TDCX (TDCX) - 2023 Q4 - Annual Report

Key Information Risk Factors The company faces material risks from a pending merger, significant client concentration, generative AI, and its Southeast Asia focus - The company has entered into a Merger Agreement for a going-private transaction, expected to close in Q2 2024, which carries risks of non-completion and business disruption[35][36][41] - There is significant client concentration risk, with the top two clients, Meta and Airbnb, accounting for 47.7% of revenue in 2023, and the top five clients accounting for 72.6%[44] - The emergence of generative AI poses a significant risk as it could disrupt the industry by automating tasks, potentially reducing demand for certain services[55][56][57] - A substantial portion of operations, 84.6% of 2023 revenue, is in Southeast Asia, exposing the company to regional economic, political, and regulatory risks[76] - The company's dual-class share structure gives its Founder approximately 98.4% of the aggregate voting power, granting him considerable influence over corporate matters[200] Information on the Company History and Development The company, founded in 1995, went public in 2021 and entered a definitive merger agreement to go private in 2024 - The company was founded in 1995 in Singapore by Laurent Junique and commenced trading on the NYSE under the symbol "TDCX" on September 30, 2021[244][249] - On March 1, 2024, the company entered into a merger agreement to be acquired by its Founder in a going-private transaction, implying an equity value of approximately US$1.037 billion[252] - The merger consideration is US$7.20 in cash per share, and the transaction does not require a shareholder vote[255][256] Business Overview The company provides digital customer experience solutions, primarily for new economy clients across 18 geographies Key Financial and Operational Metrics (2021-2023) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue (S$ thousands) | 658,351 | 664,120 | 555,198 | | Profit for the year (S$ thousands) | 120,150 | 104,938 | 103,842 | | Adjusted EBITDA (S$ thousands) | 172,686 | 198,010 | 183,683 | | Net profit margin (%) | 18.3% | 15.8% | 18.7% | | Adjusted EBITDA margin (%) | 26.2% | 29.8% | 33.1% | | Number of clients | 97 | 84 | 52 | - The company's business comprises three main service offerings: (1) omnichannel CX solutions, (2) sales and digital marketing services, and (3) content, trust and safety services[264] - As of December 31, 2023, TDCX has an international footprint across 18 geographies, servicing clients' customers in more than 20 languages[263] Our Services and Solutions Revenue is driven by three service lines, with a majority from new economy clients and decreasing top-client concentration Revenue by Service (2021-2023) | Service | 2023 Revenue (S$ '000) | % of 2023 Revenue | 2022 Revenue (S$ '000) | 2021 Revenue (S$ '000) | | :--- | :--- | :--- | :--- | :--- | | Omnichannel CX solutions | 395,040 | 60.0% | 384,184 | 334,047 | | Sales and digital marketing | 176,423 | 26.8% | 166,506 | 114,718 | | Content, trust and safety | 81,012 | 12.3% | 109,496 | 103,538 | | Other service fees | 5,876 | 0.9% | 3,934 | 2,895 | | Total | 658,351 | 100.0% | 664,120 | 555,198 | - New economy clients contributed 87.8% of total revenues in 2023, a decrease from 91.9% in 2022 and 93.1% in 2021[274] - The top five clients accounted for 72.6% of total revenues in 2023, showing a trend of decreasing concentration from 81.2% in 2022 and 84.4% in 2021[274] Operations and Technology The company leverages proprietary tools and licensed technologies to support its multi-lingual, global operations - The company has developed a proprietary human capital management suite called FLASH, which includes tools for recruitment, coaching, and employee surveys to improve hiring and engagement[347][348][353] - Acuity, the company's enterprise data warehouse and analytics platform, provides data governance and visualization to deliver actionable insights to clients[290][361] - TDCX utilizes licensed technologies from partners like Automation Anywhere for robotic process automation and NICE for workforce management, integrating them with client systems[368][369] Employees and Culture The company's competitive advantage is its skilled workforce of 17,862 employees and a culture built on five core values Total Employees by Geographic Location | Location | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | The Philippines | 7,055 | 6,783 | 5,750 | | Malaysia | 5,516 | 5,826 | 4,201 | | Thailand | 1,821 | 2,122 | 2,363 | | Singapore | 1,170 | 1,478 | 1,454 | | Others | 2,290 | 1,674 | 938 | | Total | 17,862 | 17,883 | 14,706 | - The company's culture is defined by five core values: Teamwork, Innovation, Courage, Initiative, and Trust, which are reinforced through talent programs[316] - TDCX provides extensive learning and development opportunities, and in 2023, 732 team leaders attended the New Leaders' Journey program[328][330] Regulatory Environment Operations are subject to complex data privacy, labor, and investment