our business in that region and further investments into AI data solutions software platform.
Percentage of revenue our capital expenditures remained modest at around 4% of revenue.
We have also continued to reduce our leverage lowering our net debt to adjusted EBITDA leverage ratio as defined by our credit agreement to one <unk> as of September 30th if further improvement from one <unk> as of June 32022.
This improvement moves Telus international into its lowest interest cost year, which saves us on an incremental 25 basis points and interest cost prospectively.
Our total available liquidity at the end of the quarter was approximately $982 million, which includes cash on hand of $143 million and our available capacity under our revolving credit facilities of $879 million.
With a strong and healthy balance sheet and liquidity position, we continue to maintain meaningful capacity for strategic growth opportunities just like the recently announced we lost through acquisition and as we have demonstrated on a consistent basis, even during a downturn our robust free cash flow profile enables us to rapidly repay debt.
Moving on to team member counts at.
At the end of the third quarter, we had 69 69250, <unk> global team members, which was up 18% year over year and consistent with the prior quarter.
While attrition in Q3 was stable relative to last quarter, we have intentionally adjusted the pace of our new hires to align with the current outlook.
And turning to our outlook given the macroeconomic environment, we are recalibrating, our outlook to reflect softer client demand and slower sales cycles, particularly from our technology sector clients as we spoke about earlier.
We anticipate revenues in the range of $2 45 to $2 49 billion, reflecting a year over year increase of 11, 7% to 13, 5% on a reported basis and 16% to 18% on a constant currency basis.
Given the further depreciation of the euro relative to the U S. Dollar our outlook now assumes an average euro to U S. Dollar exchange rate of 98 four.
For Q4.
Given these exogenous factors, we are focusing on what we can control in terms of internal efficiencies and driving cost optimization initiatives.
As a result, we are increasing our adjusted EBITDA margin to be in the range of 24, 4% to 24, 6%, reflecting our commitment to not just revenue growth at all costs by profitable revenue growth at best in class margins.
We expect to deliver adjusted diluted earnings per share in the range of $1 18 to $1 23, reflecting growth of 18% to 23% over last year.
This assumes a weighted average diluted share count of approximately $270 million in each of the quarters.
Similar to Jeff I'd like to conclude my remarks, with some commentary on our agreement to acquire <unk> military.
As you may have heard on our Investor call last week, not many companies were able to grow revenues in the first half of this year by 48%, while driving healthy profitability at approximately 20% adjusted EBITDA margin along with robust free cash flows.
Well, let's just focus on high value digital engagement as evidenced by their leading annualized revenue per team member of approximately $190000 puts them significantly ahead of peers, such as <unk> and <unk> and even accenture.
While we expect this transaction to close early in 2023 integration planning has already begun.
This early planning approach has served us very well in our history and given will achieve will be our 10th acquisition. We have an established track record of successful acquisitions and corresponding integrations.
In terms of deal structure.
Any of our previous acquisitions, we've thoughtfully considered ways in which we'll see management will be incentive to ensure alignment of financial and operating goals.
The equity rollover a commitment that is in place as part of the deal consideration that we spoke about last week, we enforces that will achieve managements have significant skin in the game to continue to grow the business profitably together with Ti.
And as mentioned last week, we have secured committed financing for this transaction, reflecting an upsizing of our credit facility of $2 billion and extending it for a new five year term.
While our leverage at close will be around three <unk> well within our steady state leverage ratio range, we expect a robust cash flow cash flow generating capacity capabilities of both Ti Anguilla tree will allow for continued rapid deleveraging.
With that let's move on to questions I'll kindly ask you to please keep it to one question at a time, so that everyone can participate Jonathan now over to you.
Thank you Ms <unk>.
Ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone and once again, we kindly ask you to please limit yourself to one question you may get back in the queue as time allows.
And our first question comes from the line of Ramsey El <unk> from Barclays. Your question. Please.
Thanks, so much for taking my questions. This morning.
It feels like a very uneven demand environment across your verticals with pretty pretty localized weakness I guess in E Commerce and Fintech.
I guess can you provide some more color on sort of what's going on in that sector and whether you feel good that some of the diversity diversification in your business might shield you from similar trends evolving in these other these other verticals.
Okay.
Hey, Ramsey nice to hear your voice once more thanks for the question, Yes, I think you're spot on I think there is a high degree of heterogeneity within that e-commerce and fintech vertical for us.
Some of those clients are crypto centric businesses, and I think you've seen and heard from others.
