TELUS International(TIXT) - 2023 Q4 - Annual Report

Executive Summary & Business Highlights TELUS International navigated a challenging 2023 with improved H2 profitability, focusing on efficiency and AI, securing business wins and industry recognition Management Commentary on Performance TELUS International navigated a challenging 2023 with improved H2 profitability, focusing on efficiency and AI integration, with a cautious 2024 outlook - The company characterized 2023 as a challenging year but noted that results in the second half showed signs of stabilization with significantly improved profitability[2] - The 2024 outlook assumes the challenging business climate will continue for the first half of the year, with hopes for a broader demand recovery in the second half[2] - Strategic focus includes streamlining operations to match client demand, improving efficiencies, and integrating WillowTree to strengthen its position as an AI-fueled customer experience partner[2] - The company's balance sheet remains solid, with meaningful cash flow generation used to lower debt levels and improve its leverage position[3] Key Business Developments & Recognitions Q4 saw new client wins, expanded existing relationships driven by AI, and significant industry recognition for data labeling and CCaaS solutions - Secured new business with a North American customer engagement software company, a Western Canadian truck dealership, and a German research institution[2] - Broadened relationships with existing clients, including Google (driven by AI momentum), a Canadian multinational bank, and expanded mandates with parent company TELUS, particularly its Health business unit[2] - Recognized as a Leader in the IDC MarketScape, Worldwide Data Labeling Software 2023 Vendor Assessment[2] - Awarded Canadian Partner of the Year and Global Partner of the Year in 2023 by Five9, a key partner for its Contact Center as a Service (CCaaS) platform[2] Financial Performance Q4 2023 saw revenue growth and strong cash flow, but full-year profitability declined, with a cautious 2024 outlook projecting moderate growth Q4 2023 Financial Highlights Q4 2023 revenue grew 10% to $692 million, net income increased, but diluted EPS declined, while Adjusted EBITDA and free cash flow showed strong growth Q4 2023 Financial Metrics | Metric | Q4 2023 (in millions) | Q4 2022 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $692 | $630 | +10% | | Net Income | $38 | $34 | +11.8% | | Diluted EPS | $0.10 | $0.13 | -23.1% | | Adjusted EBITDA | $164 | $157 | +4% | | Adjusted EBITDA Margin | 23.7% | 24.9% | -120 bps | | Adjusted Diluted EPS | $0.26 | $0.35 | -25.7% | | Free Cash Flow | $115 | $60 | +92% | | Net Debt to Adj. EBITDA Ratio | 2.8x | 1.1x | +1.7x | Full-Year 2023 Financial Highlights Full-year 2023 revenue grew 10% to $2.708 billion, but net income and Adjusted EBITDA declined significantly, while cash flow from operations and free cash flow increased Full-Year 2023 Financial Metrics | Metric | FY 2023 (in millions) | FY 2022 (in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Revenue | $2,708 | $2,468 | +10% | | Net Income | $54 | $183 | -70.5% | | Diluted EPS | $0.18 | $0.68 | -73.5% | | Adjusted EBITDA | $583 | $607 | -4.0% | | Adjusted EBITDA Margin | 21.5% | 24.6% | -310 bps | | Adjusted Diluted EPS | $0.91 | $1.23 | -26.0% | | Free Cash Flow | $405 | $333 | +22% | 2024 Financial Outlook The 2024 outlook projects revenue growth of 3-5% to $2.79-$2.85 billion, with Adjusted EBITDA of $623-$643 million and Adjusted Diluted EPS of $0.93-$0.98 2024 Outlook Projections | Metric | 2024 Outlook Range (in millions) | Implied Growth (Midpoint) | | :--- | :--- | :--- | | Revenue | $2,790 - $2,850 | ~4% | | Adjusted EBITDA | $623 - $643 | ~8.5% | | Adjusted EBITDA Margin | 22.3% - 22.6% | N/A | | Adjusted Diluted EPS | $0.93 - $0.98 | ~10% | - The 2024 outlook for Adjusted EBITDA and Adjusted Diluted EPS is calculated under a modified presentation that no longer excludes share-based compensation expense and changes in business combination-related provisions[8][9] Corporate Developments TELUS International announced a planned CFO transition, with Vanessa Kanu departing and Gopi Chande from TELUS assuming the role in March 2024 CFO Transition Vanessa Kanu will depart as CFO on March 31, 2024, succeeded by Gopi Chande from TELUS on March 4, 2024, as part of a planned succession - Chief Financial Officer (CFO), Vanessa Kanu, will leave the company effective March 31, 2024[11] - Gopi Chande, currently SVP Finance and Treasurer at TELUS, will be appointed as the new CFO of TELUS International, effective March 4, 2024[11] - The transition is presented as a planned succession, reflecting a collaborative program between TELUS International and its parent company, TELUS[13] Financial Statements & Reconciliations Consolidated financial statements detail 2023 revenue growth, net income decline, asset expansion, and strong operating cash flow, with non-GAAP reconciliations and a future reporting change Consolidated Financial Statements Consolidated financial statements detail 2023 revenue growth, net income decline, asset expansion driven by acquisitions, increased debt, and strong operating cash flow Consolidated Statements of Income The Consolidated Statements of Income present revenue, operating income, net income, and diluted EPS for 2023 and 2022 | Metric (in millions) | Twelve Months 2023 | Twelve Months 2022 | | :--- | :--- | :--- | | Revenue | $2,708 | $2,468 | | Operating Income | $183 | $284 | | Net Income | $54 | $183 | | Diluted EPS | $0.18 | $0.68 | Consolidated Statements of Financial Position The Consolidated Statements of Financial Position detail assets, liabilities, and owners' equity as of December 31, 2023, and 2022 | Metric (in millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $4,823 | $3,556 | | Goodwill & Intangibles | $3,509 | $2,358 | | Total Liabilities | $2,786 | $1,718 | | Long-term Debt | $1,628 | $881 | | Total Owners' Equity | $2,037 | $1,838 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows outline cash flows from operating, investing, and financing activities for 2023 and 2022 | Metric (in millions) | Twelve Months 2023 | Twelve Months 2022 | | :--- | :--- | :--- | | Cash from Operating Activities | $498 | $437 | | Cash used in Investing Activities | ($941) | ($119) | | Cash from Financing Activities | $443 | ($300) | | Net Increase in Cash | $2 | $10 | Non-GAAP Financial Measures & Reconciliations The company uses non-GAAP measures, with a Q1 2024 reporting change to include share-based compensation, and provides detailed reconciliation tables - The company uses non-GAAP measures such as Adjusted EBITDA, Adjusted Net Income, Free Cash Flow, and constant currency revenue to provide a clearer view of its underlying business performance[17][19][21] - Beginning in Q1 2024, the presentation of Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA will be modified to no longer exclude share-based compensation expense and changes in business combination-related provisions[3][8][18] - Detailed tables are provided to reconcile GAAP Net Income to non-GAAP Adjusted Net Income and Adjusted EBITDA for both Q4 and the full year, and to show the pro-forma impact of the modified presentation[41][42][43] Risk Factors & Forward-Looking Statements The report contains forward-looking statements for 2024, based on management assumptions, and outlines key risks like competition, economic conditions, and client concentration Forward-Looking Statements The report contains forward-looking statements and the 2024 outlook, based on management's assumptions, are subject to inherent risks and uncertainties - The report includes forward-looking statements regarding business operations and financial performance, which are based on current expectations and are not guarantees of future results[28] - The 2024 financial outlook is based on key assumptions about the company's ability to execute its growth strategy, maintain its culture and service competitiveness, attract talent, and realize benefits from the WillowTree acquisition[30] Key Risk Factors Key risks include intense competition, adverse economic conditions, client concentration, technological adaptation, talent retention, acquisition integration, and data security - Major risks include intense competition, adverse global economic conditions, and significant revenue concentration, with three clients accounting for a large portion of revenue[31] - Technological risks are highlighted, specifically the need to keep pace with changes like generative AI (GenAI) to meet client expectations[32] - Operational and corporate risks include competition for talent, challenges in integrating acquisitions like WillowTree, potential cyberattacks, and the concentration of voting control with parent company TELUS[32]