laws across its diverse geographic footprint - In Singapore, the company must comply with the Personal Data Protection Act (PDPA) for data handling and the Employment of Foreign Manpower Act for its workforce[404][407] - In the Philippines, operations are subject to the Data Privacy Act and rules from the Philippine Economic Zone Authority (PEZA) and Board of Investments (BOI)[413][415] - In China, the company must navigate the PRC Cybersecurity Law and the Personal Information Protection Law (PIPL), which impose strict data requirements[436][438] - In Thailand, operations are subject to the Foreign Business Act (FBA), which restricts foreign ownership in certain businesses[183][430] Operating and Financial Review and Prospects Operating Results In 2023, revenue slightly decreased by 0.9% while profit for the year increased by 14.5% to S$120.2 million Consolidated Results of Operations (2021-2023) | (S$ in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | 658,351 | 664,120 | 555,198 | | Employee benefits expense | (424,571) | (436,350) | (339,683) | | Profit before income tax | 146,454 | 141,987 | 132,079 | | Income tax expenses | (26,304) | (37,049) | (28,237) | | Profit for the year | 120,150 | 104,938 | 103,842 | | Basic earnings per share (in S$) | 0.83 | 0.72 | 0.81 | - 2023 vs. 2022 Performance: - Revenue: Decreased 0.9% to S$658.4 million, driven by a 26.0% decline in Content, trust and safety services - Employee Benefits Expense: Decreased 2.7% to S$424.6 million, mainly due to a reversal of equity-settled share-based payment expenses - Income Tax Expenses: Decreased 29.0% to S$26.3 million, due to tax holiday reinstatement and absence of a one-off prosperity tax - Profit for the Year: Increased 14.5% to S$120.2 million[506][509][520][521] - 2022 vs. 2021 Performance: - Revenue: Increased 19.6% to S$664.1 million, driven by a 45.1% increase in Sales and digital marketing - Employee Benefits Expense: Increased 28.5% to S$436.4 million, due to higher headcount and wage adjustments - Profit for the Year: Increased 1.1% to S$104.9 million[524][527][540] Liquidity and Capital Resources The company maintains strong liquidity with S$451.8 million in cash and an undrawn S$20 million credit facility Summary of Cash Flows (S$ in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 137,177 | 164,551 | 103,825 | | Net cash used in investing activities | (31,470) | (29,669) | (44,139) | | Net cash (used in)/from financing activities | (33,238) | (50,451) | 199,644 | | Net increase in cash and cash equivalents | 72,469 | 84,431 | 259,330 | - As of December 31, 2023, the company had S$451.8 million in cash and cash equivalents and an undrawn revolving credit facility of S$20 million[554] - Capital expenditures were S$12.4 million in 2023, a decrease from S$25.2 million in 2022, primarily used for office expansion[555] - Net cash used in financing activities in 2023 was S$33.2 million, mainly due to S$24.0 million in lease liability repayments and S$9.2 million for share repurchases[566] Critical Accounting Estimates Key estimates involve client warrant valuation, share-based payments, and deferred tax liabilities on foreign earnings - Warrants issued to Airbnb are treated as variable non-cash consideration, resulting in a S$1.0 million revenue reduction for 2023[575][991] - For share-based payments, the company reversed S$10.9 million in previously recognized expenses in 2023 as certain vesting conditions were not expected to be met[581][1065] - The company did not recognize deferred tax liabilities of S$18.1 million on unremitted earnings from foreign subsidiaries as of December 31, 2023[583][996] Directors, Senior Management and Employees Directors and Senior Management The company is led by Founder and CEO Laurent Junique, with an experienced board and executive team - The board of directors is composed of five members: Laurent Junique (Executive Chairman & CEO), Chin Tze Neng (CFO & Executive Director), Edward Goh Kok Hwee (EVP Corporate Development & Executive Director), Koh Chia Ling (Independent Director), and Tan Yee Peng (Independent Director)[587] - Laurent Junique, the Founder, has over 26 years of outsourcing experience and plays a central role in the company's strategy and vision[588] Compensation Total 2023 executive compensation was S$14.5 million, and all unvested share awards will be cancelled upon the merger - Total compensation for directors and executive officers in 2023 was S$14.5 million[604] - The company's Performance Share Plan (PSP) will be terminated upon the merger, and all unvested awards will be cancelled without consideration[608][609] Board Practices The board has three committees and utilizes home country exemptions from certain NYSE corporate governance rules - The board has three committees: Audit, Compensation, and Nominating and Corporate Governance[620] - The Audit Committee is chaired by Tan Yee Peng, who qualifies as an audit committee financial expert, and consists of two independent directors[621] - The company follows home country practice and is exempt from