TELUS International (Cda) Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the TELUS International First Quarter 2024 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.

Operator

As a reminder, today's program is being recorded. I would now like to introduce Jason Meyer, Head of Investor Relations and Treasurer at TELUS International. Mr. Meyer, you may begin the call.

Speaker 1

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q1 2024 Investor Call. Hosting our call today are Jeff Pierrot, President and Chief Executive Officer and Gopi Chande, 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 Gopi, who will provide some key financial highlights.

Speaker 1

We'll 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 2 of the supplementary presentation available for download on this webcast and also available on our website at telusinternational.com/investors. The statements made during this call may be forward looking in nature, including all comments reflecting expectations, assumptions or beliefs about future events or 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.

Speaker 1

Jonathan Gopi will also discuss certain non GAAP measures that the management team consider 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 Plus and EDGAR. I would also like to remind everyone that all financial measures we're 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.

Speaker 1

With that, I'll now pass the call over to our President and CEO, Jeff Pierrette.

Speaker 2

Thank you, Jason. Good morning, everyone. In the Q1 of 2024, TELUS International delivered results that were on track in terms of our expectations and what we see as a continued path to recovery. While the operating and macroeconomic environment remains pressured for the first half of the year with inflation and higher for longer rate narratives dominating the market sentiment, we anticipate demand starting to recover in the latter part of the year. We continue to center our efforts on what we can control and with our meaningful global cost efficiency programs executed over the past 9 months, we're maintaining our focus on profitability.

Speaker 2

Our outlook for 2024 is unchanged and it remains prudent based on our current view of client demand and our assumptions around the macroeconomic conditions in the near term. Gopi will share more details on this topic later in the call. With our 3rd largest client, a leading social media network, we're encouraged by recent volume stabilization. Our team is working to surface incremental opportunities for further rejuvenation in the account through a potential expansion in our service line offerings and geographic diversification, although these efforts will likely play out over the medium and longer term. Carrying over from last year's results, our momentum continues in AI data solutions driven by the strength of our relationship with Google in particular, while we're also working diligently on pilots and opportunities with many major foundational AI model developers.

Speaker 2

In this regard, the progression of our Fuel IX, GenAI client engagements led by our WillowTree team is accelerating and I'll share more details shortly regarding our most recent beta launch last month. This launch positions us favorably as we endeavor to become the AI fueled customer experience partner of choice for our clients and across the industry. To start the year, our global sales team won several new clients, including a multinational hospitality company, a Canadian based global e commerce powerhouse, a leading provider of winloss analysis services and technology and a financial technology company in the U. S. Among others.

Speaker 2

To highlight a few wins by our team at WillowTree, they secured mandates with a multinational consumer credit reporting agency, an American biotechnology company, a movie theater chain that operates the 2nd largest theater circuit in the United States and a global fashion house coach. For the latter well recognized name in particular, our team at WillowTree will lead a transformative project involving strategy development, research, design and advice on technical architecture to envision a seamless single pane of glass employee retail experience. Importantly, we also continue to deepen our relationships across our existing client base. In the Q1, we expanded work for many of our long tenured clients, including one of the largest global logistics providers focused on transportation, e commerce and business services, a leading ride hailing services company, an American telecommunications and media conglomerate and a leading information services provider of financial property and consumer information and analytics. We also continue to be a beneficiary of steady growth serving TELUS Corporation, our parent company and anchor clients including further ramp up within their TELUS Health division that we expect to continue throughout 2024.

Speaker 2

Similarly, WillowTree secured an AI innovation win with an American consumer financial services company and saw incremental expansion with clients across diverse industries including retail, fast food restaurants, energy and insurance. Specifically as it pertains to Fuel IX, our WillowTree team also continues to drive new client engagements including 2 well established American Financial Services Companies. I'll share details of one of these engagements, namely Inspira Financial in a case study in just a moment. Last month, we announced a beta release of Fuel IX as part of the ongoing growth and refinement of our enterprise grade AI engine structured now as 2 main solution layers, core and apps. FuelIX Core offers the orchestration, integration and administration as a backbone for enterprise AI, while FuelEyeX apps includes templated Gen AI applications across customer and employee experiences.

Speaker 2

Think of these as add on solutions and tools including 3rd party applications along with our own consulting and design services, for example, our 8 week GenAI JumpStart Accelerator program. Key divisions of our parent company TELUS are part of both the Jumpstart and the FuelIX client rosters. Across multiple business areas and corporate support functions at TELUS, we've designed, built and delivered AI solutions supporting an IT service desk, field service and internal team member knowledge solutions, an in store retail associate co pilot, a customer service agent assistant and a public facing consumer website. These solutions have delivered tangible outcomes for TELUS already, helping them achieve a lower cost to serve and support their focus on driving a higher average margin per user. Our AI capabilities are expanding opportunities with TELUS charting a path to an additional differentiated service revenue stream.

Speaker 2

In fact, we currently have several more pilots underway as well as over 30 requests for new applications. Our TI sales team is also taking the successful real world implementation of TELUS on the road to demonstrate the value of FuelIX to enterprise clients across multiple industries. We also continue to foster strategic technology partnerships to complement our capabilities and broaden the scope of our offerings. In March, TI announced the partnership with Local Measure, which is an out of the box Gen AI enabled contact center solution powered by AWS Amazon Connect. This addition to our Fuel.

