Q2 2023 TELUS International (Cda) Inc Earnings Call
Because there will be a question and.
Answer period, if you'd like to ask that question at this time. Please press star one one on your telephone if you'd like to remove yourself from the queue simply press Star One again as a reminder, today's program is being recorded I'd now like to introduce your host for today's program, Mr. Jason Lee head of Investor Relations and Treasurer.
Telus International Mr. Martin you may begin the call.
Thank you Jonathan Good morning, everyone and thank you for joining us today for Telus International's Q2, 2023 investor call.
Hosting our call today are Jeff Jarrett, President and Chief Executive Officer, and Vanessa <unk>, our Chief Financial Officer.
As usual, we'll begin with some prepared remarks, where Jeff will provide an operational and strategic overview of the quarter followed by Vanessa will provide some key financial highlights.
We'll then open the lines of questions from pre qualified analysts before turning the call back to John for his closing remarks.
Before we begin I would 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 slash investors.
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 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.
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.
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 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 period.
Thank you, Jason and good morning, everyone.
As discussed on our July 13th Investor call. When we provided our preliminary Q2 results and Sheraton revision to our full year outlook. The second quarter of 2023 marked a particularly challenging time for Telus International.
While we generated revenue growth of 7% year over year, adjusted EBITDA declined 20% year over year, and what I would characterize as a perfect storm of near term and temporary profitability pressure, which we'll discuss in more detail in our remarks today.
Indeed, as we've discussed with many of our stakeholders over the last few weeks there are a few points I'd like to reemphasize. The first relates to Ti's outlook revision.
In particular changed now versus earlier in the year and whether the revised outlook is derisked given the profitability pressure in Q2.
To address what changed I'll first point to even more aggressive near term cost cutting behavior by some of our large tech clients in particular earlier in the year, we had anticipated and reflected some of the softness in our annual outlook. However, as an example, we experienced a sudden and larger than expected reduction in content moderation.
<unk>, which disproportionately impacted our European operations. This in turn strain the pace of our revenue growth and added temporary pressure on our profitability when we've encountered demand softness from clients in the past our scale and growth trajectory enabled us to repurpose our highly skilled team members to other <unk>.
<unk> client accounts. Unfortunately, we were unsuccessful in this regard in Q2 and as a result, we were faced with an unfavorable ratio of labor cost of revenue, which created a temporary drag on our profitability, adding to the complexity of this particular challenge was the labor regulations in certain countries in Europe that impeded our ability to scale down as quickly.
<unk> and efficiently as we were required to in response to the decreased demand. Despite this we have now successfully action meaningful cost savings and have other efforts currently well underway to right size our team member count with current client demand. We believe these margin pressures in the second quarter were largely due to isolated issues.
We have now either already addressed or have a clear line of sight to remedy due to the strong progress in execution of these and other remediation efforts as reflected in our updated outlook. We expect to quickly return to our typical 20% adjusted EBITDA margin for the balance of the year.
That said based upon what we currently see in our sales funnel have heard from our clients and have observed in the broader macroeconomic environment. Our revised annual outlook reflects a much more cautious view.
With respect to our pipeline our sales funnel remains very healthy at over $2 9 billion as of June 30th, albeit with an increased aging profile of the opportunities within it that we ascribe to the longer than typical delays in decision, making due to macroeconomic uncertainty impacting clients' budgets.
Fortunately, we have not seen many funnel opportunity cancellations and indeed, our global sales team continued to win incremental business in the second quarter, attracting new logos, such as a <unk> human resources software company, a multi utility service provider a subsidiary of a multinational ITN consulting company and a facilities based <unk>.
Knowledge and communications company again, while its not at the pace. We expected. We also continued to expand services with our existing clients in the second quarter, including with Google Our third largest clients as well as secured incremental volumes with an integrated power company in the U S. A leading north American financial institution, a major American.
Telecommunications provider and an north American integrated retail electricity and power generation company.
I also want to touch on Willow tree.
While the integration continues to progress quite well Willow trees business has been subject to similar pressures brought about by the macroeconomic environment with many clients are deferring decision, making in connection with their near term digital transformation projects until the economic climate improves. These headwinds are not intrinsic to willow tree, but appear to weigh heavily on the broad.
It services industry manifesting themselves as project delays lower volumes and slower decision, making by clients I'm confident these pressures will subside in time. However, it's worth noting here that our deal thesis for the acquisition of Willow tree like any other acquisition was always predicated upon a longer term outlook and I remain <unk>.
Extremely confident in the opportunities ahead to further bolster ti's front end design and build offerings and to extract incremental value from our combined capabilities, especially as it relates to the continuing support of our largest client tell US corporation due to their their unwavering focus on customer service excellence as we.
Help to enable their digital progression.
Without understating the magnitude of our July 13th pre announcement I want to reiterate my belief that <unk> long term investment thesis is very much intact and our competitive positioning remains strong. Indeed, there are meaningful opportunities ahead in digital transformation and generative AI in particular, which I'll touch upon more in moment.
<unk> areas, where <unk> is uniquely positioned and credentialed to design build and deliver differentiated responsible and market leading solutions for our clients.
On that note, let me now provide some insights and updates regarding generative AI as the technology and its seemingly limitless applications continue to drive extreme interest across all markets, including CX outsourcing with some expressing a level of existential concern regarding the industry's continued viability.
