TDCX - TDCX: Why Weak Guidance Is Not A Big Concern

2023-04-17 12:22:17 ET

Summary

• TDCX reported 4Q22 revenue of SGD$177 million and adjusted EBITDA of SGD$47 million, resulting in a margin of 26.5%.
• TDCX's cautious approach to guidance is appropriate, considering the limited visibility into future client demand trends.
• Increased emphasis on cost optimization among both new and existing clients provides a path for more demand for high-value outsourcing projects.

Summary

As before, I recommend buying TDCX ( TDCX ). My opinion has not changed since I first wrote about TDCX ; rather, this piece serves as a follow-up to the thesis in light of the company's recent performance. TDCX reported its 4Q22 financial results, disclosing revenue of SGD$177 million and adjusted EBITDA of SGD$47 million, resulting in a margin of 26.5%. It should be noted that the EBITDA margins would have been 29.9% if the negative FX impact on the quarter's USD strength had not existed. The cautious approach with regards to guidance taken by management seems appropriate, considering the limited visibility into future client demand trends, in my opinion. I believe it is necessary for investors to adjust their expectations as I believe digital advertising clients are likely to focus on cost optimization in the coming future, thereby reducing budget. In light of these considerations, TDCX has provided guidance for 2023 in which it projects a 3-8% y/y increase in revenue and an adj. EBITDA margin of 25-29%. And if we look over the medium-term, there is a path for more demand for high-value outsourcing projects as there is an increased emphasis on cost optimization among both new and existing clients.

Despite the weak guidance, I was heartened to see a healthy pace of client expansion in 4Q22 with 10 new logos, bringing total adds to 41 in FY22 compared to 20 new logos in FY21. In the meantime, as of 4Q22, 84 clients had launched campaigns, a significant increase from the 52 launched clients as of 4Q21. As a result of TDCX's continued exposure to rapidly expanding new-economy customers, I maintain my buy rating on the company. Additionally, and arguably one of the most bull point is TAM - the outsourced CX solutions industry in SEA is expected to reach a TAM of US$12bn by 2026 . Finally, TDCX provides a viable offshore model that also addresses the cost optimization initiative of many businesses by providing support in multiple languages from a central location.

Omnichannel CX solution

Existing campaign expansion among clients in the travel & hospitality and technology industries continues to drive revenue growth. Lower demand from digital advertising and media clients has partially offset this growth, and I anticipate this trend to continue into the current year. Consequently, guidance has become less optimistic due to the weakened demand. Even though there is hope for a tourism rebound, especially with the reopening of North Asian countries, I appreciate that management is proceeding cautiously in the face of unknown client demand, having already implemented cost-cutting measures like layoffs and efficiencies.

Sales and digital marketing

Consistent progress is also evident here. Expansion of existing campaigns and the beginning of contributions from new clients drove the 41% increase in revenue to SGD$49 million. A similar dimming of optimism is anticipated for this year as I anticipate weaker volumes from digital advertising and media clients. While the Sales and Digital Marketing division may have a higher proportion of digital advertising clients, I anticipate stronger headwinds (resulting from reduced spending) in the Omnichannel Customer Experience [OCX] division because the services provided under OCX are typically regarded as non-core support functions by customers.

Guidance

Due to the effect of macroeconomic uncertainties on its key customers, the company is only projecting revenue growth of 3-8% for FY23. As a result of rising labor costs and other expenses associated with its global expansion, TDCX expects its adjusted EBITDA margin for FY23 to be between 25% and 29%, down from 30% in fiscal year 22. These margins, in my opinion, should continue to improve from here over the medium to long-term as TDCX grows its business in the new regions and eventually passes on some of the wage inflation to its customers. TDCX's revenue outlook, in my opinion, will improve as business visibility of key customers increases. My hope that things will improve is not without foundation. TaskUS, another outsourcing competitor, finished FY22 with 40 client additions and a healthy net revenue retention rate of 114%, reporting revenue of US$242 million in 4Q22, which was above its US$231-233 million guidance range. As a result of its continued execution on efficiency improvements, its adj. EBITDA margin increased to 23.9%, exceeding its guidance of 23.2% by 0.3%. Management did remain cautious on the results call, citing macro uncertainty and tough comps, but indicated a return to growth beginning 2H23, with FY23 revenue growth of 0.5% and EBITDA margin of 23% compared to revenue decline of 3.2% and adj. EBITDA margin of 21% in 1Q23.

I appreciate management's realistic approach to setting growth expectations in the face of ongoing macroeconomic uncertainties. However, I do believe that TDCX has potential for growth, particularly in the medium-term, if they prioritize cost optimization with both new and existing clients, which could lead to an uptick in demand for high-value outsourcing work.

Macro risk

TDCX's visibility is taking a hit as a result of recent announcements of layoffs and the elimination of business units by some of the company's most important clients. In addition, TDCX's FY23 contract negotiations are expected to last longer than usual. As a result of staffing up for expected increases in project volume that haven't materialized due to macroeconomic uncertainty, TDCX is also experiencing short-term productivity pressures.

Conclusion

In conclusion, despite the weakened guidance, I maintain my recommendation to buy TDCX. The company's recent 4Q22 financial results showed a healthy pace of client expansion and an increased number of launched campaigns, particularly among new-economy customers. TDCX's exposure to these rapidly expanding customers, combined with its offshore model that provides support in multiple languages from a central location, makes it a viable choice for businesses seeking cost optimization. Although macroeconomic uncertainties have affected the company's visibility and caused short-term productivity pressures, TDCX has potential for growth in the medium-term if it prioritizes cost optimization with both new and existing clients, leading to an uptick in demand for high-value outsourcing work.

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