TELUS International (Cda) Inc. (TIXT) Earnings Call Transcript & Summary

Hi, everybody. Thanks so much for joining us today. We're very fortunate to have Jeff Puritt, President and CEO of TELUS International; and Vanessa Kanu, CFO, for a fireside chat today. Thank you both for joining us. Really appreciate it.

Good to be here, Ramsey.

Thanks, Ramsey.

Pleasure. Maybe we can start, given your somewhat recent entry into the public markets, we can start with a little bit of level setting. Maybe from folks who are not familiar with the business, you can spend a few moments kind of describing the business. Maybe also helping us think through the key challenges that you saw for your customers.

Certainly. So always appreciate the opportunity to talk about my favorite topic, my TELUS International family. For those of you not familiar with us, we're a leading digital customer experience innovator that supports the full life cycle of our clients' digital transformation journeys. And by full life cycle, I mean we have a deep domain expertise, industry experience to design, build and deliver the critical next-gen solutions and services that companies have to embrace to remain relevant and competitive in today's environment. We offer a unique set of end-to-end capabilities, with an emphasis on new economy services like trust and safety solutions, including content moderation or our AI data solutions, which include data collection, annotation and labeling. We partner with more than 600 top global brands, including all the tech hyperscalers, digital disruptors across high-growth industry verticals like Tech & Games, communications and media, eCommerce & Fintech, health care and travel and hospitality. TELUS International started 16 years ago with the acquisition of a contact center business located in the Philippines called Ambergris Solutions, primarily serving our parent company, TELUS, a leading telecom company in Canada. And from this single delivery location in the Philippines, our company has grown exponentially, both organically and with thoughtful acquisitions playing a key role in accelerating our growth and transformation. Today, we're a globally scaled business. We operate in more than 25 countries and in over 50 languages with 53 delivery centers, more than 60,000 team members and a diverse and talented AI community of over 1 million members located around the world where we're strongly positioned today to capitalize on the surge in demand for digital transformation, accelerated in large part by the pandemic and quarantine. And we estimate the total addressable market today is well over $150 billion. The sectors that we compete in are global fragments and rapidly evolving, and our end-to-end capabilities across the design, build and deliver spectrum enable us to compete successfully with a pretty diverse set of industry players, globally diversified IT consulting companies, think Accenture; digital transformation providers like Endava, EPAM, Globant; customer experience providers, like Teleperformance; and even single-threaded data annotation companies like Appen. What sets TI apart are the integrated end-to-end digital capabilities that span across the full customer experience value chain, while most of our competitors are typically over-indexed on 1 or maybe 2 of those design build and deliver elements. And being a one-stop shop gives us a significant edge. I think it enables us to be a trusted partner, a strategic adviser for our clients as we have a better understanding of the full picture of client operations and requirements and also facilitates opening the door for cross-selling complementary services and solutions. Another key differentiator that enables our team and business to really stand out amongst our peers is our unique value proposition encompasses not only what we do but how we do what we do. Our caring culture ensures TI is a destination for top talent, enabling us to attract, engage and retain team members who really are passionate brand ambassadors that deliver superior client experiences on a sustained basis. And my goodness, that competition for talent, never been more fierce than in today's market in particular. Our highly engaged team rank in the top decile globally among our peers. This arms us with a sustainable competitive advantage in delighting our clients, and we take great care to ensure that TI isn't just a place to earn a paycheck, but rather it's a place where our team members can enjoy a meaningful career while supporting their communities. And obviously, having a highly engaged and tenured workforce naturally translates into our ability to deliver better service for our clients and customers and on a sustainable basis, which means we can win more complex, higher-value business and decrease the cost associated with backfilling higher attrition rates. And the key elements that I've just described really form the basis of our best-in-class financial profile, which features robust double-digit organic revenue growth, industry-leading margins and complemented by our proven track record of value creation through thoughtful, disciplined strategic acquisitions since our company's inception. So why don't I pause there? Hopefully, that gives you a good starting point, Ramsey, and happy to dive into more detail as appropriate.

Yes. That's terrific, Jeff. And you did mention right at the end there, robust growth, and we've always been impressed by the company's organic growth profile, sort of mid- to high-teens organic revenue -- normalized organic revenue profiles, we're seeing it. Maybe Vanessa, could you describe the kind of underlying growth algorithm? What are the primary drivers of that growth between existing clients, cross-sell, new clients or any other factors that sort of you would consider feeding in there?