I believe that like so many technological evolutions that have preceded it the advent of Gen. AI will benefit organizations that are able to adapt with greater pace and agility, but also with purpose and thoughtfulness with.
The CX environment has changed many times before and back in 2018, I paraphrase that quote that said, having a digital strategy will soon seem as silly as having an electricity strategy because of how ubiquitous and ingrained, we predicted digital channels will become in our clients' customer support strategies.
Today's digital CX landscape has evolved from in person voice only support to incorporate bots automation machine learning and AI to name just a few of the technologies and innovative applications that have become the norm and how we design build and deliver our leading services and solutions.
According to Gartner, 89% of all companies have either adopted a digital first business strategy or are planning to do so and 91% of businesses are engaged in digital initiatives. There is no doubt that the CX industry is evolving once again as generative AI dominates the headlines and disrupts almost everything.
Notably Ti is not merely a backseat passenger and this disruption nor have we been in the past, we invested and Lionbridge AI and climate years ago to capitalize on the growth in need for AI data annotation and computer vision services.
<unk> and shovels as I like to call them to help our clients leverage AI opportunities more recently, we invested in Willow tree to incrementally grow our digital advisory capabilities and our bench of top tech talent that could help to create market differentiating brand experiences.
Generative AI is now already expanding the scope of CX tasks that can be automated and augmented to assist employees in their work and it will continue to do so at an accelerated pace.
Ti has done during previous tech fueled iterations, we are simultaneously expanding our range of solutions and Upskilling, our workforce at an accelerated pace in order to meet the changing demands of our customers. This includes new ways of structuring our client engagements with a mix of professional services outcome based pricing and even saw.
Software as a service licensing elements, depending upon the solution, we see generative AI as a net positive development for our business, thanks to our existing capabilities and the benefits we stand to realize by deploying generative AI solutions within our own operations and on behalf of our clients do this and tell US International has a comprehensive.
A suite of data driven end to end generative AI solutions that integrate the best of Gen AI capabilities and human expertise to transform digitally led customer experiences across the entire customer journey, let's look at <unk> through the lens of our design build and deliver approach within design.
We provide CX strategy experienced design and digital consulting services that leverage our deep expertise in understanding the customer journey throughout the entire CX lifecycle, including how gen. AI can be responsibly leveraged through thoughtful data governance to optimize client experience or build capabilities around <unk>.
I rely upon our unique ability to structure and operationalized customers' data to empower digital CX supported by Jin AI to reach its maximum potential specializing in AI dataset sourcing annotation testing and validation for AI models. Our team members are the H and R. L. H F reinforce.
But learning through human feedback that ensure high quality data for optimal AI performance, we responsibly create source and utilise diverse and trusted data sets to ensure that our clients. Gen. AI solutions are built upon a foundation of inclusive and accurate data and in terms of the deliver domain our data.
Driven CX solutions powered by <unk> AI enabled businesses to achieve enhanced productivity with improved customer satisfaction driving exceptional outcomes in today's competitive landscape with operations across five continents, including a global community of more than 1 million annotated and linguists Telus International provides global reach and low.
<unk> expertise to deliver exceptional gen AI enabled solutions.
Because of its implications on society I believe the responsible development and progression of generative AI must be underpinned by our humanity in the loop approach not simply human in the loop processes, whereas the ladder helps optimize AI models and algorithms through human intervention in contribution the key to <unk> unique humanity.
And the loop approach is our commitment to codifying diversity and inclusion into all stages of generative AI design development and implementation.
From creating high quality datasets to establishing policy guardrails that protect rather than detract from the complex ecosystem that connects US. All for example, we're currently supporting a leading conversational generative artificial intelligence chatbot developed by one of our hyperscale or clients by actively dry.
Giving the expansion efforts across multiple initiatives, while im limited in a level of detail I can provide regarding this engagement.
Can share that we are helping our client with prompt research and leveraging <unk> global AI community of subject matter experts for the prompt in response creation. Our team is also involved in their generative AI evaluation and dataset tuning as well as benchmarking and analytics, we've been providing generative AI support across the span of this client.
Language coverage and supporting multiple Gen AI engineering efforts throughout the year, we anticipate expanding the scope of the services, we're providing to all of more than the 500 languages and dialects. We support this is a large scale complex engagement for our AI data solutions team that builds upon our long standing partnership with this client.
That spans well over a decade and also includes CX support services and a joint go to market opportunity supporting digital transformation strategies and digital customer experiences.
Another enterprise Great AI use case is with our parent company <unk> Corporation. We're currently engaged on hundreds of programs for Telus. This fast growing tech enabled lines of business, including our support of Telus health as I shared on our Investor call in May today I'll provide an example of the exciting work we're doing for Telus agriculture.
And consumer goods.
When it comes to adopting technology. The agriculture industry has always exhibited a pioneering spirit in fact beef producers have been using artificial intelligence to augment productivity profitability and improved performance in crops and cattle for decades, and this particular engagement. The end customer is a large north American beef producer.
With more than half a million cattle the client wanted to mine its extensive data regarding the genomic and expected project any differences of cattle, meaning the likely characteristics of an offspring in order to uncover correlations between the specific cattle characteristics and production data in order to drive performance improvements in particular.
The client wanted to assess what factors had a significant impact on the healthy growth of their cattle for Ti. This meant creating a specific task to identify disease resistance attributes in animals to decrease mortality incidents that in turn would increase production efficiency.
