Teleperformance SE (TEP.PA) Earnings Call Transcript & Summary

Welcome to TP Third Quarter 2025 Revenue Conference Call. [Operator Instructions] Now I will hand the conference over to the speakers, Thomas Mackenbrock, Deputy CEO; and Olivier Rigaudy, Deputy CEO and Group CFO. Please go ahead.

Thank you, and a warm welcome from our side. Olivier and myself are very happy to present to you our Q3 numbers. Let's have a start. I will give you a short update on the key highlights. Olivier will deep dive on the composition of our Q3 and 9-month revenue, and then we provide also some further explanation on the outlook that we're currently seeing. Let's have a look at the key highlights. So here, 3 messages. First of all, the group is resilient, and we have demonstrated in Q3 the resilience that we have shown in the first half of the year. It is very simple. We have grown in Q3 1.5% like-for-like, which is exactly the same number that we have delivered for the first 9 months of this year, 1.5% like-for-like growth. And also in the first 6 months, if you remember, the growth was 1.5% like-for-like. So we are now at EUR 7.6 billion. We have, and that's the second metric, also in Q3, a story of 2 tails. Our Core business, our Core BPO business is growing healthy and demonstrates strong momentum also in Q3. You see the numbers here. We are close to 4% growth in Q3, which leads to growth of more than 3% for the first 9 months. We continue to see strong momentum in EMEA, APAC and which is very positive to note in Q3 is a ramp-up and acceleration of the momentum in the Americas. You see this year in the first half year, we were less than 1% growth, and we have now demonstrated with the team, in particular with the strong performance in India and LatAm, but also an improvement in our U.S. domestic market to go back there of a growth rate of more than 2% in Q3. We see on top of that for our core BPO services, double-digit growth in back office-related task as well as in all our AI-enabled solutions, including AI data services. So we are in this part, fully on track with the execution of our strategy. On the other hand, Specialized Services. We talked about this in depth in our half year numbers. There, we see a different picture. As you can see, on a like-for-like basis, if we exclude the famous nonrenewal of our Visa application contract, the growth is at 2.6%. But if you adjust and if you see the number on a true like-for-like basis, we are down at minus 8.7%. And if you just look at Q3, it's down by minus 12%. We are doing a bunch of measures of addressing this. It is a highly volatile U.S. market that the Specialized Services team is facing, but they have implemented strong measures to protect profitability, and there, we are on a good path. Third message is beyond the numbers. We are making good progress on executing our strategy, Future Forward that we presented end of June. We have set up now an institutionalized group value creation office that will focus and is focusing and supporting all our management teams across the world on 3 things: one, accelerating growth; [indiscernible]; three, driving efficiencies and to accelerate the transformation. We are working hard on expanding our AI solutions portfolio, and I will give you later a sneak preview on the current status and more is to follow in the months ahead. And we are continuing to leveraging any in our own operation and see there are opportunities to drive process excellence as well as enhanced efficiencies. Based on the current momentum and the latest forecast and also the volatile development in the world, we also have to adjust our financial objectives for 2025. We don't see an acceleration in Q4 that would have allowed us to reach the 2% guidance on the revenue growth side. And thereby, we're seeing now a growth for the year between 1% and 2%, a recurring EBITDA margin between 14.7% and 15% at constant exchange rates and a cash flow generation that is a bit lower at around EUR 900 million, excluding nonrecurring items. Let's have a look at the different elements. If we start on the business side, as you can see here, the split, Specialized Services and the Core business, 15%, 85% is unchanged. What is interesting to note is the strong performance of almost 5% of our core BPO business in EMEA-APAC. This is true for a number of regions. I just highlight here a few. The U.K., our sub-Saharan Africa, APAC, our multilingual hubs, Egypt, Turkey, the Middle East really demonstrate strong performance, and we are seeing there good momentum across a number of verticals. In the Americas, as I said, it's important to note the acceleration that we've seen in Q3. We see strong momentum in India, even moving businesses -- more businesses for our Indian operation as well as in LatAm on the domestic side as well as on the new and offshore side. Specialized Services, as mentioned before, is impacted negatively here in the 9 months by a bit more than 8% like-for-like growth. But we see really as a resilience in LanguageLine on the profitability side, even though we see remaining challenges for the rest of the year. To put this into perspective and particular on the BPO businesses where we spent last time a lot of discussing the different elements of growth, you can see here over the last 2 years, a continuous momentum of the business, and we see this really as a strength in our ability to adapt our business portfolio to the changing environment. Strategy. As announced in June, our Capital Markets Day, we're in full force of implementing TP Future Forward, building a better TP for the future, enhancing our capabilities on transformation, driving efficiencies and accelerating growth for selected areas. On the transformation side, as I said before, a few updates. We are growing double digit in these key areas: technology, consulting, back-office solution, AI data services in particular. We have launched more than 400 new AI projects in the first 9 months of this year, of which more than 150 in Q3. The whole transformation teams are busy in developing, implementing on client side, while at the same time, we are investing in our FAB solution, our foundational AI backbone solution, and we focus on driving outcomes for the clients. And that means driving industry-specific AI solutions built on our deep domain expertise and our close proximity to our clients. And on the other hand, we're building horizontal functional solution that address specific needs of our clients. On the other side, on the flip side, if you will, this is client faces, but on the internal side, we also have launched several projects to enhance the usage of AI in TP's internal processes. As you can imagine, core processes like talent acquisition, training, coaching, workforce management, quality management are benefiting from an enhanced use of AI. And we started their company-wide program to accelerate the adoption. In parallel and closely linked to that, we do a thorough review of TP's processes and structures and see how we can, with an accelerated AI adoption, drive efficiencies for the future while at the same time, improving our operational excellence. As promised to give you a quick sneak preview what is happening on the AI acceleration side. So this is the picture we discussed end of June, building our framework and orchestration platform for AI solution. It's really how will TP look like. And it's a combination of Agentic AI driving outcomes while combining it with the human ingenuity and the human competence that we have in the organization. And we believe we will be successful if we drive tangible outcomes for the clients. So it's not an abstract concept, but we're building and are deploying AI solution on our client operation that drive these outcomes. For us, it's a question about being close to the client and having specific solution that works in enterprise environments. And as you can see, we have structured it in 2 dimensions: dimension one, how do we provide AI competence for functional needs; dimension 2, how do we drive point solutions with AI for industry-specific needs. As we speak today, because TP has a rich portfolio already of AI micro services that already are built upon these FAB solutions, and we're enhancing those, have more than 400 live deployments of FAB solutions in place with our clients, and we are now honing and developing further these solutions as we move forward. And as this is really the future of TP, we will present now on a regular basis the progress along these different solution suites. To give you maybe one example, what is live today and where we spent already a lot of efforts over the last years, it's now our new platform, FAB Assist, which combines a whole set of AI solutions TP has developed over the last 2 years. It's about augmenting human talent with AI when it comes to knowledge management, coaching, real-time feedback, quality, accent neutralization, language translation, decision support and expected action. And this is live today in practice with more than 190 clients, driving real outcomes every day for our clients. Another sneak preview is FAB Collect. As you know, we do provide for many clients around the world collection services with human. Starting in the summer, we have developed a hybrid solution, combining human talent with Agentic AI to drive better outcomes on the collection process. I'm very proud to announce that we have already deployed now 3 client solution with FAB Collect, which is an autonomous AI voice agent for early collections, driving, of course, all the benefits also in collection services, and we have great plans to accelerate FAB Collect and the other solution as we move forward. So this is it, the sneak preview. I now hand over to my dear friend, Olivier, who will provide some further details on the numbers. Over to you, Olivier.

