TDCX - TDCX: Full-Year Guidance Unchanged Despite Q3 Beat

2023-11-25 00:54:54 ET

Summary

• It is disappointing that TDCX didn't raise its FY 2023 guidance, although its Q3 2023 results were above expectations.
• TDCX has a huge cash pile on its books, which could be used for M&As or buybacks to boost its future financial performance.
• A Hold rating for TDCX is maintained following an assessment of its recent quarterly results and prospects.

Elevator Pitch

TDCX Inc. (TDCX) shares are still rated as a Hold.

I previously highlighted the positives and negatives associated with TDCX in my earlier write-up published on July 3, 2023. My latest update focuses on the company's most recent quarterly financial performance and its outlook.

My decision is to maintain a Hold rating for TDCX. On one hand, the company's Q3 2023 top line and bottom line beat expectations, as a result of good progress with its diversification plans and solid cost control. On the other hand, TDCX didn't revise its guidance upwards because revenue contribution from its biggest clients has been disappointing.

TDCX Maintained FY 2023 Guidance Notwithstanding Third Quarter Results Beat

TDCX didn't make changes to the company's top line expansion and normalized EBITDA margin outlook for the full year, even though its Q3 2023 headline numbers came in above expectations. Note that the company reports in Singapore dollars or S$.

Revenue for TDCX decreased by -4.5% QoQ and -5.4% YoY to S$163.5 million for the third quarter of the year. TDCX's actual Q3 2023 top line turned out to be +0.7% higher than the sell side's consensus forecast of S$162.4 million (source: S&P Capital IQ ).

The company's top line beat for the recent quarter was driven by an expansion of its customer base and its success with diversification. In its Q3 2023 results press release , TDCX revealed that its number of customers grew by +31% YoY to 94 at the end of the latest quarter. Also, sales derived from TDCX's customers other than the five largest jumped by +51% YoY in Q3 2023. The proportion of revenue generated from new markets, which the company defined as "Colombia, India, Romania, South Korea, Hong Kong, Türkiye, Vietnam, Brazil and Indonesia", was "five times" as high for Q3 2023 vis-a-vis Q3 2022, as stated in its third quarter earnings release.

But TDCX still saw a decline in its top line for the third quarter because of the weaker-than-expected performance of the company's largest customers. At its Q3 2023 earnings call , TDCX noted that "revenues from the rest of the business (excluding its biggest customer) would have grown in the low-teens percentage year-on-year for Q3 2023 compared to Q3 2022."

TDCX's normalized earnings per share increased from S$0.21 in Q3 2022 to S$0.22 for Q3 2023, and this was +5% better than the analysts' consensus estimate of S$0.21 as per S&P Capital IQ data.

Higher interest income and lower employee benefits costs were the key factors that led to the company's +5% EPS beat in the recent quarter. TDCX's interest income surged by +166.8% YoY to S$3.3 million for Q3 2023, thanks to an increase in interest rates on its deposits. Employee benefits costs for the company declined by -4.4% YoY to S$104.7 million in the third quarter, which TDCX credited to "recalibration of employee headcount and costs of several key operating units" in its results press release.

While some investors would have hoped for TDCX to raise its FY 2023 guidance after delivering above-expectations earnings for Q3 2023, the company chose to reiterate its existing full-year guidance. Specifically, TDCX still expects to expand its top line by +2-4% and register a normalized EBITDA margin in the 25-27% range in the current fiscal year. This implies a slower pace of revenue growth and EBITDA margin contraction, as TDCX's top line increased by +19.6% in FY 2022 and its EBITDA margin for the prior fiscal year was 27.1%.

In my opinion, there are two reasons for TDCX sticking to its earlier guidance.

One reason is that the decrease in headcount might not be sustainable, and there could be an increase in employee benefits costs for subsequent quarters. TDCX emphasized at the company's third quarter results call that "as the business picks up, we'll be hiring more", and stressed that there is no "program of layoffs."

Another reason is that the company's largest clients aren't performing as well as one would expect, a topic which I write about in the subsequent section.

Performance Of TDCX's Biggest Customers Is A Concern

TDCX disclosed at the company's third quarter results briefing that the sales derived from its two largest customers declined from 56% for Q3 2022 to 47% in Q3 2023. Based on my calculations, this suggests that revenue contributed by TDCX's two biggest clients had decreased by approximately -21% YoY in the latest quarter.

The company mentioned at its most recent quarterly earnings briefing that "our large digital advertising client has cut volumes", and also indicated it has "some large clients who are restructuring, looking for efficiencies."

With its five biggest customers still accounting for 71% of TDCX's top line for Q3 2023, it is reasonable to expect that TDCX's revenue in the short term will be under pressure, although it has done a decent job relating to diversification as highlighted above.

TDCX's Cash Pile Might Be Utilized For Buybacks And M&As

As of September 30, 2023, TDCX boasted a net cash balance of S$433.6 million or $317.7 million, which is equivalent to about 44% of its current market capitalization.

TDCX noted at its latest quarterly earnings call that its financial strength offers it the "flexibility to pursue strategic growth as well as to enhance shareholder returns through a variety of avenues."

In the preceding section, I noted the weakness associated with its biggest clients. This means that TDCX has to seek other ways of driving bottom line expansion such as buybacks or M&As.

TDCX has already spent over $15 million on share repurchases since the initiation of its $30 million buyback plan with no expiry date in March 2022. The company can boost its future EPS by shrinking its equity base with accelerated buybacks.

On the other hand, TDCX can consider allocating more time and effort to exploring new inorganic growth initiatives such as acquisitions, as the weakness of its largest customers is now a drag on its organic growth prospects.

Final Thoughts

A Hold rating for TDCX is fair. The near-term outlook for TDCX is lackluster, as the prospects for its largest customers are poor. However, TDCX's future performance could potentially surprise on the upside, assuming that the company can utilize its cash wisely for share repurchases and acquisitions.

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