This client also sought our support to identify other statistical correlations and its data assets in order to leverage AI to disrupt its conventional business model to position the business to be more proactive productive economical and competitive for this project Ti is using an AI technology stack from Google cloud.
Platform, which leverages tools to handle complex challenges related to the AI pipeline from data ingestion preparation storage in exploration the training and generating insights. It supports the complete journey of the AI loop. This project brings forward some unique challenges given the sheer amount of data involved and its volatility.
But by leveraging AI, we were able to employ techniques that simultaneously evaluate multiple factors and their interactions, enabling our clients to uncover reliable correlations in the data AI algorithms help our team to efficiently rank critical factors that impact profitability, including factors around animal health and quality of production.
This client also requested extensive hand crafting of their production data features a process called feature engineering. We're currently in the proof of concept stage on this particular project, but by analyzing the datasets and employing AI models, our team will be able to identify the critical traits that define outperforming capital characteristics, which will help generate app.
Actionable insights for performance improvements, including preventive cattle health interventions and procurement strategies once our team successfully moves this project to the next stage, we will employ an outcome based gain share model with a multi year contract worth several million dollars.
More broadly speaking ti had been developing and employing digital tools to automate our clients and our own operations for many years now among our more recent case studies is an example that relates to robotic process automation or RBA.
<unk> implemented a box solution for a diversified construction company to help process and manage up to 48000 purchase orders annually previously processing, each invoice and inputting needed details into the clients' enterprise platforms with a tedious manual task, whereas now our board is able to free up resources save our.
Money and allow their teams to focus on more complex and higher value tasks. We deployed similar RBA solutions for another client a north American waste management company with multiple digital co workers one of our bots for this client is working on purchase order creation as well as vendor setup, along with automating work.
Closed at a repetitive labor and time consuming importantly, the bot can also proactively flag any missing data inputs for human colleagues to follow up on.
Another digital co worker, we deployed for the same waste management company took on the manual process of reconciling transactions for one of the clients partner banks. The board is able to process multiple files and accurately input needed data into our clients Bank reconciliation application with the capability to generate on demand reporting and summaries for <unk>.
And one last example, this past quarter relates to a Canadian food company for whom we deployed an <unk> solution to support their supply chain operations to take on repetitive manual tasks around scheduling appointment dates for the clients multiple warehouses are bought received E mails from individual warehouses and inputs or revise.
His appointments into the clients' scheduling platform the bottom sands confirmations to notify specific warehouse teams to confirm the employment details. The details are bought handles are fairly comprehensive including not only the date and time of appointment, but all the details of the shipment in question, including trailer estimated loading and unloading times <unk>.
Location and carrier comments previously submitted to the bot via the order E Mail. These RBA examples of saved our clients money and improve productivity in a meaningful way and with the continued evolution and integration of journey II, our bots will get smarter and add even more value for our clients.
In addition to continuing to evolve our service capabilities. We've also recently enhanced our executive leadership team with the appointment of Jose Luis Garcia as Chief Operating Officer Jose Luis brings 30 years of experience, leading service delivery operations and the telecommunications digital it and tech sectors and a track record.
Excellent and focused expertise overseeing end to end digital transformation for complex global enterprises, as our new CFO Jose Luis will play a key role to further advance and evolve Telus International's global operational delivery model.
And finally before I hand, the call over to Vanessa I would like to reference a few of the awards. We received in the second quarter recognizing the significant efforts of our global team.
For the third consecutive year, our proprietary intelligent bot platform was named the best informational bought solution at the AI breakthrough Awards.
This year's when placed us amongst the most notable and well recognized AI companies, including open AI, Microsoft Palo Alto networks variant and an impressive list of top startups from across the industry and around the World. We were also named the elite eight winner of the 2023 achievers.
<unk> most engaged workplaces award in the category of purpose and leadership.
And our team at Willow tree one another Webby Award. This year. This time in the category of best Public service and activism for an App, we created in partnership with meals on wheels of Charlottesville. These awards truly showcase our team's ability to bring our culture to life through our inspirational workplaces that encourage our people.
To think differently innovate and evolve day in and day out our teams demonstrate their unwavering commitment to supporting the well being of the citizens in the communities, where we operate with that I'll now invite our CFO Vanessa <unk> to share details of our financial results and I'll return to answer your questions as usual.
Vanessa over to you.
Thank you Jack and good morning, everyone. Thank you all for joining us today as usual in my review of the financial results I will refer to some items that are non-GAAP measures for a description and a reconciliation of our GAAP to non-GAAP measures. Please see our earnings release and regulatory filings from earlier this morning.
In the second quarter, we delivered revenues of $667 million up 7% year over year on both a reported and constant currency basis.
Contribution from the military in the second quarter was $45 million, excluding military our revenues were $622 million, a decrease of $2 million or less than 1%.
As we indicated during our early release call and as Jeff expanded upon earlier, our revenues in Q2 were impacted by reduced spending by certain clients, particularly those within the technology sector as well as ongoing cautionary customer behavior impacting the speed to conversion of new funnel opportunities.
Looking at our revenue by vertical.
In the tech and games vertical revenues grew 3% year over year. However, this has not been the typical growth rates and it reflects the impact of service volume reductions with our second largest client related to reduced demand for our European based content moderation services in particular.