Thank you, Thomas. Hello, everyone. I'm really happy to present you the figure of the Q3 and the 9 months. So let's start with this first figure. So as you can see, Q3 is a good quarter. We have announced a growth of 1.5%, which was significantly above what the market was waiting today. So we are in a growth mode, and we are going to see how it's going to be built. Clearly, we have a positive momentum in Core Services all along the period, which is noticeable, while having a volatile business environment in the U.S., which has impacted interpretation and also recruitment process outsourcing activity. Let's go in detail to understand what happened in the 9 months. As you can see here on the slide, you have the impact of the different, I would say, events that had an impact on the 9 months figure. Of course, the first one is the currency effect, which is significantly high and higher than that we have known over the last months. EUR 225 million. I'm sure you remember that in the first half -- in the second quarter of the year, we had already a first impact. In Q3, we had an impact of close -- more than EUR 100 million -- EUR 104 million, which is, of course, mostly linked to dollar for EUR 50 million, but also from some other currency, including Indian rupee and to a lesser extent, Colombian pesos and Turkish lira. If you take out this EUR 225 million currency effect with a limited impact of hyperinflation, as you can see, which is negative by 0.1%, we had a like-for-like growth, which is EUR 108 million, mostly coming from Core Services. I'll come back in a minute to that. And of course, the change in scope and consolidation, which is mostly driven by ZP acquisition that was consolidated early 2025, February 1st -- 1st of February 2025 and to a lesser extent, Agents Only that came in the group in June last year -- this year. Of course, this EUR 108 million growth is split in 2, as mentioned by Thomas. There is a significant growth coming from the Core Services, which is roughly EUR 200 million, I'll come back later on; and the negative impact from the Specialized Services, which is mostly due to the nonrenewal of the significant Visa application contract in U.S. -- in U.K., sorry. Of course, this is a global picture. Let's go in detail on the figure. As you can see, you have here laid out on this slide, the revenue by activity for the quarter and for the 9 months. What we see, and I just wanted to highlight 2 points. The growth of the Core Services, plus 3.9% in Q3, which is clearly the most -- higher figures that we achieved over the last quarters, driven not only by the growth in Europe, which is renewed some times, 5.1%, but also with the growth that is coming back in Americas, 2.4%. Of course, the impact of the Specialized Services is minus 12.3%, which if you exclude this [indiscernible] contract, is still positive at 1.7%. You have also for the 9 months, the figures that are shown here, plus 1% for Americas and minus 8.7% for Specialized Services, but Core services is growing at 3.2%. So if I want to summarize this quarter is what we see is a continuous growth of the Core Services, mostly driven by Europe -- continuing Europe performance, but also by the fact that Americas are back on track in terms of growth. Now if you want to look where does come from this growth, of course, the fact that TP benefit from -- enjoy a diversified client portfolio is also really a strength and adds a value. We had a very good momentum this quarter, but since the beginning of the year in the public sector, in the media and entertainment and gaming and to a lesser extent, in FMCG and travel and hospitality. So when you look at this broad vertical approach, it helps the group to be resilient, what could happen. And as mentioned by Thomas a minute ago, if you look where we are, care is always 54 -- as before, 55% of the business. But what we see is a growth of BPO, back-office service solution and the trust and safety and technical support solution. So we have a double-digit growth in back-office BPO solution and AI-powered solution everywhere across the region, and we have a care that is roughly at the same level that we had before. So that are the figure for the Q3 and for the 9 months. So I hand it over to Thomas to give you an updated approach on the target for the full year.