That sector has been candidly ravaged.
And as a consequence, it has had an adverse impact in part on US Thankfully, we didn't have significant exposure there, but not meaningless.
Conversely, we continue to support a fairly robust.
And as I say heterogeneous mix of e-commerce, fintech providers and in totality.
We're cautiously optimistic that we're going to continue to see.
Meaningful growth as Vanessa shared I think on a constant currency basis still growth in that group.
Where it had been historically, but in the fullness of time, we continue to be optimistic.
And thankfully, we're not as I said overexposed to the crypto sub sector. If you will.
Great. Thanks, so much great to be diversified at this point I appreciate your interest today.
Indeed, indeed, thank you.
Thank you one moment for our next question and.
And our next question comes from the line of Tien Tsin Huang from Jpmorgan. Your question. Please.
Alright, Thanks, gentlemen, I wanted to maybe ask you to elaborate on the cost containment.
That youre doing right now can you give us a little bit more detail or examples of that and how much more.
Thank you.
You bet.
The volume started to slow.
More than you're anticipating now.
Hi, Tien tsin.
I'll I'll take your question and maybe Jeff feel free to top up.
So we're not really doing anything unusual here from a cost containment perspective, I think you and hopefully the rest of the audience recognize that Telus International has always been.
Very focused on ensuring that the cost profile.
Highly aligned to the revenue growth profile and we've always always had pretty strong operating leverage within our financial model as well.
Looking at Q3 has unfold that as Jack mentioned earlier, we've always engaged in joint forecasting with these clients and as we did our forecast with these clients last quarter.
The strength of those those forecasts and the historical accuracy of those forecast that we put our guidance together as the quarter unfolded and we started to see signs of softness within those clients themselves and we started to see that in our own business clearly that meant that we needed to look at our cost profile and with.
With a particular focus around third party spending.
In terms of internal team member counts you May have heard me say my prepared remarks, we're not reducing our head our internal team member counts. However, the pace of hiring we have realigned to meet what we think are now.
Expect that growth profile for at least the near term so not cutting back on internal head counts per se our team member count, but certainly looking at the pace of hires so ensure that we're not.
Aggressively hiring relative to the current market environment and then the rest of the cost containment is really around third party spend renegotiating some contracts and ensuring that we're seeing.
Efficiencies within that start party.
Cost bucket.
Only thing I'd add Tien tsin is on the offset if you will focusing on securing price increases as pervasive as possible to provide us with the additional headroom we need.
<unk>.
In order to try and continue to balance the business as we've discussed many times I think youll recall during our IPO Road show, you and I specifically talked about.
To offset the potential toggle of revenue growth versus profitability.
And I said, then and continue to believe now that the two I don't want to be focused on profitable growth not just growth for the sake of growth.
So in this particularly pressurized environment.
<unk> disciplined in that regard.
<unk> is continuing to serve as well and as long as we continue to remain in the double digit topline revenue growth ZIP code, which we are 16% on a constant currency basis and continue to deliver meaningful profitable growth again, 16% EBITDA growth I feel like we are appropriately managing those.
What competing considerations on occasion, as we weather through what I anticipate will be a three six perhaps nine months.
Continued challenge.
Sure. Thank you both.
But the homebuilding.
Okay.
Thank you one moment for our next question.
And our next question comes from the line of Stephanie price from CIBC. Your question. Please.
Hi, good morning.
Hoping you can talk a little bit about the mix of growth between new wins versus existing customer expansion. Just wondering if it's changed at all given given the current environment here.
Hey, Stephanie it's Vanessa here I'll start and Jeff Please feel free to top up.
The mix of new versus existing I wouldn't suggest has changed meaningfully in terms of the recognized revenue in the quarter.
I think so as you kind of look at that.
As you look at our overall revenue profile about 10% of the revenue in any given quarter will be new client contribution. So to speak is that tends to take a couple of quarters to really ramp up so in the immediate quarter the revenue.
Contribution doesn't tend to be as meaningful but it is over the course of time as those new clients since a buildup in ramp up over time.
I don't think the profile is that different when you look at the recognize revenue in terms of new wins, I think going back to Jeff's earlier point, we are seeing sort of a longer sales cycle. So the funnel continues to be very very robust and thats a funnel of not only growth from existing clients, but also growth from new clients, that's a robust funnel, but particularly as it pertains to new clients.
We are seeing elongated sales cycles and longer decision time frame.
And that's.
Frankly, partly what we just.
Okay.