Notably excluding the impact of the volume reductions from the second largest clients revenues in the second game is vertical increased 15% year over year in Q2, reflecting growth in AI related revenue from Google as well as growth in other notable clients during the period, including growth in revenues from a well known guest <unk>.
<unk> platform growth in a ride sharing platform growth and another highly recognized social media platform and growth in a popular gaming platform amongst others.
Revenues from the E Commerce, and Fintech vertical declined 14% year over year due to volume reductions, particularly from Fintech clients.
On a combined basis revenues from tech and games and E Com and E Commerce, and Fintech, which we collectively referred to as technology clients were flat year over year.
And again when excluding the impact of the aforementioned volume decline from that one particular second largest client revenue. Some revenue from this combined group that is second games and E Commerce and Fintech together were up 7% year over year in Q2.
Indeed, while the technology sector as a whole has been and continues to be under pressure. We are encouraged by the fact that we have seen reasonable growth here once normalized for a client specific impact.
Banking financial services and insurance, our BSI declined 26% year over year due to lower service volumes with one of our global financial institution clients, which was partially offset by growth in others.
Communications and media continued to deliver solid growth of 10% year over year, driven by the ongoing strong digital transformation revenues from tell US Corporation, along with another leading U S telco.
Revenues in our healthcare vertical increased by more than 200%, which was also primarily due to additional services provided to the healthcare business unit of <unk> Corporation, which includes integration services related to tell US This acquisition of Lifeworks now integrated with and rebranded as Telus health.
Revenues from all other verticals, which includes travel and hospitality energy utilities retail and consumer packaged goods amongst others grew 30% year over year.
Turning to our revenue performance by geography, Europe was particularly challenged given it is our primary delivery region for content moderation services for our second largest clients as well as other services for some of our Fintech clients.
The reduction in service volumes within those clients resulted in our revenues declining 6% year over year in Europe .
Meanwhile, revenues in North America grew by 20% year over year, driven by contributions from military which were partially offset by lower volumes from BSI.
Central America, and other revenues grew 22% year over year, and Asia Pacific revenues increased by 4% year over year.
Moving onto operating expenses salaries and benefits expense in the second quarter were $427 million, an increase of 20% year over year.
This was due to a higher team member counts compared to the same period in the prior year investments in our team members through increased salaries and wages and temporarily disproportionate higher cost of service delivery in certain regions principally in Europe due in part to the longer lead time to implement ramped down and other costs realization activity rationalization activities.
Salaries and benefits as a percentage of revenue increased to 64% in the current three month period compared to 57% in the prior year comparative period.
Our goods and services purchased for $120 million, an increase of 2% year over year, which was primarily due to additional goods and services purchased arising from the acquisition of Willow tree, partially offset by lower dependency on external contractors in favor of continued development investments in internal capabilities.
Largely as a result of our cost reduction efforts acquisition integration and other charges in the second quarter were $21 million, an increase of $15 million, primarily reflecting costs related to team member downsizing from the aforementioned volume ramp downs and the right sizing of our excess capacity.
Depreciation and amortization expense was $81 million, an increase of $17 million, primarily due to capital and intangible assets acquired as part of military as well as increased investments in capital and intangible assets over the previous 12 months.
Interest expense in the second quarter was $36 million, an increase of $26 million, which was due to higher debt levels associated with the military acquisition higher average interest rates and interest accretion recognized on the provisions for written put options associated with the military acquisition.
We recorded an income tax recovery of $10 million in the second quarter, primarily due to an increase in adjustments recognized in the current period for income tax of prior periods and due to a loss before tax this.
This compares with an income tax expense of $21 million in the same quarter last year.
Moving onto profitability measures adjusted EBITDA was $120 million in the second quarter, a year over year decrease of 20% and adjusted EBITDA margin was $18 zero percent compared with 25 zero percent in the same quarter of the prior year. Adjusted net income was $46 million a year over year decrease of 43% and adjusted diluted earnings per share was <unk> 17.
43% lower year over year.
Profitability in the quarter was impacted by the aforementioned temporary cost imbalances arising from reductions in service demand principally in Europe from some of our larger clients. This can have a more pronounced effect when programs from long tenured clients that are already optimized from a margin yield perspective suffer a topline reduction, creating a disproportionate near term impact on our profitability.
We also experienced higher service delivery costs, and our AI business due to greater task complexity.
All of these impacts combined were only partially offset by our cost efficiency efforts that were realized during the quarter.
As mentioned during our pre release call. Most of these team member Rationalizations have now already been completed the benefits of which will be seen more acutely in Q3 and Q4 as indicated by our outlook.
In terms of our global team our team member accounts was 76594 as of June 32023, and that counts does not yet fully reflects the full impact of the cost efficiency efforts we have action.
Turning now to the balance sheet and cash flow the balance sheet remains strong with cash of $143 million and available capacity under our credit facility of $325 million.
We generated free cash flow of $66 million in the second quarter, which was consistent with what we saw in Q2, a year ago. A notable results given the aforementioned reduction in EBITDA.
Our capital expenditures in the quarter were $25 million or $3, 75%.
As a percentage of revenue is slightly lower than usual level and largely due to project timing.
Leverage ratio as of June 30 was $2 <unk>, which remains within our communicated steady state range.
Now turning to our outlook.