Sure. So as discussed before, we have updated our objectives because we are a bit cautious for Q4. And the reasons are threefold. Number one, we don't expect a stronger rebound of our Specialized Services business in Q4. Yes, there's the effect of the UKVI where Q2 and Q3 have been the biggest impact, but we don't expect that the other businesses are growing more than anticipated before. Second effect, the strong performance of our Core Services that you've seen throughout this year, we don't believe that this will overcompensate the weakness in our Specialized Services in Q4. We see in really this volatile environment, some cautiousness from our clients based on the latest business forecast. And thereby, we don't see that this can accelerate more than anticipated this weakness. And thirdly, even from a macro environment, as you can see almost every day in the news, we had yesterday a hurricane in the Philippines that impacted our sites. We had 4 weeks ago, an earthquake in the Philippines. We had a hurricane in Jamaica that impacted our operations in Jamaica. We have the U.S. government shutdown that obviously impacts also our government services operation in the U.S., but also general consumer sentiment. So we are a bit cautious when it comes to Q4. It's still very much sort of in line in terms of range, what we have delivered for the first 9 months of this year, but we want to give here this warning, and this impacts also our EBITDA guidance and to some extent, the net free cash flow guidance. In context, and many of you know this, Q4 is always typically the strongest month of the year for our BPO operations, but it's also the most volatile quarter of the year that gives a little bit of uncertainty as we have for many clients, their peak period in this period. And this will ultimately land how we then deliver now November, December in the numbers. If you look at a quarterly revenue of EUR 2.5 billion, you see also the magnitude we are operating. Lastly, and just as a reminder, our financial ambitions, as we highlighted in our strategy in June are unchanged. With this, I would open the floor for Q&A, and I'm sure you have many questions that we are happy to answer.

[Operator Instructions] The next question comes from Remi Grenu from Morgan Stanley.

Three questions on my side, please. So the first one would be on your revised margin guidance. So can you first explain what has changed between July and now to explain that 30 bps downgrade at the midpoint? If there is any competitive or pricing pressure or if it's only in the context of what you were saying about expectations for Q4? It would be great also to have an idea of what you expect will be the FX impact. We need to add to that constant currency guidance at current level of FX, so we can kind of make the forecast on the back of that. The second question is on the downgrade to free cash flow generation as well. Is it purely about lower organic growth and margin guidance? Or is there also some drivers within CapEx intensity or working capital that we need to have in mind and which would have changed? And then the third one, I think you're referring to some kind of strategic review in the press release. So -- and that -- you will announce the conclusions from that in February. So just wanted to have your initial thoughts on what could be included in that plan? Is it about a review of the perimeter, cost cutting, headcount reduction? What are basically the options you're looking at?