Speaker 2

IX platform provides our clients with even more choice and greater flexibility in implementing Genai. In April, we announced an expansion of our strategic partnership with Appian, a company name spelled appian and not to be confused with another similar sounding company name out of Australia. The key focus of this partnership is to offer clients an intelligent automation as a service platform with low code automation solutions accessible on demand and based in the cloud, with all elements and tools coming together to create a unified AI powered IT ecosystem. We successfully tested this value proposition by deploying it for our anchor client TELUS Corporation within their core telecom business. Employees at TELUS were able to develop network build tools with a wide variety of functionalities such as network design, configuration, deployment and optimization.

Speaker 2

All of this at a pace 5 times faster than conventional methods and already resulting in savings of over $5,000,000 Turning to case studies, one of the WillowTree client wins in the quarter I mentioned a moment ago is Inspira Financial, a financial services company based in the U. S. Providing custody solutions for alternative assets and retirement services, including self directed individual retirement accounts and 401 rollovers. Having acquired another player focused on providing health savings and spending account solutions, our client needed to undergo extensive rebranding as they brought the offerings of the 2 companies together under one portfolio to transform the combined company into a comprehensive health, wealth, retirement and benefit solution provider for institutional business partners, employers and individuals. To achieve this strategic goal, the client partnered with our team at WillowTree to expand the new brand through digital channels, including web and product platforms, creating impactful illustrations, animations and content that resonated with users.

Speaker 2

We then applied these new digital brand guidelines to the product portals to support the enterprise wide brand rollout. We also strategized and implemented marketing operations workflows to support the brand rollout and maintenance using tools like Adobe Workfront and Brand Portal. In addition to developing a web strategy for the new brand with key focus on designing and building an intuitive public web experience for the updated portfolio, our team has migrated the client systems and operations to Adobe Experience Cloud. Excitingly, we've also implemented an AI powered navigational assistant to guide users through the new portfolio of offerings and reduce support costs by offering self-service solutions. The AI assistant we've built for the client is a hybrid LLM and rule based chatbot with a secure intent classifier augmented by LLM function calls to deliver optimal solutions for user queries.

Speaker 2

It adeptly handles various needs such as FAQs, login inquiries and guiding users to the next step in the journey with Inspira. The chatbots engagement surpasses search usage by 5x with a notable 53% conversion and engagement rate achieved to date. Moreover, insights collected from the chatbot logs and site analytics fuel continuous optimization aimed at reducing the client's call center volume. Another WillowTree client from a completely different industry, Mercury Marine is a global leader in marine manufacturing, offering a comprehensive range of engines. The client sought our expertise in digital transformation when they recognize the need to harness technology to improve their multichannel offerings and deepen their direct engagement with customers.

Speaker 2

In less than 10 months of engagement, our team at WillowTree introduced a brand salient engaging design and modernized Web decentralizing the authoring model and allowing for regionally relevant and timely campaigns across 36 websites in 14 language combinations. Mercury Marine has seen growth in leads in the quarter following the launch of our solutions compared to the same time in the previous year. Meanwhile, better user experience enabled by our solutions has improved discoverability, driving increased customer interest and dealer profitability. For 2024, our team at WillowTree continues to work with Mercury Marine on improving their online presence through a more targeted search engine optimization and feature enhancements to create even better customer experiences. We believe this will enable further opportunities to drive additional revenue for the business both that of our clients and our engagement with them.

Speaker 2

Next, I'll share a case study update from our computer vision group within our AI data solutions team. We continue to work with a long tenured client, an American robotics company based in California, who develops autonomous delivery vehicles. If you're from the San Francisco Bay Area or Houston, Texas, you may have seen their delivery vehicles in your neighborhood. Loyal listeners of our investor calls may also recall, I spoke about this client and our work for them back in 2021 during one of our earlier earnings calls. In addition to creating training datasets for this client's computer vision perception models, we've expanded our scope to include fine tuning of the client's LLMs built for real time explainability of the autopilot's decisions.

Speaker 2

Our team's goal is to teach LLMs based on the expertise of a human driver with actions or preferences across various driving scenes, including complex and rare scenarios as well as generate and explain resulting motion plans depending on a wide range of very specific traffic conditions. The workflow starts with several English speaking and qualified drivers writing detailed and clear descriptions of various traffic scenarios they see in a given image or video, then annotating the edge cases in the image or video followed by selecting their motion decisions for the given scenario. As you can imagine, the universe of potential scenes and traffic scenarios is very close to infinite, yet the client and our team need to generate, categorize, structure, annotate and ensure the quality of all these data points and permutations. Thanks to TI's proprietary multimodal annotation and fine tuning platform, we're able to automate many of the steps involved using AI assisted generation and video labeling. Drivers then edit descriptions and annotations applying their driving expertise, knowledge of traffic rules and using their best judgment.

Speaker 2

This is a great example to illustrate how TI is able to combine deep human insights and nuances with high accuracy of input data for LLMs with speed at scale to build adaptable and safer Gen AI models for our clients. In the spirit of continuously refining our own capabilities and particularly in relation to AI, just 2 weeks ago we launched TI's FineTune Studio, part of our broader AI data solutions proprietary platform. It's a task execution module designed to create high quality fine tuning datasets for LLMs and GenAI models. While our experts engine can algorithmically match tasks with best fit experts from our global crowdsourced AI community of more than 1,000,000 contributors, the fine tune studio goes further in enabling contributors to create high quality datasets for LLM fine tuning in more than 100 languages, deployed across domains where specialized responses are required, including STEM disciplines, healthcare, finance and more. Our fine tune studios allows for native AI integrations, including real time assessments of possible plagiarism, tone analysis, spelling and grammar checks, features that improve output accuracy and facilitate users' task completion with increased productivity and efficiency.