There are no changes to what we shared on July 13th which is that we expect revenues in the range of $2 seven to $2 73 billion, including $205 million to $215 million from military representing year over year revenue growth of 9% to 11% on a reported basis and growth of 1% to 2% excluding military.
This assumes an average exchange rate of one euro to $1 nine U S dollars for 2023.
In terms of profitability, we expect adjusted EBITDA in the range of 575 to 600 million, which implies an improvement in our EBITDA margin in the second half to.
To achieve this we have undertaken meaningful cost efficiency effort, including downsizing our team by nearly 2000 people to date with the largest impact being within Europe .
As a result of these two member reductions along with other initiatives, we will generate over $40 million of annual cost savings, which we will realized principally in the second half.
In addition, we've reduced discretionary costs optimize our own third party vendor relationships as well as implemented hiring freezes for noncritical non billable team members to resolve overcapacity in certain locations.
We expect adjusted diluted earnings per share in the range of 90 to 97 for the full year 2023.
This incorporates our expectation for the effective tax rate in the second half of the year to be approximately 20% to 25% and more normalized level based on our current view of pre tax earnings and the corresponding geographic income mix.
From a seasonality perspective, given our finalized Q2 results, we expect second half revenues to be split roughly 48% and 52% between Q3, and Q4, and we expect a roughly 46% and 64% split across Q2 and Q4 for adjusted EBITDA and adjusted diluted earnings per share.
We believe this outlook is prudent given the uncertainty that remains in the market and the extended delays we continue to witness in our sales funnel conversion.
With that let's move on to questions I can we ask that you. Please keep it to one question at a time, so that others can participate.
Jonathan over to you.
Certainly one moment for our first question.
And our first question comes from the line of Tien Tsin Huang from Jpmorgan. Your question. Please.
Hi, good morning, Thanks, Thanks as always.
I appreciate all of your comments.
Maybe Jeff I'm curious thinking about the cycle.
And you've been at this a long time and we've been observing in fill learning.
From the pad, but given where we are now and we've been dealing with some uncertainty for a bit.
What do you think happens next I mean, I'm always worried about risk of cancellations warming I know youre not seeing it now or certainly can inflect higher in <unk>.
Do you expect to move forward again, and we live with the new normal as.
As well where do you think we are in the cycle with respect to visibility if you can draw on passport.
I appreciate your thoughts.
Hey, Tien tsin nice to hear your voice.
Boy I wish I had a crystal ball and.
I spend more time at the tables in Vegas, I think if I was able to predict with a better certainty here I think unfortunately, we're still in the middle of this mess.
I've been asked a lot lately as you can imagine if I'm ready to call the bottom and if I see light at the end of the tunnel and I don't think we're there yet Unfortunately, which is why in part as Vanessa just articulated.
Our outlook for the balance of the year. It takes a decidedly conservative approach.
So what we think is likely to occur by certainly continue to be optimistic and hopeful and as I mentioned earlier, our sales funnel continues to be very very robust conversations I'm personally having with existing and prospective customers continue to indicate a desire to procure from us the very capable.
<unk> that we've.
Perfected over the last many years, including in particular more recently, our exciting new Gen AI enabled capabilities, but youre right. There is still always a risk of continued cancellation continued delay in decision, making there's just too. Many question marks out there are we at the end of interest.
Rate hikes and as a result of all of the other macro uncertainties.
Is the fed going to finally stop and.
Is there going to be an opportunity for folks to start returning.
Returning to normal for lack of a better description how are we going to see finally, an end to the war in the Ukraine Theres just so many things I think is still impacting the macroeconomic environment.
It's a longer term issue that we're all going to grapple with and my hope is and candidly my expectation in part hence our continued investments at scale things are going to get better in the long term I just don't see how businesses Kenneth expect to survive thrive.
And compete effectively with their own peer group, if they don't take the requisite decisions to modernize their environments and meet customers when and how customers now expect to be met these are irresistible forces in terms of the ease of interaction that AI will.
Now enable.
There are few businesses out there that have deployed an AI enabled ecosystem to facilitate self serve and automation at scale to ensure that human assisted interactions occur with.
Our pace of accuracy and insight.
Timeliness and frankly materially improved economics.
There is a gold rush here. So it's not an if it's a win and I sure hope it's sooner than later.
Me too me too.
Thank you so much.
Thanks, Tien tsin.
Thank you one moment for our next question.
And our next question comes from the line of Ramsey El <unk> from Barclays. Your question. Please.
Hi, guys and thank you for taking my question. This morning.
Could you comment a bit further on the weakness you're seeing in Europe , and maybe just provide a little more color on the drivers of that weakness in weather whether its differ.
Differs at all from the drivers of maybe softer demand in other key regions like North America.
Okay.
For Us Ramsey I think it's principally two fold one is disproportionately coming from one of our clients.
And so I think that's a bit of.
And normally for us that magnifies the impact on our results.
The second though I think is a continued sense.
Sensitivity from business demand more broadly given continued wage inflation in the region.
That continues.
Really quite surprisingly strong.
And as a consequence, I think it's softening the demand environment in totality, where by way of example businesses historically that were only willing to be served in German language from Germany.
Now as a consequence of how expensive that has become our for the first time willing to be served in German language derived from other markets, whether eastern Europe , North Africa or otherwise.
I think that too will likely continue a pace.
And so that's really what has underpinned our need to right size, our delivery capabilities in Europe in particular.