Sure. Thanks for the question, Ramsey. You're right. We have been able to achieve differentiated growth at scale. When you look at our outlook for 2021, we've called for total revenue in the range of $2.17 billion to $2.21 billion, which is an implied growth rate in the range of 37% to 40% from last year. And then from an organic growth perspective, that translates to mid-teens organic growth. It's also important to keep in mind that TI has a larger scale relative to many of our peers, and yet we're still able to deliver meaningful profitable growth on both a total and an organic basis. But to answer your question specifically on what is driving this growth, we've seen it come from across the board. We win new business from our existing clients as we execute on our land and expand strategy, which has been a key strategy for us from the get-go. We leverage cross-sell opportunities on the back of our diverse service offerings. And we've also seen success in winning new deals with brand new clients. And an overarching element that's fueling our growth is really the partners or the clients that we choose to partner with. Our outsized growth is supported by this well-diversified client base. We've got about 600 clients across the board, across high-growth verticals. And we're partnering with tech forward clients who are themselves digital disruptors in their own rights. And across all of these target verticals, we tend to focus on clients who are experiencing rapid growth or are in high-growth markets themselves. So we're able to participate in that growth as well. Clients who view customer experience as a critical driver of success. Clients who require premium solutions to achieve competitive differentiation and clients to share our cultural values. And we win these clients largely as a result of the quality and the value of our services as well as the breadth of our capabilities and our overall differentiated domain-led solutions. The other element I would add in terms of our growth profile is that we're a fairly low capital intensity business. And combined with our track record of double-digit top line growth, mid-20s adjusted EBITDA margins, our business has the ability to generate substantial cash flows that are used in part for reinvestment into further growth to meet the increasing client demand that we see for our services.

Okay. Jeff, I wanted to ask about one of the more recent additions to your portfolio, which is, I guess, Lionbridge AI and Playment, which are now rebranded as TELUS AI Data Solutions, I believe, or TELUS International AI Data Solutions. I want to ask about the revenue synergy opportunities with that asset. Have you begun cross-selling that solution yet into the client base? What's your broader go-to-market approach, kind of the long-term business strategy? Any color there would be helpful.

Sure. Happy to provide a little bit more context. Perhaps just for a baseline understanding for those not familiar with our AI Data Solutions, we operate one of the largest data annotation platforms of its kind in the world. As I mentioned earlier, we tap into a diverse global AI community of more than 1 million members who speak over 500 different languages and dialects. And we rely on that community to support the development of AI and machine learning algorithms for leading tech companies around the world. And our ability to scale is paramount in this area to produce accurate, reliable and near unbiased data to train these AI algorithms. So our proprietary platform handles all data types, text, image, audio, video and geo. Our AI solutions enhance AI systems across a range of applications from advanced smart products, better search results, expanded speech recognition, to more human-like bot interactions. And perhaps to illustrate, let me offer just an example of one of our clients that's perhaps fairly well recognized at this point in the autonomous vehicle space, a company called Nuro. Many of you may have seen those ads for pizza delivery. So Nuro is currently leveraging our computer vision capabilities in its vehicles, which are essentially self-driving robotic vehicles for pizza delivery, grocery delivery. So this application required an AI system to recognize street signs, traffic patterns, driving rules, and the system also has to learn to use judgment on a real-time basis to avoid the risk associated with pedestrians and dogs and other objects on the street. And our AI community and solutions were sort of the underpinnings of vast amounts of image and video data captured from cameras and sensors, which were then labeled in order to train that AI system that underpins the Nuro robotic vehicle to ensure that it can effectively, reliably navigate around the streets and in fact, its delivery capabilities. So we've created pretty significant revenue synergies already across both the AI capabilities through the acquisition of this AI-focused business, together with our content moderation product. It's something that we've had in place for many years and was itself amplified and accelerated through the acquisition of CCC just barely 2 years ago now. So effective AI solutions, in our experience, provide a valuable first line of identification. They kind of enable a robust trust and safety framework while thoughtful, empathetic, caring, what we call human digital first responders, our AI-enabled content moderators, can focus on the higher value, more nuanced, more complex, judgment-centric aspects of content moderation. And here too, maybe I can give you a quick example, where we're serving our largest client by revenue today, the world's leading social media network. For this client, our team members leverage our AI capabilities to review over 1 million ads per month. So we recruit, educate, manage over 4,000 local evaluators in more than 10 different markets. And our comprehensive evaluator management system ensures the requisite diversity, high-quality of AI training data for this client's platform in order to boost ad relevance on a global scale. So this same client, we're supporting on the content moderation front. And while most people think content moderation, they think about identifying and deleting objectionable content, but in our case, that kind of content moderation activity is really barely 5% of the overall volume that we're addressing. A much larger portion of the responsibility that we undertake is addressing what we are seeing benign content, ensuring ads are proximate to content to better ensure that the ads reach a particular audience, thereby ensuring higher value for those ads. And by integrating our content moderation and AI solutions, we're further deepening the relationships we enjoy with some of the world's largest and fastest-growing tech companies. And we really believe this AI data solution content moderation capability form a powerful go-to-market service offering and already seeing proof of this investment thesis bearing out with new wins with new clients and not just among the hyperscaler community. And as all of hyperscalers and enterprises are investing more heavily in AI, it's our ability to provide that high-quality service and training data that is so critical to supporting their growth, it gives us even more optimism and confidence about opportunities to benefit from these longer-term technology tailwinds.