Speaker 2

Our team presented the fine tune studio during the 2024 World Summit AI, which took place in Montreal a couple of weeks ago with a great reception from industry participants. One last case study I'll share today illustrates our deep capabilities to serve telecom clients. As you might expect, TELUS is a meaningful source of opportunities within our media and telecommunications industry vertical. And over the years, it's opened doors as a reference for other telecom businesses, notably in the U. S.

Speaker 2

On our investor call a couple of quarters ago, I shared with you an example of one such client, a large service provider of pay television and retail wireless services. 1 acquired a mobile network operator and turned to TI who then excuse me to help them excuse me reimagine and assemble a comprehensive cloud infrastructure. As an update on that engagement, after we successfully helped the client to set up their infrastructure, TI was then tasked to manage a complicated network migration of the client's entire customer base, a process that also necessitated an introduction of additional functionalities for customers, a customization of user interface and experience, integration with numerous application programming interfaces, a robust logging and exception handling framework and a complex porting process for account management. Our team collaborated across several squad groups within TI's enterprise platform services working in the AWS cloud environment to deliver exactly what the client needed, while ensuring network compatibility, managing customer data and overcoming technical integration obstacles all while maintaining a positive customer experience. Among the outcomes delivered for the client, our team put together self-service tools that enabled customers to migrate seamlessly and independently.

Speaker 2

Our solution enhanced account management capabilities, providing customers with increased control and better insights. We streamlined support operations, reducing the time spent troubleshooting and tracking telephone numbers across different networks and data models. And we added new sales and service reporting capabilities providing valuable insights for performance analysis and decision making. This example not only illustrates the continuity we enjoy with some of our clients having done good work and shown value on the first engagement we're often rewarded with more and more complex work in the future. It also shows how TI solutions address critical business needs for our clients, addressing both ends of successful customer experience management, cost efficiency and growth enablement.

Speaker 2

We've also started the year on a positive note with several industry awards and rankings, which reflect our global team's continuing commitment to excellence in everything we do. Following on from our leader ranking in IDC's market scape for worldwide data labeling software last December, this year TI was recognized as a leader in Everest Group's peak matrix for data annotation and labeling solutions for AI and machine learning. What's truly notable here is that TI was the only provider ranked in the top 2 for both these assessments, highlighting the unmatched leadership of our AI Data Solution division's vision, strategy execution, innovation and client satisfaction. Additionally, for the 8th consecutive year, TI was named on the Global Outsourcing 100 list, once again placing us amongst the best outsourcing providers for size and growth, customer references, awards and certifications, programs for innovation and corporate social responsibility. Also for the 8th year in a row, our global team's efforts were recognized by Business Intelligence Group in a 2024 Excellence in Customer Service Award within the Organization of the Year category.

Speaker 2

This award duly recognizes those who are transforming the customer experience in today's online driven economy. Further, at this year's Webby Awards, known as the Internet's highest honor, Our team at WillowTree and several of our clients were recognized among nearly 13,000 entries from 70 countries. You may recall among the case studies I shared with you on our investor call in November last year were BrightLine Trains and McGraw Hill. Both of these clients won the awards. BrightLine Trains secured recognition as an honoree in 2 categories with their mobile app and enterprise website developed by WillowTree, excelling in the travel and travel and lifestyle sectors.

Speaker 2

McGraw Hill's access app also developed by WillowTree was honored in the education, science and reference category. Additionally, WillowTree's vocable app won the trailblazing TechQuity, which stands for Tech and Equity Innovation Award, a much deserved recognition for the team's groundbreaking initiative that redefines healthcare through digital innovation. Vokable was applauded as a healthcare initiative, helping to close the digital divide in underserved or marginalized communities. If you haven't already done so, I encourage you to read my colleague Tobias Denggel's best selling book, The Sound of the Future, which reveals how voice technology powered by the latest AI advancements is poised to drastically alter the way we live and how companies do business. Speaking of interesting reading material, TELUS International's second standalone sustainability and ESG report was published on April 5 this year providing update on our progress against our 4 pillars and 2023 commitments.

Speaker 2

I'd like to highlight some of the encouraging results achieved in 2023. We volunteered over 90,000 hours, the equivalent of 12000 days in the communities where we operate around the world. This included building schools, refugee centers and homes, planting trees and community gardens and building beehives, as well as providing mentorship and employment opportunities to historically marginalized communities across the Philippines, India, Guatemala and El Salvador. We provided over $1,600,000 in cash and in kind donations to communities around the world. Additionally, our 5 international community boards allocated $2,500,000 to fund 67 projects spanning our priority areas of health, employment and education and the environment.

Speaker 2

We know that diversity, equity and inclusion are integral to our ongoing success. As such, we set targets to ensure that there would be appropriate representation of women at all levels of the organization. In 2023, we surpassed those targets with women representing 36% of Board members and 44% of the executive team. Since 2012, we've also been developing programs to hire and provide career development opportunities to people in economically disadvantaged and or marginalized communities around the world. These powerful life changing impact sourcing programs have a dual benefit.