The outlook that we put together this morning.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of David <unk> from Scotia Bank. Your question. Please.
Good morning, guys, just talking about a decline in demand I wanted to understand what's the impact on decline demand more so on the legacy business like the BPL CX business or did you see a material impact on the digital side as well and adding to that how do you I know you don't provide guidance for fiscal 2023.
How do you expect or how should we anticipate.
Michael over the next few quarters.
So let me I'll take the first half Davita and Vanessa can speak to the second half.
I'm not sure that I can discern a meaningful difference between the.
Timeliness the slowdown in the overall demand dynamics between our <unk> and <unk>.
Digital at both continue to be.
Reasonably strong I think.
The real challenge for US has been the slowdown in decision, making so by way of a specific example, we generally were seeing.
Net newer growth to existing opportunities that would come to our attention through either RFP or.
Direct bid opportunities, we would enter into negotiations discussions and a decision will be taken by the client and we'd be off to the races between 369 months and on renewals considerably less than that again across both Dcs.
<unk> and digital it.
And what we've been seeing now over the last couple of months has been continued discussion and opportunities around demand. So we're not seeing a lessening in the overall size of our funnel, but customers seem to be taking a lot longer to pull the trigger on finally say, okay, let's get going and signing off on this.
Statement of work and or a new Master services agreement.
This is what is I guess.
Tempering, our enthusiasm in the near term, but continuing to provide us confidence in the longer term because no. One is saying we simply don't see a path to continuing with this planned project transformation or otherwise what we're seeing is we need to add.
Slow things down because of the uncertainty of what's going to happen with our own customer consumer demand in the near term and so we just want to proceed a little bit more cautiously.
In terms of the 'twenty three outlook I'll leave that to my colleague so.
Thanks for your question, Dave, Yes, so we're not providing 2020 guidance this morning.
But I think we can all agreed that.
Even think about sort of estimations of GDP growth rates are lower today than they were even six months ago or frankly, even three months ago.
And I think we can also probably agree that the.
The headwinds the macro headwinds that we're all talking about not just this morning, but for the last several weeks are probably not going to end. After this earnings call in today.
So I think based on that while we're not giving 2023 guidance with it probably assume.
That's at the macro softness we have today is probably going to continue for a little while longer.
But consistent with our past practice, we will provide guidance for 2023 concurrent with our Q4 results, which will be in early February .
Thanks, Jeff Mueller muscle.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Jesse Wilson from William Blair. Your question. Please.
Alright. Thank you for taking my questions. This is Jesse on for Maggie So Jeff you provided some examples of clear cost saving solutions in.
Intelligent automation in.
The AI data solutions offering as well are you seeing longer sales cycles, even for these types of work.
Yes.
Just a few.
Like everybody is moving with a degree of caution right now just because of the continued uncertainty.
I think the looming recession is euphemistic.
<unk> I keep hearing and I think others are recognizing suggesting it's not looming any longer it's here and as a consequence folks are just being a lot more.
Cautious taking a lot longer in terms of their own diligence to validate that they really need to move forward with these expenditures at this particular juncture and as I said, just a moment ago in response to <unk> question, it's not like I'm hearing anyone say we're just.
Back burner ring this <unk>.
Project the need for this particular.
Project their evolution in our own capability to better serve our clients and do more with less theyre, just taking longer to get on with it which is as you can imagine it's frustrating and disappointing.
But we obviously want to continue to be ready to go and engaging with these clients on a regular basis. So that when they are finally comfortable to move we're right there.
Understood. Thank you.
Okay.
One moment for our next question.
And our next question comes from the line of Keith Bachman from BMO. Your question. Please.
Hey, good morning team.
Well.
Jeff I wanted to ask you about the kind of sensitivity to the economy and I'll phrase it.
The context of <unk>.
Thank you said Europe constant currency was.
Growth was much lower it sounded like 4%.
Yes.
I missed that number.
Regardless Europe economy.
Economy is worse in the U S and your growth there was worse than the weighted average and I'm just trying to understand.
How we should be thinking about the U S seems to be tilting as you just said into the recession.
How we should be thinking about the economic sensitivity you actually produce what I thought was a pretty good quarter here all around but is the U S.
In particular growth weekends, and perhaps the rest of the world.
I'm just trying to tie that with the growth that youre seeing now in Europe , which is significantly lower than what you are experiencing here in Asia, how we should be trying to tie all those threads together.
Al.
The risk so to speak in 2023.
Thanks, Keith good question.