So that's very interesting. And candidly, it might be something that I didn't fully appreciate enough that the AI side of the business and the content moderation side of the business are highly complementary that you're really leveraging technology on the one side in order to optimize your performance on the other side. I think that's quite interesting. Maybe we can spend a little bit of time on the content moderation business now. Explain to us about sort of what your offerings are there in that space. And also kind of help investors think through how you guys might have a different approach than some of the headlines that we've seen about that part of the industry in the past.

So I obviously drank my own Kool-Aid on this front a long time ago, Ramsey, and I really do believe that our caring culture, which is at the heart of how we've been managing this business in totality since its inception, really comes to life and is at the forefront of our unique and differentiated, sustainably successful content moderation practice. So our thoughtful approach to attracting and retaining the best talent has really been a source of our ability to fuel our continued growth in the content moderation space. And I really do think it's differentiated from all of our competitors. I mean we have super highly trained digital-first responders as well as the leading wellness programs for team members doing this work for our team and on behalf of our clients. And our approach to content moderation is it's tailored at first instance to support and protect our team members in a holistic manner. And we think it is so critical in developing what we're calling an effective resilience framework. So the entire team member journey needs to be thought through with care. So from testing at first instance, assessing whether on a potential candidate, to become a digital first responder, has the requisite bias not just towards helping ensure a better outcome, but equally, and sometimes perhaps even more importantly, identifying people who are willing to ask for help themselves when they're in need. So at the onboarding stage, our content moderators receive training and education on potential early warning signs in the detection of any negative impact that their day-to-day work might be having on that. We also work with our clients. And given the scale and scope, the number and volume, we have, again, a little bit of an advantage over many others where we can ensure a more varied workflow on a daily basis for our digital first responders to ensure that we can minimize their exposure at any given setting to the more distressing content to keep that service well balanced and minimized. Our digital first responders, they undertake an ongoing evaluation by our HR professionals to determine how well are they responding to and coping with the demands of their work. We provide ongoing support from mental health professionals, which helps to ensure a safe venue for open communication and support for our team members. And we work as often as we can to ensure that it's not a steady balance of -- or excuse me, steady diet of the solutions content. But like I said, it's 5% in totality. So if we can keep it to 5% on a daily work regimen basis, again, we've seen much better outcomes. You've not read about TI or our team members experiencing suffering from post-traumatic stress disorder in the market ever. And would that I can promise that would always be the case, but we are reasonably confident that because of our differentiated approach to this, hopefully, we will continue to inoculate our team members, our customers and ourselves from those adverse impacts. How we are managing this ecosystem, I think, is really why we continue to be so bullish on addressing this opportunity. The unabated growth in user-generated content, the ever-widening gap between created and moderated content just means that there is more need for this. The regulatory uncertainty, the regulatory heterogeneity from one jurisdiction to another, all of these things, I think, really continue to create a need, a demand for a capability at scale with the sophistication to sustainably support this ecosystem. I mean Gartner talks about the Internet today is besieged by polarizing content, and understandably, brand advertisers, they get a little bit worried about are their ads going to show up proximate to some of that polarizing, objectionable, misleading content. And again, part of the day-to-day challenges our team supports is curating the content and its proximation to appropriate content, to targeted content as opposed to objectionable content. And it's really doing that, as I said, reliably sustainably at scale. This is something that we specialize in, and we're excited about continuing opportunities to do that.