Speaker 2

They provide training, meaningful work, coaching and development, while providing TELUS International with a deeply engaged, highly skilled workforce. For example, we run a training and employment initiative in India called Project Sakima, providing opportunities for women from economically challenged communities. And last, but certainly not least, as climate change remains one of the most challenging issues of our time, we're committed to continue to work in tandem with our parent company to achieve net zero operations through a combination of emission reduction and emission removal by our 2,030 target. With that, I'll now invite our CFO, Gopi Chande, who's had a great fast paced start to her role here at TI to share details of our financial results and I'll return to answer your questions. Gopi, over to you.

Speaker 3

Thank you, Jeff, and good morning, everyone. Thank you for joining us today. As per usual practice, in my review of the financial results, I will refer to some items that are non GAAP measures. For descriptions and the reconciliation of our GAAP to our non GAAP measures, please see our earnings release and regulatory filings from earlier this morning. Upfront, I'd like to highlight that in the Q1 of 2024, our top line results reflected a tough year over year compare due to the macroeconomic environment and the impact on our clients since the summer of 2023.

Speaker 3

However, we anticipated this and set our targets and our outlook accordingly. Our Q1 results are very much in line with our expectations and the views we shared back in February. In the Q1, TELUS International delivered revenues of $657,000,000 down 4% year over year, which was expected knowing the impact on the revenue trajectory from our 3rd largest client, a social media network. We mitigated this headwind in part by growing and diversifying our revenues with other existing large clients, namely TELUS Corporation and Google, as well as adding new clients over the past year. In fact, we've seen an accelerating trend of new customer acquisitions across several verticals And while not yet materially contributing to near term revenue, it does provide better visibility for the balance of the year as these new clients ramp up.

Speaker 3

With Google in particular, over the past 12 months, we've successfully broadened our relationship across several lines of service and deepened our engagement in the fast growing area of AI, which drove Google to become our 2nd largest client by total revenue. As a result, our revenues with Google in the Q1 of 2024 grew 30% year over year and momentum remains strong with this key client. With our parent company, TELUS Corporation, we grew revenues by 22% year over year in the Q1. TI remains a key enabler of digital transformation at TELUS with hundreds of programs underway across all business divisions, with particular acceleration year over year with TELUS Health as well as supported by the strength of capabilities at WillowTree, not least in our ability to design, build and deliver From a sequential quarter perspective, revenue from the social media client is showing signs of stabilization. I echo what Jeff shared at the start of today's call.

Speaker 3

We are encouraged by this volume stabilization and our team is hard at work to surface incremental opportunities for further rejuvenation of this account. I also wanted to highlight that the leading social media company still remains our 3rd largest client, but has now dropped to just below 10% of revenues in the quarter. Moving on to revenue by vertical. While we faced a similar challenge of a strong comparison base, in the tech and games vertical, our momentum with Google was a positive offset. In fact, excluding the impact from the social media client, our revenue in the tech and games vertical grew by approximately 7% year over year.

Speaker 3

Our games clients, in particular, performed very well. Looking at the rest of our key verticals, we're seeing sequential quarter improvement, a positive reading this early in the year. For example, with clients in the Banking, Financial Services and Insurance or BFSI vertical, revenues increased by approximately 3% from the 4th quarter, driven by a ramp up with a couple of clients, one of Canada's largest banks and one of the financial clients at WillowTree. Meanwhile, the communications and media vertical continued to deliver growth, increasing 5% year over year by expanded digital engagements with TELUS. And finally, our revenues in the healthcare vertical decreased 23% increased 23% year over year, also primarily driven by an expansion of services provided to TELUS Health.

Speaker 3

Turning to our revenue performance by geography. As we expected, Europe remains our most challenged delivery region, partly due to the aforementioned year over year dynamics with the leading social media clients that we primarily serve from that region. That said, on a sequential quarter basis, revenues generated in Europe were flat. For further context, the year over year changes for certain other geographic regions also reflect our efforts to optimize both our clients' cost to serve and our own cost of delivery. For example, revenues in North America reflected increased offshoring with the beneficiary being our Central America delivery region along with the growth in South America and Africa with revenues generated from these offshore locations increasing 13% year over year.

Speaker 3

Meanwhile, in Asia Pacific, revenues were relatively flat year over year with reductions in service volumes with certain technology, BFSI and e commerce clients, offset by higher volumes delivered for our clients in Communications and Media as well as Healthcare. Moving on to our operating expenses. Salaries and benefits expense in the Q1 were 416,000,000 dollars a year over year decline of 3%, reflecting a lower average team member count, which also declined by 3% year over year as a result of our cost efficiency efforts taken in 2023 to align our supply levels with changes in service demand from certain clients. This was partially offset by higher training costs commensurate with a typical ramp up earlier in the year and expectedly higher average salaries and wages in the Q1 of 2024. As a percentage of revenue, we kept salary and benefits relatively flat at 63% in the Q1 compared to 62% in the same quarter last year.