Thanks, so much super helpful.
Thanks Ramsey.
Thank you one moment for our next question.
And our next question comes from the line of Eric <unk> from Canaccord. Your question. Please.
Good morning, Thanks for taking my question, Jeff you had alluded to sort of increased.
Pricing pressure.
Particularly coming from the customers.
Do you have any Intel at this point around.
Movements in market share any potential losses because of that I was wondering if there's anything you can share on that front.
Hey, Irvin.
I don't have sufficient visibility to comment meaningfully on market share.
Impacts.
Can certainly share that pricing sensitivity has indeed amplified over the last six to nine months in particular.
Yes. There is no question that these are levels of price sensitivity that we certainly haven't experienced in the past and it has pressurized hour.
<unk> value proposition in the sense that as you I hope recall, we've never approached the market as your mess for less are cheap and cheerful, believing that there was always a sufficiently robust segment of the market looking for premium services and willing to pay the premium price associated with ensuring that service quality was engendered.
And unfortunately in today's environment, we're seeing a movement towards a compromise if you will in those expectations and.
Really an emphasis on.
Price over quality.
In conversations with clients that historically, just simply didn't think of their business needs in that fashion and it's it's really forced us more than ever to demonstrate how the incremental costs associated with working with us is warranted.
And it.
Almost a bit of a sophie's choice for sometimes right I don't want to Miss out on new business opportunities, whether it's net newer growth through existing.
But I'm also not willing to discount our prices. So much so that the margin yield implications are our catastrophic so continuing to balance those competing considerations is is really the challenge prospectively.
Thank you.
Thank you.
Thank you one moment for our next question.
And our next question.
It comes from the line of Cathy Chan from Bank of America. Your question. Please.
Hey, guys. Thanks for taking my question just wanted to follow up and ask about the lower European volumes.
You mentioned that some content moderation from the second largest client and are there any existing projects being canceled.
Dan.
But the longer term outlook for broadly trust and safety at the segment overall change in the longer term. Thanks.
Hey, Kathy so I don't think its reflective of a macro deterioration of the demand ecosystem around trust and safety our content moderation.
I think there is absolute.
The opportunity for that segment for Ti to continue to grow not just in Europe , but globally.
I think it's fair to say that as AI models continue to incur.
Increase in sophistication and capability that more traditional moderation activity will at first instance be undertaken on that automated basis, but the ongoing proliferation of content on the web more broadly continues unabated and so I think the residual.
Content that cannot be effectively identified through AI will continue to generate meaningful opportunities for businesses like ours that have the experience and sophistication and capability to address it reliably and effectively.
But indeed in the near term as a result of this one particular client in this one market. It has proven challenging for us and as I said I'm I'm hopeful that we'll see a return to growth there as well.
Got it.
A separate question around AI. It was helpful to hear. The example that you guys partner with your clients on to develop AI strategy.
I guess is there any way to size, maybe how many of your clients you're working with on some type of AI products do these Saturday they add project kept price differently and are these generally higher margin type of work as well.
So it's still early days for us admittedly, although it is dozens and dozens of our clients with whom we are already currently engaged in either actually doing work or consulting in connection with how we're going to leverage generative AI in order to assist they in achieving better outcomes for their businesses in there.
Customers.
In connection with those multiple conversations similarly.
The business model is as equally under.
Evolution, if you will so in some cases, it's transaction based conversation based interaction based outcome based.
With a fixed fees for the consulting professional services upfront similar.
Similarly time of materials in connection with some of the data in your engineering data analytics activity in order to structure. The client's data at first instance to make it accessible and meaningful in terms of deriving actionable insights.
So I think it's the tip of the iceberg right now and we're actually quite excited about where this is going to take our industry more broadly for decades now there's been talk about outcome based pricing gained share risk reward pricing customers, although often historically, having expressed an appetite for that.
Seemed invariably to get cold feet and returned to a more predictable time of materials based engagement historically and I think at long last Gen. AI is going to force.
A change across the industry more broadly and we're looking forward to what that means in terms of opportunity.
Great. Thanks for the thoughts guys. Thank you.
Thanks Kathy.
Thank you one moment for our next question.
And our next question comes from the line of Daniel Chan from TD Cowen Your question. Please.
Jeff just wanted to double click on this large content moderation customer again, given that this customer's user engagement metrics are strong AD revenue from them seems to be stabilized in its new platform is showing early signs of strength can you help us reconcile a decline in content moderation volume from them against their recent performance.
Hey, Dan.
I think it ultimately comes down to there I think self described year of efficiency.
I think.
They have been looking to rationalize their spend in as many areas of opportunity as possible and unfortunately I think.
We simply didn't do as good a job as we should have done in diversifying from where we serve them and across a broader range of services for them. So as to more effectively mitigate the adverse impact that you've seen we experience as a consequence of being a bit too.
Single threaded if you will.
I think prospectively to your point exactly with their return to growth increased AD spend et cetera that there is indeed, a exciting opportunity for wheat to enable them more broadly.
I'm cautiously optimistic that they will entrust more of those opportunities to us prospectively, but there is work to be done there still.
Thanks, Jeff.
Thanks, Dan.
Thank you one moment for our next question.
And our next question comes from the line of Maggie Nolan from William Blair. Your question. Please.
Hi, Thank you.
I wanted to explore how clients are thinking about balancing the cost of using generative AI tools and then how that may be impacting demand near term and long term.
