2023-03-21 11:50:13 ET
Summary
- TELUS International reported its Q4 2022 and full year 2022 financial results on February 9, 2023.
- The company provides a range of customer experience, outsourcing and technology consulting services worldwide.
- TIXT is executing well, and its WillowTree acquisition shows promise, but is exposed to macroeconomic challenges from technology sector layoffs and a strong US dollar.
- I'm on Hold for TIXT for the near term.
A Quick Take On TELUS International
TELUS International ( TIXT ) reported its Q4 2022 financial results on February 9, 2023, missing revenue but beating EPS consensus estimates.
The firm provides customer experience, consulting and technology solutions to enterprises worldwide.
TIXT is subject to potential macroeconomic challenges and strong US dollar headwinds ahead.
I’m on Hold for TIXT in the near term.
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 for their ease of initial installation and expanding adoption within client firms through 'land and expand' approaches.
Major competitive or other industry participants include:
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Endava (DAVA)
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EPAM (EPAM)
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Globant (GLOB)
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Accenture (ACN)
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Cognizant (CTSH)
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Genpact (G)
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WNS (WNS)
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24-7 Intouch
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TaskUs (TASK)
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Teleperformance (TLPFF)
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Webhelp
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Appen (APPEF)
TELUS’ Recent Financial Results
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Total revenue by quarter has risen per the following chart:
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Gross profit margin by quarter has trended slightly higher in recent quarters:
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Operating income by quarter has also trended higher recently:
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Earnings per share (Diluted) were flat year-over-year for Q4 2022:
(All data in the above charts is GAAP)
In the past 12 months, TIXT’s stock price has fallen 21% vs. that of Cognizant’s drop of 35.8%, as the chart indicates below:
As to its Q4 2022 financial results, total revenue rose 5% year-over-year and gross profit margin increased two percentage points to 24%.
Operating income also grew an impressive 24% year-over-year to $84 million, while earnings per share were flat.
For the balance sheet, the firm ended the quarter with $125 million in cash and equivalents and $705 million in total debt.
Over the trailing twelve months, free cash flow was $332 million, of which capital expenditures accounted for $105.0 million. The company paid only $6.0 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:
Measure [TTM] | Amount |
Enterprise Value / Sales | 2.6 |
Enterprise Value / EBITDA | 12.4 |
Price / Sales | 2.2 |
Revenue Growth Rate | 12.5% |
Net Income Margin | 7.4% |
GAAP EBITDA % | 20.8% |
Market Capitalization | $5,500,000,000 |
Enterprise Value | $6,340,000,000 |
Operating Cash Flow | $437,000,000 |
Earnings Per Share (Fully Diluted) | $0.69 |
(Source - Seeking Alpha)
Assuming generous DCF parameters, the firm’s shares would be valued at approximately $18.60 versus the current price of $20.46, indicating they are potentially currently overvalued, with the given earnings, growth, and discount rate assumptions of the DCF.
As a reference, a relevant partial public comparable would be Cognizant; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | Cognizant | TELUS International | Variance |
Enterprise Value / Sales | 1.5 | 2.6 | 74.8% |
Enterprise Value / EBITDA | 8.0 | 12.4 | 54.8% |
Revenue Growth Rate | 5.0% | 12.5% | 150.8% |
Net Income Margin | 11.8% | 7.4% | -37.2% |
Operating Cash Flow | $2,570,000,000 | $437,000,000 | -83.0% |
(Source - Seeking Alpha)
Future Prospects For TELUS
In its last earnings call (Source - Seeking Alpha), covering Q4 2022’s results, management highlighted the company's full-year 2022 performance ‘whilst concurrently navigating challenging headwinds.’
Part of those headwinds includes a strong dollar, which has reduced the firm’s growth rate in dollar terms.
The company's sales funnel as of the end of 2022 was an estimated $2.7 billion, not including potential business from its WillowTree acquisition.
The WillowTree deal adds capabilities to the firm’s digital transformation offerings.
Looking ahead, management guided to total revenue growth of 21.5% at the midpoint of the range, including the WillowTree acquisition. Ex-WillowTree, management expects 11% revenue growth at the midpoint.
Adjusted EBITDA is forecast to grow 17.5% at the midpoint and adjusted diluted EPS of $1.22 at the midpoint.
The company's financial position is excellent, with total available liquidity of nearly $1.4 billion.
Regarding valuation, the market is valuing TIXT at significantly higher multiples than it is valuing Cognizant, which is not surprising given TIXT’s higher growth rate.
However, my discounted cash flow calculation indicates the stock may be fully valued at its present level of around $20.00, as the graphic shows below:
The primary risk to the company’s outlook is a slowing macroeconomic environment and continued layoffs in the technology sector which over-hired during the pandemic, potentially reducing its growth trajectory in 2023.
Also, a continued strong dollar, possibly due to banking system problems causing dollar shortages globally may reduce its earnings as other currencies drop in comparison.
For these reasons, my outlook in the near term for TIXT is on Hold.
For further details see:
TELUS International Expands Capabilities With WillowTree Acquisition