<unk>.
It feels to me to us right now that.
There is obviously a.
A bifurcated experience between Europe , and North America as reflected in the results we just shared.
Our outlook for balance of year anticipate sort of a continuation across that trend line to.
And at this point, we're not yet in a position to offer guidance for 2023.
Much as I'm inclined to want to try and say something about it to the best I'm allowed to offer.
<unk>.
I continue to be quite bullish on.
The local economy here and in managing to deliver to support our ability to deliver meaningful double digit growth.
<unk>.
I think in part it's a.
A consequence of where businesses seem to be in their own lifecycle in their own appetite to embrace digital transformation.
Yeah.
I have seen and continue to see that our north American customers prospective and existing are just further ahead in leveraging these capabilities at scale and <unk>.
Certainly the the recession and the fears of perhaps a deeper broader one persist for now.
Think there is a fairly pervasive recognition that digital transformation is actually a potential panacea for that in part really enabling businesses do more with less.
And I think historically there was this perception that these were mutually exclusive outcomes either.
Spend more in order to get more or you spent less and you've got less than what I think is so unique and special about digital transformation as you can actually spend less and get more and just by way of a specific example, some of the work that I highlighted in the case studies there by leveraging a box solution by deploying self.
And automation capabilities, you're actually spending less on the support and Youre getting significantly improved outcomes, whether it's shorter time to serve and higher customer satisfaction and higher employee satisfaction scores and I think our opportunity in north <unk>.
Erica continues to be a little bit more.
Scale and robust in the near term so I don't think even if the economy worsens in North America that all of a sudden our growth from that region goes to 4% I think we stay in the double digits Zip code.
Perfect. Thank you Jeff.
Thanks Pete.
For our next question.
And our next question comes from the line of Dan Perlin from RBC. Your question. Please.
Thanks, Good morning, I had a question about.
Really the overall cost structure and kind of the current environment and then maybe even the go forward to the extent we're in a recession.
So rather than kind of ask the question about like where can you pull the toggles My question is.
Are you.
In an environment, where the rate of change of your input costs are probably going up faster than your ability to pass that through like how long do you think youre going to be able to sustain a positive margin trajectory.
And my sense is and we've heard this from other companies companies that have longer term contracts with CPI escalators. I mean, you can kind of push some costs through but it seems like the near term input costs are so much greater.
Yeah.
Thanks, Tom I'll start and jackpot, certainly you cannot you can top up.
This has been a question that's been asked of Telus International It seems like Forever and then it just keep getting asked every quarter, but every quarter. Our margins we demonstrate that we're actually able to maintain our margins. So I think we'd start up demonstrated this through to actual experience and not just explanations, but really to come back to your question.
Youre right. So input costs are rising fast we've spent a lot of time on prior calls talking about wage inflation, specifically, yes. There is obviously other forms of inflation, but in our case wage inflation has been that the biggest element, but we successfully managed through the wage inflation, we built that into our initial guidance of approximately 24% and now youre seeing an increase in our in our profitability yield in the guidance.
A 24, 4% and 24, 6% so I think it's been sustainable there.
Keith and and we're approaching that across many different fronts.
It is passing on the increased inflation to customers, but youre right theres a limit to that but we actually have had success in passing on increased system to many of our customers and you can see that reflected in our margin profile, but we also which is something we've always historically done managing.
Efficiencies within our own business.
And that's not necessarily new <unk>, we've always had fairly strong operating leverage and we'll continue to do so prospectively. So as we look at overall cost profile management, we're not doing anything unsustainable we're not.
There's a lot of headlines around companies out there, reducing workforce by 5%, 10% and sometimes even greater amounts of <unk>.
But youre not going to see those kinds of headlines about Telus international that's not how we're sustaining our profitability, but we are making sure that we are being increasingly efficient just given the challenges that you just mentioned and I feel pretty good I mean to come out with a higher profitability yields in this kind of environment I think speaks well for execution.
Yes, no I agree I thought the margin targets, which were quite impressive in the current environment. I was just trying to think about to the extent that that escalates against you.
Okay. Thanks.
We feel pretty good about what's what we've put together for 2022.
Clearly I don't think.
I'm not inclined to speak beyond 2022 at this particular juncture until we give our formal guidance.
But again I think what we've done well in the past, we will continue to do well prospectively and as inflation, whether inflation structure get better or worse will again continue to make sure that we pass on whatever price increases we're able to you again, we've seen success, so far and we'll continue to do that prospectively and we will continue to manage our cost structure in meaningful ways that are.
Not essentially detrimental to the long term growth trajectory of the organization and the once off of their Dan would be the continued improvement in the mix shift as we continue to progress.
The proportion of our revenues that are derived from less labor intensive delivery models that creates headroom that provides a bit of relief for us in terms of managing that inexorable wage inflation dynamics at all are we in the technology services sector are forced to deal with on a regular base.
<unk>.
I think it's a fair question, but.
I have to say when I hear and read some of your peers continue to question our ability to sustain these margins when we've been doing so quarter in and quarter out not just throughout our tenure as a public issuer, but is one we will have seen in the three year historical financials, we filed as part of our IPO and although one wouldn't have had visibility.
Two it for every year of our existence prior there too.
It starts to weigh on me when folks continue to question our ability to manage this business at these margin levels for the longer term when not only have we demonstrated we're doing so with the level. We're at is best in class across our entire peer group.
Okay understood. Thank you.
Thanks, Dan.
Thank you one moment for our next question and our next question comes from the line of Richard <unk> from National Bank. Your question. Please.
Yes. Thank you I had a question on Willow tree, how would you compare willow tree to your other acquisitions.
Say answer easier or harder to integrate on your model relative to the other names in I guess in a related question I'm just kind of curious like how many willow tree type companies are there out there in the market today.
Hey, Richard good questions.
So on the latter one I would suggest there are no other targets out there like Willow tree and as you might expect we have been spending a great deal of time and effort in our corporate development function evaluating potential candidates for quite some time. This transaction I would suggest is squarely with.
In the crosshairs.
Vanessa and I have been talking about frankly, since our IPO Road show and even more so over the last year.
This hopefully didn't come as a surprise to anybody in terms of the capabilities that Willow tree brings to Telus international and providing us with expertise and scale, particularly around the design and build components of the design build delivery ecosystem in which we operate.
In terms of the anticipated integration roadmap relative to other transactions.
I don't want to be.
Dismissive in terms of the complexity I think integration is always where the rubber hits the road on making acquisitions.
Accretive or not and delivering incremental shareholder value or not.
And as Vanessa said, we've already spent a great deal of time and effort first independently based on available information.
Mapping out how we think to best realize and leverage the synergy potential through the combination and then post execution of the agreement pre closing working as collaboratively as we can with the Willow tree leadership community.
Again subject to limitations as a result of awaiting antitrust approval.
To get going here, but I think this one is going to be pretty darn exciting only because.
At the headline what attracted us to this business beyond the stellar revenue growth rate profitability profile and scale was the people in that business, the cultural alignment and I know, sometimes folks in this industry and by that I mean financial.
Services financial analysts and evaluation think about culture is one of those fluffy touchy fueled good soundbites, but I can tell you from experience it matters a great deal if the people in the business that you are looking to combined with your own approach their team members their customers their stakeholders differently then.
You do it in this case <unk> and his leadership community I, certainly felt like a strong kinship right out of the gate they approach those.
Assets in their business no differently than we do and so I'm anticipating that we're going to get along like a house on fire I think the opportunity to work collaboratively to sell our services to their clients their clients excuse me their services to our clients I mean goodness, even during the confirmatory customer.
<unk> conversations.
<unk> has hosted with me some.
His customers when hearing more about <unk> trust and safety content moderation capabilities, which willow tree doesn't have he was saying well as soon as you guys closed you've got to come back and see me and talk about how we can access some of that stuff. So I think we're feeling pretty confident about the opportunity on the integration front, perhaps even more so for example than we.
Did on the Lionbridge deal previously, which as Youll remember was a carve out which had a whole bunch of incremental complexities that this one doesn't have.
Okay. Good stuff. Thanks.
Thanks for that.
Thanks Richard.
Thank you and one moment for our next question.
And our next question comes from the line of Dan Daniel Chan from TD Securities. Your question. Please.
Hey, Good morning, No question on will the tree basically some exposure to the consumer goods segment, just given some of the examples you provided given the current macro backdrop and we've seen some weakness in consumer retail how did you get comfort around the exposure in your due diligence and how did the macro dynamics impact how you thought about the timing to execute that deal.
Thanks, Daniela another good question.
Think consumer goods is an exciting area of opportunity and the challenges that that sector and others are having right now as I mentioned at least.
Inferential in my comments earlier.
Think as they look to manage through these current challenging times finding ways to leverage automation through technology and innovation is going to be a key component of their survival and success.
