CA - TELUS International Reduces Revenue Growth Expectations Ahead

Summary

• TELUS International went public in April 2021, raising around $925 million in an IPO.
• The firm provides an array of technology and business consulting services worldwide.
• TIXT has grown revenue and profits but faces a negative macroeconomic environment, reduced client budgets and delayed projects ahead, so I'm on Hold for the stock near-term.

A Quick Take On TELUS International

TELUS International ( TIXT ) went public in February 2021, raising approximately $925 million in gross proceeds in an IPO that was priced at $25.00 per share.

The firm provides customer experience consulting and technology solutions to enterprises worldwide.

TIXT has sold off in recent months and management has not provided strong guidance to counteract fears of a downturn’s effect on the company's growth prospects.

Until we learn how serious the downturn will be, I’m on Hold for TIXT.

TELUS International Overview

Vancouver, Canada-based TELUS International was founded as a division of parent firm TELUS Corporation to enable enterprises to maximize their customer engagement and value through its customer experience knowledge and consulting capabilities.

Management is headed by president and CEO Jeffrey Puritt, who has been with the firm since 2016 and previously held leadership positions at parent firm TELUS Corporation.

The company pursues new client relationships with mid-size and large enterprises via a direct sales & marketing model with a consultative approach tailored to each client's unique requirements.

TIXT has made a number of acquisitions and received outside investment since its inception within its parent firm.

TELUS has over 50,000 employees in 50 delivery locations in 28 countries.

The firm counts over 600 company clients in the technology, games, communications, media, ecommerce, fintech, healthcare, travel and hospitality industries, among others.

TELUS’ Market & Competition

According to a 2020 market research report by Grand View Research, the global customer experience management market is expected to reach $23.6 billion by 2027.

This represents a forecast CAGR of 17.7% from 2020 to 2027.

The main drivers for this expected growth are the continuing transition to digital engagement by enterprises in response to changing customer behavior demanding increased quality, convenience, and speed of service.

Also, the ongoing rise in the use of social media networks and online business is increasing demand for 'contextualized and personalized consumer experience through data management.'

Brands now understand the ability of consumers to share their experiences and potentially affect the brand's reputation for better or worse.

Additionally, companies are choosing cloud-based delivery models to ease initial installation and expand adoption within client firms through 'land and expand' approaches.

Major competitive or other industry participants include:

• Endava

• EPAM

• Globant

• Accenture

• Cognizant

• Genpact

• WNS

• 24-7 Intouch

• TaskUs

• Teleperformance

• Webhelp

• Appen

TIXT’s Recent Financial Performance

• Total revenue by quarter has begun to plateau in recent quarters:

• Gross profit margin by quarter has risen in the most recent reporting period:

• Operating income by quarter has grown markedly recently, as the chart shows below:

• Earnings per share (Diluted) have also risen more recently:

(All data in the above charts is GAAP)

In the past 12 months, TIXT’s stock price has fallen 20.5% vs. the U.S. S&P 500 index’s ( SPY ) drop of around 11.4%, as the comparison chart below indicates:

Valuation And Other Metrics For TELUS International

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $20.93 versus the current price of $19.90, indicating they are potentially currently slightly undervalued, with the given earnings, growth, and discount rate assumptions of the DCF.

As a reference, a relevant partial public comparable would be Cognizant Technology Solutions ( CTSH ); shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

A complete comparison of the two companies’ available performance metrics may be viewed here .

Commentary On TELUS International

In its last earnings call (Source - Seeking Alpha), covering Q3 2022’s results, management highlighted the potential for a global recession amid ‘prolonged geopolitical uncertainties.’

As to its financial results, total revenue rose 11% on an as-reported basis, or 16% on a constant-currency basis.

Gross profit margin increased, leading to a strong rise in operating income and growing earnings per share.

For the balance sheet, the firm finished the quarter with $143 million in cash and equivalents and $482 million in long-term debt.

Over the trailing twelve months, free cash flow was $293 million, of which capital expenditures accounted for $108 million of cash used.

Looking ahead, management is seeing ‘challenges to our client’s revenue growth…we did not anticipate the magnitude and rapidity of the impact to our clients.’

For the full-year revenue outlook, management expects growth of 12.6% on an as-reported basis, with significant foreign exchange headwinds negatively impacting its revenue growth in US dollar terms.

Regarding valuation, the market is valuing TIXT at higher valuations than Cognizant, perhaps due to higher growth.

Potential risks to the company’s outlook include a continued slowdown in macroeconomic activity, negatively affecting client budgets for digital transformation initiatives.

An upside catalyst could be a ‘short and shallow’ downturn that is completed by mid-2023 for an improved second half of 2023.

Recently, TIXT has sold off and management has not provided strong guidance to counteract fears of a downturn’s effect on the company's growth prospects.

Until we learn how serious the downturn will be and how TIXT reacts to it, I’m on Hold for TIXT.

For further details see: