CTSH - TELUS International Suffers Headcount Reduction Delays And Lowered Growth

2023-09-28 10:51:31 ET

Summary

• TELUS International (Cda) Inc. provides customer experience consulting and technology solutions globally.
• Management has reduced growth guidance from lowered client spending, and profitability has dropped due to delays in European headcount reductions.
• My near-term outlook on TELUS International is Bearish [Sell].

A Quick Take On TELUS International

TELUS International (Cda) Inc. ( TIXT ) provides customer experience consulting and technology solutions to organizations globally.

I previously wrote about TELUS with a Hold outlook.

TELUS International (Cda) Inc. management has reduced forward growth guidance, and profitability has dropped due to delays in European headcount reductions.

My near-term outlook on TIXT is Bearish [Sell].

TELUS Overview And Market

Vancouver, Canada-based TELUS International was originally created as a division of parent firm TELUS Corporation to help organizations maximize their customer engagement through its customer experience knowledge and consulting capabilities.

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

TELUS seeks new client relationships with mid-size and large enterprises via a direct sales & marketing model.

The firm counts hundreds of clients in various industry verticals, including technology, games, communications, media, ecommerce, fintech, healthcare, travel and hospitality industries, among others.

According to a 2023 market research report by Grand View Research, the global customer experience management market is expected to reach $32.9 billion by 2030.

This represents a forecast CAGR of 15.4% from 2023 to 2030.

The main drivers for this expected growth are the ongoing shift to digital engagement by enterprises as customers demand increased quality, convenience, and speed of service.

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

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

Also, firms are choosing cloud-based delivery models for their ease of initial installation and are expanding adoption within client firms through 'land and expand' sales and marketing strategies.

Major competitive or other industry participants include:

• Endava

• EPAM

• Globant

• Accenture

• Cognizant

• Genpact

• WNS

• 24-7 Intouch

• TaskUs

• Teleperformance

• Webhelp

• Appen

TELUS Recent Financial Trends

• Total revenue by quarter has continued to rise; Operating income by quarter has dropped in recent quarters due to a fall in gross profit:

• Gross profit margin by quarter has fallen markedly in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have remained relatively stable:

• Earnings per share (Diluted) have fallen sharply since Q3 2022, as the chart shows here:

(All data in the above charts is GAAP.)

In the past 12 months, TIXT’s stock price has fallen 73.34% vs. that of Cognizant’s ( CTSH ) rise of 17.65%:

For balance sheet results, the firm ended the quarter with $143.0 million in cash and equivalents and $1.65 billion in total debt, of which $80.0 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $291.0 million, during which capital expenditures were $93.0 million. The company paid $14.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For TELUS

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:

Based on the DCF, the firm’s shares would be valued at approximately $7.06 versus the current price of $7.41, indicating they are potentially currently fully valued.

As a reference, a relevant partial public comparable would be Cognizant:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below shows the frequency of certain keywords during management’s most recent earnings conference call:

The company and its clients are facing a variety of macroeconomic challenges and uncertainties in the current business environment.

Analysts questioned leadership on its view of where the firm was in the current business cycle, the effects of AI technologies on its operations and business and pricing pressures, among other topics.

Management said that it is not ready to "call the bottom," sees continued pricing pressures from clients and is embracing the AI revolution, realizing that it will create disruption but also opportunities.

Commentary On TELUS

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted a "perfect storm of near-term and temporary profitability pressure."

Some of the firm’s large technology clients are continuing in their ‘even more aggressive near-term cost cutting’ efforts.

Also, its European operations were not able to scale down in response to changing market conditions due to labor law constraints there, so profitability has been damaged in the short term.

Notably, the company is engaged in "hundreds of programs" for AI projects with its parent firm, TELUS Corporation, gaining expertise and real-world experience there and with other organizations.

Total revenue for Q2 2023 rose by 6.9% year-over-year, while gross profit margin fell by 5.2%.

Selling and G&A expenses as a percentage of revenue increased 0.1% YoY and operating profit fell by a whopping 53.2%.

The company's financial position is moderate, with ample liquidity but a significant debt load; free cash flow has been quite strong.

Looking ahead, management lowered its full-year guidance, so consensus estimates now expect topline revenue growth of 10.0% in 2023.

If achieved, this would represent a drop in revenue growth rate versus 2022’s growth rate of 12.5% over 2021.

In the past twelve months, the firm's EV/EBITDA valuation multiple has dropped precipitously, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include improving profitability as management is able to rationalize its European operations with headcount reductions.

However, given the continuing soft demand from clients, especially in the technology sector, and more broadly as clients delay discretionary projects and exert greater scrutiny over existing projects, I’m not optimistic about the company's prospects.

So, my outlook on TELUS International (Cda) Inc. in the near term is Bearish[ Sell].

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