Speaker 3

Our goods and services purchased were $116,000,000 an increase of 13% due to higher external contractor costs from growth in our AI data solutions service line, as well as a reduction of certain sales tax reserves we realized in the Q1 of prior year that did not recur in the Q1 of this year. For additional context, as part of our ongoing efforts to improve efficiencies, we continue to consolidate and optimize our physical footprint as appropriate with the net impact of slowing our facilities growth and related costs in the quarter. Share based compensation in the Q1 was $1,000,000 a decrease of $13,000,000 year over year, reflecting an expense recovery due to a downward revision on the of the estimated achievement of certain performance based restricted share award units and the further expense recovery on award forfeitures as well as lower expense associated with share based compensation awards granted in relation to our acquisitions in the past. Our acquisition integration and other charges in the Q1 were 7,000,000 dollars a decrease of $9,000,000 year over year, primarily due to lower personnel related efficiency program costs. Depreciation and amortization expense held steady at $79,000,000 for the quarter due to higher depreciation and amortization associated with our investments in capital assets over the past 12 months, which were partially offset by timing of fully depreciated or amortized capital assets.

Speaker 3

Changes in business combination related provisions increased by $29,000,000 in the Q1 of 2024 compared with the same quarter in the prior year. This was due to a downward revision to our estimates of certain performance based criteria associated with the WillowTree business, resulting in a reduction of our provisions for written put options. The thoughtful design of our transaction at first instance provided good alignment of incentives that ensured that there was an appropriate linkage between expected performance and future payouts. Interest expense in the Q1 of 2024 was $35,000,000 an increase of $2,000,000 primarily driven by higher interest accretion on lease liabilities due to higher average interest rates and balances. In the Q1 of this year, our income tax expense was $9,000,000 with an effective tax rate of 24.3 percent compared with an income tax recovery of $2,000,000 and a negative ETR of 16.7 percent reported in the same quarter of the prior year.

Speaker 3

These year over year changes were primarily due to a change in income mix, whereby proportionately more income was earned in higher tax jurisdictions in the current year's quarter and an increase in the foreign tax differential, partially offset by a decrease in withholding taxes. Moving on to profitability. In the Q1, our adjusted EBITDA was $153,000,000 an increase of 9% year over year, primarily due to other income arising from business combination related provisions and lower share based compensation expense, which were partially offset by lower revenue. Adjusted EBITDA margin was 23.3% in the quarter, an improvement of 2 70 basis points year over year due to the factors I've just described as well as changes in our revenue mix across industry verticals and geographic regions. If not for the favorable impact from the business combination related provisions and share based compensation expense, our adjusted EBITDA declined and the margin compressed year over year, reflecting lower revenue flow through as well as higher service delivery costs from increasing complexity of work, variability in utilization levels based on customer demand volumes, along with an overall increase in average salaries and wages.

Speaker 3

As discussed on our investor call in February, this year we're making further investments in our sales and marketing organization and internal transformation. The strategic initiatives to position our business for success in the near and long term and that we started to implement during the Q1. Adjusted net income was $65,000,000 in the current year's quarter, an increase of 3% year over year, whereas our adjusted diluted EPS of $0.22 declined slightly compared with $0.23 in the same quarter of the prior year due to an increase in weighted average number of diluted equity shares outstanding during the Q1 of the current year arising from the dilutive effects on the provision for written put options. Turning to the balance sheet and cash flow. The balance sheet remains strong with cash of $154,000,000 and available capacity under our credit facility of $504,000,000 We generated robust free cash flow of $107,000,000 in the quarter, a year over year increase of 65%, driven by higher net inflows from working capital, which included higher cash receipts and lower income taxes paid, partially offset by lower operating profits and higher capital expenditures.

Speaker 3

As a percentage of revenue, free cash flow was 16% in the quarter. Our capital expenditures were $19,000,000 in the quarter, an increase of $4,000,000 year over year, primarily due to facility build outs in our newest delivery centers in Africa as well as additional investments in our digital solutions and AI businesses. As a percentage of revenue, capital expenditures in the quarter were approximately 3%. Our leverage ratio as of March 31 was 2.9x, a slight increase when compared with the prior quarter, driven mainly by headwinds when comparing the 12 month rolling EBITDA in the calculation of the ratio, which overshadowed debt repayments in the quarter. That said, the ratio remains within our communicated steady state range, and we believe our strong cash flow generation will enable further meaningful debt repayment and leverage ratio improvements throughout the remainder of 2024.

Speaker 3

Turning to our outlook. We are reaffirming our full year outlook today. For 2024, we continue to expect revenue in the range of $2,790,000,000 to $2,850,000,000 which represents revenue growth of 3% to 5% on a reported basis. We do not currently expect year over year foreign currency impacts on revenue to be material. Within this outlook range, we assume near term stabilization in revenues from our 3rd largest client with any softness offset by continued expansion of revenue with TELUS and further momentum with other large clients, including Google.

Speaker 3

As I mentioned earlier, we are seeing an acceleration in new client additions that we expect will have more meaningful revenue contribution in the quarters ahead and something that is already reflected in our outlook range. Our funnel remains robust at circa $2,000,000,000 For adjusted EBITDA, we expect a range of $623,000,000 to $643,000,000 representing 7% to 10% year over year growth, with adjusted EBITDA margins of 22.3% to 22.6%. We expect adjusted EBITDA growth to outpace revenue growth in 2024, in part due to the significant cost efficiency programs we executed upon in the past 9 months, as well as our current year in flight initiatives that address our service delivery capabilities to enhance service quality and optimize our global cost of service. Our outlook continues to call for an adjusted diluted EPS range of $0.93 to $0.98 representing growth of 7% to 13%. We assume a weighted average diluted share count of approximately 292,000,000 for the year.

Speaker 3

And finally, for the full year 2024, we expect our effective tax rate to be in the range of 22% to 26%, reflecting the expected jurisdictional mix of earnings. While we do not provide formal quarterly guidance, I would like to reiterate certain seasonality factors to help you model our quarterly cadence. We continue to expect revenue seasonality of approximately 48% in the first half and 52% in the second half of twenty twenty four and adjusted EBITDA seasonality of approximately 45% in the first half and 55% in the second half. Finally, our effective tax rate is also subject to seasonality being higher in the first half of the year and lower in the second half. We believe this outlook remains prudent, even though we're mindful of continued uncertainty in the market with evolving forecasts around interest rates and resulting in IT spend.

Speaker 3

At the same time, we still expect to see demand starting to recover in the latter part of the year. With that, let's move on to questions. I kindly ask that you keep it to one question at a time so that everyone can participate. Jonathan, over to you.

Operator

Certainly. And one moment for our first question. Our first question for today comes from the line of Ramsey El Assal from Barclays. Your question please.

Speaker 4

Hi, thanks for taking my question this morning. I wonder if you could comment a little bit further about the signs of stabilization that you're seeing at the leading social media partner. I think you mentioned that some of the recovery dynamics could take place over the medium to long term. I guess I'm just wondering sort of what's giving you confidence that you're seeing stabilization and also if you could comment on the shape of an eventual recovery. Is this a long gradual multi cycle recovery?

Speaker 4

Or could you see something a little bit more of like a snap back at some point?

Speaker 2

Hey, Ramsey, how are you? Thanks for the question. We suffered some pretty significant deterioration in spend with that client, really starting in the back half of twenty twenty two throughout 2023, as you'll recall. And so the performance in 2024 is still on a year over year compare basis rather disappointing. The good news that we're alluding to is we have now seen a stabilization and some meaningful green shoots in terms of incremental business.

Speaker 2

And so our outlook for 2024 already reflects that, as I said, as you heard from Gopi as well, the stabilization. So no further shrinkage, reduction, deterioration in spend and already sort of turning that around. We don't want to get too over our skis here and assume that all of a sudden we start to recover in terms of growing back to the 2023 or 2022 levels of total spend. But we do anticipate and what's reflected already in 2024 is sort of that flattening of the historical curve in the previous decline and going into hopefully 2025 with meaningful positive improvement.

Speaker 5

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Tien tsin Huang from JPMorgan. Your question please.

Speaker 6

Hi, thank you. Good morning. Just curious on conviction on the second half recovery versus 90 days ago. It feels like you mentioned green shoots, like Google is tracking quite well. You just answered on Ramsey's side with the social media.

Speaker 6

I'm just curious on conviction versus 90 days ago for the second half.

Speaker 2

I've invited Gopi to top up, but I can tell you my conviction is as confident, if not more so based on the new clients we've already signed, many of which I referenced in my opening comments. The challenge, of course, is just how quickly we can get deals signed and ramped and start to realize the profitable revenue associated with them. But we spent a lot of time, as you can imagine, Tien Tsin, discussing amongst ourselves and with our Board, the prudence of our guidance reaffirmation, given what's going on amongst our peers in the market more broadly and admittedly given what happened last year at TI. And I think where we've landed is reflective of our belief as to the prudence of this outlook reaffirmation.

Speaker 3

So, Geoff, maybe I'll top up there, Tien Tsin. So reiterating, our funnel is looking strong. Again, it's circa 2,000,000,000 dollars We're seeing that new mobile acceleration sequentially from Q4 as well as Q1 last year. We've mentioned the investment we've made in our sales and marketing organization and that's Berry Fruit, will continue to bear fruit throughout the year. And the recovery we're expecting is in the latter half of the year.

Speaker 3

And so that reflects the seasonality we've reflected in our guidance of 48% 52%. So continue to feel that that's a prudent outlook for just as we did 30 days 90 days ago.

Speaker 6

Got it. Great. Thank you so much for the thoughts.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Stephanie Price from CIBC. Your question please.

Speaker 7

Hi, good morning. Sophie, maybe this is one for you. You noted on the call that excluding the $29,000,000 add back around WillowTree that margins were down year over year and they were below the full year guidance. Just trying to understand what margin should look like on a go forward basis factoring in the cost savings and the puts and takes you saw in the quarter?

Speaker 3

Thanks, Stephanie. So maybe I'll start, Stephanie, with, I do think it's fair to continue to use our revised definition of EBITDA and the inclusion of the business combination provision. And I'll just spend a minute discussing why. So first of all, our outlook and guidance is based on our estimates of those numbers. So keeping them in is an apples to apples comparison.

Speaker 3

Secondly, if you think about both of the items that we've added in or kept in adjusted EBITDA in terms of the earn out or stock based compensation, they're both essentially a pay for performance arrangement where we're incentivizing management or through acquisition or internal management to deliver on expectations. And so to the extent that doesn't happen, we do not want to overpay for underperformance. And effectively, you're seeing the true up of those amounts. So I do think they are reflective ultimately of our business operations. Now having said that, Stephanie, we are seeing pressure on our margins and essentially still feel confident in the guidance that we've provided and the range we've provided of 22.3 to 22.6.