It would seem to be an area where there's just no end of opportunity in the marketplace, which is to say to your point, there's so much user-generated content. And I think that only increases in the future. So it's a pretty strategic place to kind of place your bets as it were. Vanessa, maybe I can ask you one, an unrelated question, about one of the bigger themes in the IT service. The broader IT services industry over the last year or so has been a war for talent and wage inflation. Can you talk about how you've managed through that, how you expect this -- the dynamic to kind of trend, and thoughts around that topic?

Sure. You're absolutely right, Ramsey, it certainly has been a theme of late, and not only in the technology services sector, but kind of across the board. I don't think a day goes by where there isn't a major headline in a newspaper about the great attrition or the great wage inflation as the case may be. We are not immune to these labor market pressures at all. However, as you noted, we've been able to manage those pressures very well. Wage inflation has been a constant feature of our industry, a part of doing business, so to speak. So we plan for it in our annual budgets, and we continue to manage it accordingly. And similarly, our ability to attract and retain talent has been a key element of our operating model, where our business success is enabled by what we think is a very strong, differentiated and caring culture. You're absolutely right, going into this year, we spoke about merit increases. But again, those were part of our normal course planning. We did anticipate higher attrition in 2021 than what we saw in 2020 because 2020 was an abnormal year because of the pandemic lockdown. And while we don't publicly disclose attrition levels, for us so far, our attrition has largely been in line with our expectations. And as you pointed out, managed very, very well so far. You can also see our success in our ability to continue to hire to meet our clients' demand, which is increasing. In Q2, you may recall, we added 5,000 new team members to the TI family, and that was a record quarter for us. And then in Q3, the quarter most recently ended, we added another 2,300 new team members and closed the quarter with over 58,000 team members overall, which was up 21% year-over-year. So even though it is definitely a tough labor market, I think some of these metrics show you that we, in fact, are seeing success and not only recruiting new team members but managing the balance with attrition as well as wage inflation. And when you look at these dynamics in a broader context, there's definitely an undeniable economic and service level benefit of having long-tenured, highly experienced team members. And these team members expect regular merit increases. So the current labor market environment certainly puts further pressure on wages, for sure. However, we have been able to absorb increases and we are able to offset increased costs through our focus on higher value, higher-margin services, seeking out efficiencies on an ongoing basis within our own operations, and also transparent pricing conversations with our client partners at the appropriate juncture. We are in the people business, and it's part of our model to be prepared for and to manage labor market and weight inflation pressures. And we've been doing that quite successfully for almost 2 decades now, and we expect to continue to do that prospectively.

And a related question in a sense. Talk about the longer-term profitability profile of the business, key drivers of margin -- potential margin expansion as we move forward.

Sure. And that all kind of ties into the labor market dynamics we just talked about as well. And as we can see through 2021, we've actually continued to enjoy a leading profitability profile. So we've done so historically. And through all of the challenges of 2021, our EBITDA margins have been very, very healthy and continues to be amongst the best amongst our peers. Our EBITDA margins today are about 24 -- between 24% and 25%, and that's where we expect to be by the close of 2021. To offer you a little bit more qualitative commentary, what's driving our profitability, just in terms of key aspects. So for us, attracting and retaining high-quality talent absolutely, because I think as Jeff mentioned earlier in the context of a different question, the ability to attract and retain the talent -- key talent and not have very high attrition, which comes with a cost, a fairly significant cost to it. I think that's one of the key areas where we're differentiated from some of our peers, which helps us from a profitability profile perspective. Our pursuit of higher value, higher-margin client engagements. Our focus on efficiency, including technological innovation, automation, business process redesign within our own operations as these ongoing productivity improvements will directly contribute to help us maintain our already high margins. And in premium services and our ability to provide that end-to-end suite of capabilities to our clients will also lead to premium pricing, which we enjoy today. We focus on complex, high-value projects brought to life by our talented, tech-savvy team members, and our margin profile certainly reflects that. And you probably heard Jeff or me say on our recent earnings call that throughout our history, we've maintained a relentless focus on driving a healthy balance between top line revenue growth and leading profitability. And while the demand environment seems to be very, very strong, we're making deliberate choices about the type of work that we'll pursue, just in terms of trying to make sure that we drive that healthy balance between growth and profitability and maintaining our already high EBITDA margins. And that kind of discipline is ever more important in this current market dynamic. So we manage our business for the long term, and we're confident that our balanced approach of profitable growth will continue to create healthy, sustainable value for our shareholders.