We believe there is going to continue to be an embracing of the capabilities that willow tree has.
As I think you know our sister organization tell us AG and consumer goods gives us some pretty meaningful visibility into opportunities for synergy realization and as you might expect as part of this early integration planning.
By Willow tree colleagues are already speaking directly with Mitel Us AG and Telus health colleagues for example about areas of opportunity for collaboration. So obviously, we're mindful of these macro dynamics, but near term and through the longer term, we think there's lots and lots of exciting opportunities to really exploit.
The willow tree expertise and capabilities to help these clients that continue to win.
Thank you.
Final question, one moment for our final question.
Our final question for today comes from the line of Ryan Potter from CIBC. Your question. Please.
Hey, Thanks for taking my question.
So the outlook implies a pretty wide range for Q2.
<unk>, 7%, 60% accounts currency growth.
Are there any reasons behind this visibility reduced at all given the macro are you, giving yourselves a buffer for specific clients and also could you broadly discuss your overall budgeting outlook formation process.
So hey, Ryan I recognized noticed that.
So Jessica from CIBC, but we know that yet.
<unk>.
But.
Absolutely. So we do have a range.
Clearly I think we are in some fairly uncertain times right. So the range is really just reflecting the level of uncertainty, but I know I know very well that you guys since you up.
Typically convert to around the midpoint of the range.
But we do know that there is a level of uncertainty.
FX continues to be very very volatile just as one example in every quarter, we just down the FX and it just gets worse right. So that's just one example of the volatility not to mention some of our very large technology clients, who continue to be under some of their own earnings pressures.
So for those reasons have given ourselves a bit of a cushion there in the implied Q4 guide.
That being said, it's still a fairly healthy year over year growth on a constant currency perspective and from a full year basis again, not just looking at Q4, specifically, but looking at the full year again that puts us firmly in the 16% to 18% constant currency revenue growth, which again, we think it's a fairly impressive number given that the times that we're in especially when you think about the margin profile that goes along.
With it.
In terms of budgeting and what's informing sort of our forward thinking on that.
I guess similar to <unk> question earlier, you know more to come there were clearly at this point in time in our in our budgeting cycle as are many of our clients.
But as Jeff mentioned earlier, we there's two things right. There is what's happening in the near term right now and then there is frankly, the long term growth trajectory of the organization and also the long term growth trajectory of that of the segments that we serve.
And the verticals that we serve so we're continuing to be bullish on a long term basis and thats really what we want to make sure that.
We that's the parting message I really don't think that we're going to see a pulling back on a long term basis off of what we've seen historically in terms of growth.
Content moderation AI digital it and frankly, even see actually I don't think that those are going to slow down on a long term basis, but yes in the near term we need to factor in what's happening today and that's what you've seen in our guidance that will come back and talk more about 2023 concurrent with our Q4 earnings.
Great. Thanks, Ken.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Mr. Buran for any further remarks.
Thanks, Jonathan and thank you all for your questions as always we appreciate your taking the time to join us for our quarterly Investor calls.
Since our inception in 2005 Ti has demonstrated its resilience in the face of various challenges extracting tuition value along the way that is served to guide our company's differentiated approach to service quality excellence, we believe that the ongoing necessity for digital transformation continues to create.
Significant long term opportunities for Ti and we remain well positioned to capture our fair share. Thanks to our 70000 highly engaged team members and then AI community of more than 1 million talented members. Our diverse set of end to end digital capabilities and new economy services are globally scaled.
Agile agile delivery model, our relentless focus on efficiency and productivity within our operations and our caring culture Thats brought to life through volunteer initiatives like our Telus days of giving here in Central America to name, but a few of these foundational elements of our business will also help us continue to execute upon our strategy.
<unk> of profitable growth driving robust cash flow complemented by thoughtful M&A. Many of you may have heard me share this sentiment about our company and other occasions, but I believe it bears repeating especially in this current challenging economic cycle within which we're operating.
<unk> unique combination of people culture and capabilities and the equal emphasis we place on what we do and how we do it will continue to support our ability to attract and retain talent.
Deliver best in class client outcomes and ultimately win in the marketplace and I believe we've only yet just scratched the surface of the possibilities ahead of US with this thought in mind, Vanessa and I have a very busy conference agenda lined up from now until early December where we hope to connect with many of you in person otherwise our next quarterly <unk>.
Mr Call will take place in February of 2023 and in the meantime, please keep yourselves and loved ones safe. Thank you again and goodbye.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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