Speaker 3

I'll give you a bit of color of the pressure we're seeing and what we're doing to mitigate that. So a bit of the pressure relates to the mix of business we're doing. So we don't provide margin by service line, but we have said in the past that trust and safety is one of our higher margin businesses. And AI Data Solutions depending on the work can be a bit below average. So we're working through the adjustment of the mix of our work.

Speaker 3

As I mentioned in my remarks, we are seeing some higher cost of delivery. And then just as demand stabilizes, we're seeing the utilization of our team members vary. What we're doing to offset that and we think that will help us keep in the range that we've guided on is, 1st of all, with our clients optimizing the geography in which we're providing them service. And then second of all, doing that internally, really creating our centers of excellence and providing our internal delivery at optimal geos within TI. And then the last comment I'll make is we've made some investments that I've referred to both in sales and marketing as well as in some of our cost transformation.

Speaker 3

That both has an effect on Q1. That is where we're making the investment, but we also believe that that will help stimulate the gross margins throughout the year.

Speaker 7

Thanks for the color.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Aravinda Galipatthige from Canaccord Genuity. Your question please.

Speaker 5

Hi, thanks for taking my question. I just wanted to go back to the EBITDA guide. I know that the provision related to the business combination obviously boosted your EBITDA number. Was that foreseen when you kind of gave the guide? Or should we sort of consider that to be incremental to sort of the number that you originally guided and you obviously maintained?

Speaker 5

Thank you.

Speaker 3

So, Arvinda, I will confirm that we did anticipate this in our guide and effectively it's aligned with what we're expecting with Willow Tree's performance and the recovery in the back half of the year. So this is anticipated within the guidance that we provided.

Speaker 5

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Sylvia Goyal from Scotiabank. Your question please.

Speaker 8

Good morning everyone. So Gopi, I wanted to actually get some color on the client concentration here. You did talk about TELUS and Google being obviously 2 of the key clients that

Speaker 7

you currently have.

Speaker 8

I wanted to make sure the amount of revenue that the company generated from TELUS at 24.3% includes TELUS Health revenue, number 1. And I am just concerned with respect to the ongoing recurring revenue that you can continue to generate out of these two accounts if the concentration were to stay where it is today?

Speaker 3

So Jeff, maybe I'll start with Vivia on that and then I'll pass to you. So lovely to hear from you, Vivia. Yes, the TELUS numbers we referenced do include TELUS Health. And of course, client concentration is something that we're focused on. What we're very pleased to see with both TELUS and Google is the diversification of the work that we're doing with both of them.

Speaker 3

So with TELUS, it's TELUS Health, as you mentioned, as well as some of our digital services with WillowTree. And with that one in particular, given the number of opportunities, projects, various business units, there really is no limit to the work we could continue to do with TELUS. There's over 30 projects leading with a favorable ROI that we need to work on at this moment in just the WillowTree digital business with TELUS. Similar with Google. Again, that is a diversification of the work on the AI front.

Speaker 3

And so we're encouraged by, while it is our larger clients, the different work that we're doing with them. And Jeff, maybe I'll pass to you to top up.

Speaker 2

Yes. I share your concern, Divya, with respect to concentration risk, given we've already experienced the downside of what that could potentially entail for us. Part of our expansion of our sales and marketing investments is reflective of our recognition of and our intention in the near term to do something meaningful to mitigate it by getting out there and winning more clients more quickly and growing them as quickly as we can so that we can reverse that trend of concentration. The history of TI way back from our origin was starting out dominated by the work we did for TELUS and I was quite pleased with the progress we made going into 2016, 2017, 2018 where TELUS' contribution to our revenues in totality was starting to diminish I think at our zenith down to about 14% of revenue. And unfortunately, as a result of our failure to be more successful in growing new other accounts and then scaling them more quickly, but at the same time, it's not entirely all bad news.

Speaker 2

It's a bit of a mixed outcome. The opportunity to continue to enable TELUS, enable Google across incremental service lines, different geographies, different capabilities, that's a good news story. And obviously not wanting to refuse the work for fear of exacerbating the concentration profile, but we well recognize the critical importance of turning that trend around and cautiously optimistic that before the year is out, we will have made a meaningful improvement in that regard.

Speaker 8

That's helpful. Thank you.

Operator

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.

Speaker 9

Hey, good morning. Just another question about diversification, but more on the opportunity side of things. Your data annotation business has been very focused on North American tech players, particularly with the cloud service providers. So two parts to this. Is the opportunity pipeline filling up with a more diverse group of customers?

Speaker 9

And secondly, do you need to modify anything in the business if enterprises start requiring your services for their AI efforts?

Speaker 2

Thanks, Dan. Good question. And it's not an if, it's already a when. Although hyperscalers have indeed historically dominated the annotation demand, we're already seeing that move into the enterprise space more broadly. And that is absolutely part of our strategy on our sales and marketing activity to try and capture the opportunity and to leverage our credentials in being a meaningful part of helping the hyperscalers to build out their machine learning algorithms and now their large language models.

Speaker 2

Again, you're quite right in terms of the North America centricity of the customer base, but we've got teams in both Japan and Korea that are already starting to win new opportunities. And we hope that that will continue to grow more quickly in the near term, given what we see as a pretty fertile target rich environment for both data annotation, computer vision work as well as gen AI work there.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Cassie Chan from Bave. Your question please.