NYSE requirements for a majority-independent board and fully independent compensation and nominating committees[620] Share Ownership Founder Laurent Junique holds 98.4% of voting power, making TDCX a controlled company under NYSE rules Major Shareholder Ownership (as of April 5, 2024) | Shareholder | % of Total Ordinary Shares | % of Aggregate Voting Power | | :--- | :--- | :--- | | Laurent Junique (and related entities) | 86.1% | 98.4% | | FourWorld Capital Management LLC | 3.2% | 0.4% | - The dual-class share structure grants holders of Class B shares ten votes per share, while Class A shares receive one vote per share[645] Financial Information Consolidated Statements and Other Financial Information The company has no fixed dividend policy and is restricted from paying dividends by the pending merger agreement - The company does not intend to pay dividends in the foreseeable future, and the pending Merger Agreement also prohibits dividend payments without prior consent[661] - Dividend payments are subject to the discretion of the board and legal requirements in the Cayman Islands, which allow dividends to be paid from profits or share premium, subject to a solvency test[663] - As a holding company, its ability to pay dividends is dependent on receiving distributions from its subsidiaries, which are subject to foreign exchange controls[667][668][669] Quantitative and Qualitative Disclosures about Market Risk Market Risk Disclosures The company's primary market risks are credit, foreign currency, and liquidity, which are actively managed - Credit Risk: Primarily from trade receivables with a net carrying amount of S$107.7 million as of Dec 31, 2023; the company has not experienced material credit losses[783] - Foreign Currency Risk: A hypothetical 5% strengthening of the USD against relevant functional currencies would increase profit by S$5.9 million in 2023[785][786] - Liquidity Risk: Managed by maintaining sufficient cash (S$451.8 million at year-end 2023) and an undrawn revolving credit facility of S$20 million[789] - Interest Rate Risk: Not significant as of Dec 31, 2023, as the company had no outstanding interest-bearing liabilities other than fixed-rate lease liabilities[788] Controls and Procedures Controls and Procedures Management concluded that both disclosure controls and internal controls over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[806] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[810] - As an emerging growth company, TDCX is not required to provide an auditor attestation report on its internal control over financial reporting[811] Cybersecurity Cybersecurity Risk Management Cybersecurity risk is managed via a formal program with board oversight and a dedicated Security Operations Centre - The company employs a Cybersecurity Risk Management program that involves vulnerability assessments and penetration tests with external firms[830][831] - A dedicated Regional Security Operations Centre (SOC) monitors emerging threats, and the company has established incident response plans[833][834] - Governance is managed by the Group CIO's office, which presents an annual IT audit plan to the Audit Committee and provides periodic updates to the board[838] Financial Statements Consolidated Statement of Financial Position Total assets grew to S$767.1 million in 2023, driven by an increase in cash and financial assets Consolidated Statement of Financial Position (S$ '000) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | 682,450 | 589,282 | | Cash and cash equivalents | 451,849 | 389,100 | | Trade receivables | 107,744 | 88,808 | | Total Non-Current Assets | 84,639 | 88,518 | | Total Assets | 767,089 | 677,800 | | Total Current Liabilities | 84,902 | 89,383 | | Total Non-Current Liabilities | 31,966 | 26,565 | | Total Liabilities | 116,868 | 115,948 | | Total Equity | 650,221 | 561,852 | | Total Liabilities and Equity | 767,089 | 677,800 | Consolidated Statement of Profit or Loss In 2023, profit for the year increased to S$120.2 million despite a slight decrease in revenue Consolidated Statement of Profit or Loss (S$ '000) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Revenue | 658,351 | 664,120 | 555,198 | | Profit before income tax | 146,454 | 141,987 | 132,079 | | Income tax expenses | (26,304) | (37,049) | (28,237) | | Profit for the year | 120,150 | 104,938 | 103,842 | | Total comprehensive income for the year | 105,517 | 91,430 | 97,618 | | Diluted earnings per share (S$) | 0.83 | 0.72 | 0.81 | Consolidated Statement of Cash Flows Net cash from operations was S$137.2 million in 2023, contributing to a year-end cash balance of S$451.8 million Consolidated Statement of Cash Flows (S$ '000) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 137,177 | 164,551 | 103,825 | | Net cash used in investing activities | (31,470) | (29,669) | (44,139) | | Net cash (used in) from financing activities | (33,238) | (50,451) | 199,644 | | Net increase in cash and cash equivalents | 72,469 | 84,431 | 259,330 | | Cash and cash equivalents at end of year | 451,849 | 389,100 | 313,147 |