Hey, Maggie.
As I said, it's still relatively early days I mean, everyone now wants to talk about Gen AI.
But frankly.
I don't know that I could offer sort of an empirical trend line around how businesses are thinking about it other than everyone wants to know what we think they can be doing in order to exploit the capabilities of Gen. AI in order to drive costs out of their business and their cost to serve their clients.
Whilst at the same time embracing the the opportunities to deliver a more tailored custom specific user experience to their customer constituents.
And it really is.
Exciting and that is bifurcated. This is a technology not just in terms of the accelerated adoption trend line, but it will help concurrently.
The size of your balance sheet I think when deployed effectively you can absolutely take meaningful costs out of your business and at the same time, you can expect a better user experience from your consumers and so contributing to increasing share of wallet accelerating customer.
<unk> adoption I think historically there was this sort of inverse correlation where you had to spend more to make more and I think this is going to be quite the you'll be going to be able to spend less and make more when deployed effectively and we're excited about how we can be a part of that trend.
Thanks, Jeff.
Thank you one moment for our next question.
Yeah.
And our next question comes from the line of Keith Bachman from BMO. Your question. Please.
Hi, many thanks for taking the question, Jeff and Vanessa you've talked.
Good that appropriately so about the decline.
And one of the large customers, but if we look at.
The revenue growth rates attributable to the balance of the customers that you can say, if we eliminate Facebook, Google tell us and even normalized for.
Willow tree to about 50% of your revenues and that revenue growth rate has declined from call. It mid teens in the September quarter to negative 7% this quarter.
So theres been a pretty pronounced deceleration in revenues outside of your largest customers.
And I was just wondering if you could speak to that.
Is that mostly the DXP outsourcing business because again, it's not just your largest customers a decline it's pretty pronounced across the base, what we would characterize as the base and then I wanted to try to sneak in a follow up.
Hey, Keith it's Vanessa I think we should connect on on.
The math, because I don't think its quite as pronounced as what you are seeing but indeed within certain segments of our business. We have seen some pressure amongst the smaller clients.
But he can kind of come back to the earlier comments around the second largest client that the impact that has had.
As I mentioned in my prepared remarks, when you normalize for that impact we actually saw growth across tech a game as well as E Commerce Fintech combined and so one of the things that international sorry, when you again.
Yes, I mean, I understand I understand your question no.
No. It's just I'm trying to stay away from Facebook and I understand the impact of that business, but I'm trying to is the breadth of the clients outside of your largest is that mostly the DXP outsourcing because it has declined pretty materially even.
If the numbers are off by a little bit.
It has declined pretty materially.
So I don't know what youre, referring to is the DXP outsourcing.
Okay.
Sure.
Okay. It's the call center related businesses that you have supporting.
Jeff referred to it as the <unk> outsourcing.
So maybe we could take this one offline Keith because.
Recognize that nomenclature digital CX, maybe <unk>.
Yes.
But there too I am not sure that I've referenced that by segment in terms of the relative growth rates, but more broadly that business is not declining although unfortunately.
Compelled to confess that indeed, our success on sales and growth more broadly has not met my expectations.
We're going to do better prospectively for sure, but I don't think were seeing negative growth. There yeah, let's take that offline I just wonder if some of the color that we provide around concentration et cetera, and doing the reverse engineered math might be resulting in.
Some anomalous.
<unk>, there, but no I don't think were seeing that the magnitude of pressure thats out there.
Are you implying.
Yes.
Robert This is no we're not we're not pleased with overall revenue growth and Youre, absolutely right whether it.
At any given specific segments. Our revenue growth has decelerated from 2022 versus 2023, we're absolutely seeing that but.
Again, let's take it offline in terms of what particular segments here.
Our crunching in terms of the numbers there because I don't think its quite as pronounced as what youre seeing.
Okay, well, we're pulling it from the 10-K's too so we're getting it from there, but let me let me go to my other question is concerned it seems to be some misunderstanding on this one Jeff.
Gartner group and others.
Have suggested that there'll be.
Over the next couple of years, probably not near term a pretty pronounced.
<unk> reduction due to generative AI.
And.
And in some of the areas that you serve and so I'm just wondering if <unk> brings a significant increase in efficiencies in serving.
Serving the needs how do you balance the potential seat reduction with.
With your ability to grow in the area or do you <unk>.
Perhaps refute the idea that there'll be seat reductions associated with.
Some of the areas that you serve.
I completely accept.
And I am embracing the expectation of seat reduction so on a like for like basis, if nothing else changed.
I would anticipate over the next couple of years that between 20% and 40% of traditional.
PNM support for existing work will be displaced by generative AI enabled solutions.
For Ti however, given our capabilities.
I believe that we will more than make up for that reduction because a our clients hopefully are going to rely upon <unk> to enable that very cost efficiency transformation and then as a consequence of our success in doing so.
They themselves the existing customers will look to us for other areas of related support that is AI enabled and equally excitingly.
Other new customers will see the success that we've enabled for our incumbent base and they will bring their needs for efficiency gains leveraging our gen. AI enabled solutions to bear as well and in totality. We see a continued evolution in our service mix and the opportunities to both grow topline and margin expansion.
Spansion that will be plentiful.
Okay perfect.
Thank you one moment for our next question.
And our next question comes from the line of Ryan Potter from Citi. Your question. Please.