Speaker 1

Hey guys, I just wanted to ask, I think you guys talked about some acceleration and some new client additions that is included in your full year guidance. Just wanted to know what kind of offerings there is more interest in which business segments, etcetera. And in general, I guess, how much of your business mix is existing client expansion versus sort of net new client addition? Thank you.

Speaker 2

The demand we're seeing now, Cassie, is really across all four service lines. And in terms of the mix, excuse me, I'll invite Kopi to reiterate sort of the percentages, if you will. I'm sorry, I got a bit of a frog in my throat this morning here. I think it really is sort of the recognition that there is opportunities across these broad segments and that's kind of been our overall strategic value proposition is not sort of just being in a single lane, but being a single point end to end service provider across the design, build, deliver continuum for our customers. That is sort of the source of our confidence and optimism about our ability to meet our guide.

Speaker 2

Pocky?

Speaker 3

Yes. And Jeff, I'll reinforce that. So Cassie, really following our current service line breakout that we give annually. So following in each four of those categories, roughly at that equal percentage is still growing all four service lines.

Operator

And our next question comes from the line of Bradley Karp from BMO Capital Markets. Your question please.

Speaker 10

Hi, thank you. This is Brad on for Keith Bachman. I want to go into the BFSI line a little bit. It's been under pressure for a couple of quarters now. You've been helpful calling out the impacts from Google and your large social media client.

Speaker 10

Are there any client specific issues within this line segment that we should think about even if it's below 10% of total revenues that would have an outsized impact on this line item? Or what are industry trends that are sort of occurring in BFSI and how and why would they get better? Thanks.

Speaker 2

So I think, Brett, Kopi mentioned that sequentially quarterly, we're actually seeing positive growth in BFSI. Indeed year over year and this over the last little over I guess a year or so, that segment was dominated by one of our BFSI clients in particular. And as a consequence of they having a bit of a hiccup in terms of their customer growth and by extension their reliance upon we to support them. And that was really the source of the decline in that vertical for us. That situation has now stabilized and indeed turned around.

Speaker 2

So we're anticipating improvement in the vertical in totality because of that situation as well as continued growth coming not just from some of the sort of TI direct BFSI sales customer wins, but again as Gopi noted earlier, the WillowTree team continued to have strength in that segment as

Speaker 10

well. Thank you.

Speaker 2

Thank you.

Operator

And our last question for today due to time constraints comes from the line of Maggie Nolan from William Blair. Your question please.

Speaker 7

Hi everyone. This is Kate Krumstein on for Maggie. Last quarter the team was really excited about the growth that you were seeing in the healthcare business and it looks like that trend is continuing this quarter. So is there anything incremental that you can share about the health of this industry vertical?

Speaker 2

Thank you for the question. Indeed, I am continuing to be quite encouraged by not just the progression in helping TELUS Health, but lots and lots of green shoots across the healthcare landscape more broadly outside of the TELUS vertical. Winning, supporting and growing work with TELUS Health has really kind of been a binary issue for TI. Despite our ambition to leverage our meaningful capabilities that I think have always been quite relevant for the healthcare sector, Our inability to have successfully grown our capability serving TELUS Health is almost a bit of a boat anchor in terms of our ability to successfully persuade non TELUS related healthcare businesses to work with us because we didn't have the credentials, we didn't have the experience, we didn't have the capabilities. And indeed, if when asked during the pursuit, how much work are you doing for TELUS Health?

Speaker 2

And the answer was not a particularly positive one. And not surprisingly, we were met with, well, I think we're going to take a pass. If your own sister organization is uncomfortable, I'm willing to work with you, why would we? Now that that's changed meaningfully and we are at, I would suggest, materiality thresholds and then some closing in on $200,000,000 a year of healthcare specific related revenues and not all will tell us, but much of that. We are now I think have earned the right so to speak to be taken more seriously with other healthcare providers and indeed the opportunities are starting to come much more fast and furious as a consequence.

Speaker 2

So excited about what we hopefully will be able to post and talk about in the quarters ahead here on the healthcare front in particular.

Speaker 7

Thanks, Jeff.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Jeff Pierrot for any further remarks.

Speaker 2

Thanks, Jonathan, and thank you all for your questions and engagement today. To echo Gopi's commentary, we are indeed committed to driving growth and remain laser focused on profitability and efficiency in our operations. We believe clients will soon again return to a growth mindset and we'll look to leverage the best of technology and TI's expertise to create better outcomes through differentiated customer experiences. TI is very well positioned going to market as an end to end AI fueled customer experience partner of choice to capture this opportunity. I'd like to remind you of our upcoming Annual General Meeting of Shareholders taking place next week, May 17, conducted in a user friendly digitally enabled format.

Speaker 2

You can find all the details on how to participate as a shareholder or join as a guest on our Investor Relations website. Gopi and I also look forward to connecting with many of you across our investor and analyst communities over the weeks ahead. And as always, our Investor Relations team is available for any further questions you may have. Our next quarterly investor call will take place in early August. And until then, please take good care and enjoy your summer.

Speaker 2

Bye all.

Operator

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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Earnings Conference Call
TELUS International (Cda) Q1 2024
00:00 / 00:00