Sure. You want to go ahead first with the cash flow and EBITDA?

Yes. Let's go with the revised guidance, which is mostly due to the fact that we are cautious, as our clients are cautious for the next 3 months to go. So there is nothing major difference from that, except this one. That's the first point. FX impact, we don't see something very different that we had in the first half, something between 20 to 30 basis points. It's difficult to tell today, but that's probably the magnitude of the topic. As far as cash flow is concerned, I would say for a group like us, which is so big, it's challenging to forecast on a monthly basis the cash flow, specifically with our global footprint. You may remember that in the first half, we published a first half year that was down versus previous year on the back of a few one-off effects. We are catching up this effect and resuming a solid path of cash flow generation. I do believe that since July -- I'm sure that since July, we have made significant progress in cash flow and specifically in the last 2 months, specifically on working cap and also on CapEx. So I'm quite confident. But on the back of the slight revision of our revenue and recurring EBITDA margin guidance, we want to be on the safe side, and we are, of course, cautious on that. It's around. It could be a little more, a little less, difficult to predict EUR 20 million to EUR 30 million on the cash flow of EUR 1 billion. Remember that we have EUR 2.5 billion, I would say, account receivable on the balance sheet and missing EUR 20 million payment or EUR 10 million payment, it's difficult to predict at this level. So we are on a cautious approach, but we should be delivering the figures that Thomas mentioned a minute ago.

To answer your last question regarding transformation, we're building a future company that is the best possible partner for our clients on the transformation side, while at the same time, using the same competence and focus on driving transformation of our internal processes. As we outlined in our strategy, the second part of the coin, how do we drive transformation internally is critical. You've seen probably many news also from our industry and competitors, how they are adopting AI to drive efficiency, and we do the same process. We look step by step, process by process, structure by structure, how we can be better set up for the future and driving this with AI adoption, but not just that, but also rethinking how we operate. We do this process now. And once we've completed it, we will present the finding at the end of February. But this is very common. I mean, if you just look in the news as some of the announcements. For all our process, our principle is to be client #1. So if we use AI to drive better outcomes, we also have to do it for ourselves.

Okay. Understood. Just one more question to follow up on that. On the capital allocation, given the share price performance -- the recent share price performance, are you thinking about or considering potentially shifting a little bit the capital allocation? And what about like increasing the level of share buyback? I think there was a change in wording in that sense with the H1 duplication. So any update on the thought process around that?

No. As we said before, this is being discussed on the TP Board level. And once the decision is being made, will be announced. To be honest, Q3 would not be the right timing, but once we have the cash flow numbers then in February.

Anyway, it's much more a 2026 decision than a 2025 one.

The next question comes from Suhasini Varanasi from Goldman Sachs.

Just one for me, please, as a follow-up to the previous one on margins. Can you please help us understand what you've assumed in the EBIT margin by division in the new outlook for the year? Now you did 12.4% margins in Core Services last year, Specialized Services was 30%. It fell a little bit in Specialized Services in the first half, but improved maybe. So how do you think about the progress in the second half of the year and for the full year? Are you expecting further deterioration in Specialized Services and maybe further modest expansion in Core Services?

Difficult to tell today. We expect, of course, a better -- a little bit better margin on the Specialized as a percentage. There is a mix effect that will have an impact because we have less business coming versus the total coming from Specialized Services. And we are going to see that in a much more precise way. But this is -- depends -- what is difficult is to predict exactly the FX impact on the Core Services where it's much more important, but probably it's where we could have an impact there. That's what I can tell you. But I won't give you precise figure at this stage. It's too early to tell.

The next question comes from Karl Green from RBC Capital Markets.

Just 2 remaining questions from me. Firstly, could you just elaborate a little bit more about the recruitment process outsourcing trends and how that's tracked through the year? And then what measures -- I mean you've indicated there's been a change of CEO for that division. What measures specifically you think could get that back to a better place in 2026? And then secondly, just in terms of the Majorel integration and the synergies flowing from that, I mean, clearly, very difficult to track in the Q3 revenue update. But just any kind of color as to what's going on there and how come that's not really sufficient to offset the mix pressures on the margin that you've outlined just before?