Jeff, I wanted to ask about M&A. It's been obviously an interesting journey from -- as you described at the beginning of this call in terms of where TELUS International started and where you are now, and M&A has been an important part of that process of transformation. What is -- how should we think about M&A in the context of your broader strategy going forward?

So you're right, Ramsey. Acquisitions really have been an important strategic accelerator of our growth. And we will continue to be guided by our proven disciplined approach to M&A with a track record of consistent value creation. We never thought about M&A as a strategy, right? Our strategy is to advance and progress our ambitions around having a meaningful role to play in the digital economy. But we think about M&A as a meaningful accelerator, amplifier, complement to a very strong, healthy organic growth profile, as we've just now discussed. And so this is a pretty exciting time in our industry, for sure. There is no shortage of opportunities to extend our reach to expand into new markets, the adjacent complementary service offerings that really enhance the depth of our digital IT capabilities and accelerate our growth and success in advancing these attractive industry verticals, and hopefully, all while ensuring that we remain true to our unique and caring culture, as we've discussed at length now, which I think really underpins our success. So as you might expect, since accessing the public markets, the purpose of which you'll recall at first instance was to give ourselves a transaction currency to use to facilitate incremental acquisition activity as well as to reward, retain and attract talents to our team. But we now are the beneficiaries of deal flow on M&A opportunities that is pretty exciting, pretty robust. The challenge, of course, is as valuations continue to seemingly inflate unabatedly, in my experience, and you pay too much at first instance, then you immediately start to do more natural things on integration to try and recover from having overpaid at first instance, and then it's a spiral into disaster. So we have historically been, I think, really quite disciplined and thoughtful about what an attractive acquisition candidate looks like at first instance to really focus on that strategic rationale, then to evaluate this target versus another target through the lens of commercial efficacy. What does it get us that another asset would or wouldn't in terms of market positioning or capabilities, et cetera. And then spend the requisite amount of time in terms of the traditional M&A economic value creation lens, and then to really over index on post-acquisition integration. These have ostensibly been technology services businesses like our own that we've acquired. So it's people that come to work every day, pre-pandemic quarantine orders in the elevators that go up and down every day. And if they don't feel like post acquisition, they still have a meaningful role to play in our business as part of the TI family, well, then they'll choose to leave. And indeed, as we now just discussed in this labor market, in this environment where there's so many options, these skills are so in demand. They can choose to walk next door metaphorically and earn as much, if not more. So we need to be ever more thoughtful and disciplined around the kind of M&A activity we want to undertake to ensure that we can live up to the obligation of creating incremental shareholder value through that acquisition activity, given the literature seem to suggest that more often than not, 7 out of 10x, it actually destroys shareholder value. So for us, I think you should anticipate we will continue to be on the lookout opportunistically for M&A opportunities that will extend our reach, get us into adjacent markets more quickly than otherwise. And you should assume that how we've approached these activities in the past will inform our approach for the foreseeable future as well.

I see. Well, unfortunately, I think we're just about out of time, but I greatly appreciate it today, super insightful comments. And best of luck. And looking forward to tracking the story as it evolves in the years ahead -- in the months and years ahead. So thanks so much for being here. Truly appreciate it.

Our pleasure, Ramsey. Thank you very much. And hopefully, we'll finally get together in person one of these days.

One of these days.

Omicron and others, still have a way to go to them.

Exactly. Looking forward to it. Thanks so much.

You too. Be safe. Take care.

Thanks, Ramsey.