Hey, Thanks for taking my question I wanted to follow up on <unk>.
Very good.
Could you give some color on how the integration of the business is going or if there's any changes to your prior cross sells energy goals.
Looks like performance in the quarter, maybe decelerated quite a bit a sequential basis and the outlook implies a relatively steep reacceleration in the back half of the year. So I guess, what's giving you confidence in that reacceleration in the business as well.
Hey, Ryan it's a good question.
The integration itself is going very very well indeed.
And we've been very pleased with.
The progress around back office integration systems financial reporting.
Security HR et cetera.
But there is no question that all of us to be us and the team at Willow tree and ourselves.
Disappointed and frustrated.
The revenue growth and the margin yield in the second quarter has not met expectations and it is really as I said in my earlier remarks, a byproduct that sort of that same macro uncertainty that that is really unfortunately, the underpinning of delayed decision making.
Willow tree portion of our funnel continues to be very robust as well they've not been the recipient of cancellation orders, but rather ongoing delays and sort of <unk> and his team share with me weekly the updates and their crestfallen because the conversations they have with their customer counterparts are.
We just got word from our boss is we got to tap the brakes on this project hopefully, it's not going to be longer than another 30, 60, 90 180 days, it's not no. It's just not now.
As a consequence, just given the.
The structure of Willow trees business, where it's ostensibly labor and we've got.
Not inexpensive hugely talented human beings rare.
Raring to go but when we don't have the work for them to do we are carrying 100% of those cost with no associated revenue. It has amplified impact on profitability in the near term.
So there are two we're trying to be as efficient as possible, but we're not.
Giving up because as I said the demand still is here, we just can't get them to.
Hit the go button, just yet, but our optimism and why you see the reflection in the back over the years because all of these deals are still sort of in the funnel and hopefully ready to go.
Got it thanks.
Yeah.
Thank you one moment for our next question.
And our next question comes from the line of the vehicles from Scotiabank. Your question. Please.
Good morning, everyone and thanks for taking my question.
So considering some of the pricing pressure discuss shouldn't be a pad here and munis, Amit Goldman discussing how the higher service delivery costs.
You're seeing higher service delivery costs due to the AI implementation project.
What is an optimal adjusted EBITDA margin that we could sort of consider I know on the July 13th call when I said that.
I kind of.
You mentioned that 33, 23% my apologies exit rate by end of fiscal 'twenty.
Is that still achievable or are we going to get there and if not yet when.
We're going to get there.
I can tell you this has not been an enjoyable.
Phase in my career Davita.
I am just crestfallen for having had to adjust guidance and we spent a great deal of time and effort before we published a revised guidance.
And God willing this will be the last time I ever do it in my career, our visibility to the balance of year is such that we are confident in having propose what we did and so this business will deliver at that level of 23% exiting Q4, and obviously, it's early to be talking about.
2024, but we'll be coming back hopefully not too long from now to talk about that as well.
Again.
Heritage of this organization is to produce profitable revenue growth.
And our intention is to be in that same zip code or better in perpetuity.
So we will talk some more for 2024 later in the year.
But indeed for now we are confident in what we've suggested for the balance of 2023.
That's great. Thanks, a lot.
Yep.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Stephanie price from CIBC.
Hi, good morning. Thanks.
New work won with Google.
Our new wins in the quarter just curious.
Whether these linzess marketing.
Got it.
Maybe related just if you could talk a little bit about the visibility you have into plans with your current customers.
Right.
Hey, Stephanie I am sorry, just about a third of the way and to your question I lost you I didn't hear you as clearly as I should have client pose upon you to repeat that yes, no problem sorry.
So I was asking about the new work won you mentioned, Google and some other new wins in the quarter. Just curious if these were factored into the pre announced guidance.
And maybe related if you could talk a little bit about the visibility you have into the plans from current customers at this point.
So yes it was.
And what we did in preparing guidance for balance of year was to triangulate across conversations that our sales team are having with our existing and prospective customers equally if not more importantly conversations our operations team are having with existing customers in order to take as I said a conservative balanced.
Approach to remove as much of the surprise factor such that for balance of year, if theres going to be a surprise it will be hopefully a surprise to the upside only.
I can't.
Guarantee that there won't be any.
Unfortunate surprises potentially additional cancellations, but right now what's reflected in there is.
Based on.
Conversations from customers in hand.
So we're feeling like we have a high degree of visibility and confidence and what's reflected in that revised guide for balance of year.
Alright, Thank you very much.
Thanks, Stephanie.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to.
Jeff.
Any further remarks.
Thanks, Jonathan and thank you all for your questions today as always.
Certainly not lost on us that the trust. We've so diligently worked to earn with Ti stakeholders, particularly in the two and a half years since our IPO has been shaken this past quarter.
We also recognize that rebuilding that trust.
Will require meaningful actions not simply words to once again deliver the consistent peer leading results that had been a hallmark of our company's performance over the past 18 years and our team is United in our commitment to achieving this goal.
Through these challenging times I sincerely. Thank all of our global team members for their perseverance and resilience their commitment to our clients and for their unwavering support of their fellow team members. Thank.
Thank you all for your time and engagement today I look forward to seeing many of you at our upcoming investor conferences and to connecting again at our next quarterly update in November at which time I expect to be delivering meaningfully better news enjoy the remainder of the summer all and take care.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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