TELUS International(US:TIXT)2023-02-09 12:00Risk Factors The company faces diverse risks spanning business operations, talent management, financial stability, legal compliance, and its relationship with the controlling shareholder Business & Operational Risks The company faces intense competition, technological obsolescence, global economic volatility, client concentration, and acquisition integration challenges - The company faces intense competition from professional services firms, IT companies, and traditional BPO providers, which could lead to client turnover, revenue loss, and reduced margins2829 - Global economic conditions, including inflation, rising interest rates, and potential recession, pose a risk by potentially reducing client spending and affecting their ability to make timely payments383940 - The ongoing Russia-Ukraine conflict creates political uncertainty and economic volatility, which could adversely impact clients' demand for services and pose risks to operations in neighboring countries4243 - The company's reliance on a few major clients is a key risk. For FY2022, three clients (TELUS, a leading social media company, and Google) accounted for 17.3%, 15.0%, and 11.9% of revenue, respectively. The loss of any of these clients could materially harm the business96 - There are significant risks associated with integrating acquisitions, including the recent WillowTree purchase. Challenges include diverting management attention, retaining key personnel and clients, and integrating operations and systems6667 Talent-Related Risks The company's growth relies on attracting and retaining talent, maintaining its culture, managing content moderation team well-being, and mitigating risks from reclassifying contractors - The company's success depends on attracting and retaining skilled professionals, as competition for talent is intense. Increased attrition could raise recruiting costs and decrease operating efficiency7879 - Maintaining the company's unique culture is critical for attracting and retaining talent and clients. Rapid growth, geographic expansion, and acquisitions could make it difficult to preserve this culture81 - Content moderation work poses risks to team members' mental health. The wellness programs in place may be insufficient, potentially leading to higher attrition, increased costs, and legal claims8586 - The classification of data annotators for the TIAI business as independent contractors is a risk. If they were reclassified as employees, the company could incur significant additional expenses for wages, benefits, and taxes9293 Financial Risks The company faces financial risks from pricing model inaccuracies, client concentration, operational variability, foreign currency fluctuations, and tax incentive dependency - Three clients (TELUS, a leading social media company, and Google) accounted for a combined 44.2% of revenue in 2022. The loss or reduction of business from these clients could have a material adverse effect96 - The company identified material weaknesses in internal control over financial reporting as of December 31, 2021, related to the integration of entities acquired in 2020. These weaknesses were remediated in fiscal year 2022103 - The company's credit agreement contains restrictive covenants, including a Net Debt to EBITDA ratio. Non-compliance could result in default and acceleration of debt108 - The company's primary operating currency is the U.S. dollar, but it generates revenue and incurs expenses in other currencies like the Euro and Philippine peso, exposing it to adverse impacts from foreign currency fluctuations110111 - The company benefits from tax incentives in jurisdictions like India and the Philippines. The reduction or withdrawal of these benefits could increase the effective tax rate and adversely affect financial results113116 Legal & Regulatory Risks The company faces significant legal and regulatory risks, including non-compliance with data privacy laws, cyberattacks leading to data breaches, and potential intellectual property infringement claims - The company is subject to complex and sometimes conflicting legal regimes globally, covering areas like anti-corruption, data privacy (GDPR, CCPA), and labor standards. Non-compliance could lead to fines, sanctions, and reputational damage121 - Unauthorized disclosure of sensitive client, customer, or employee data through cyberattacks or other breaches poses a major risk, potentially exposing the company to litigation, fines, and loss of business122126127 - The company's services could be alleged to infringe on the intellectual property rights of others, which could lead to costly litigation, royalty payments, or the need to alter business practices132134135 TELUS Relationship & Shareholder Risks The company's dual-class share structure grants TELUS controlling voting power, influencing corporate governance and limiting subordinate shareholder influence due to its 'controlled company' status - The dual-class share structure concentrates voting control with TELUS, which holds approximately 72.4% of the combined voting power, limiting the ability of subordinate shareholders to influence corporate matters142143 - A shareholders' agreement grants TELUS the right to nominate a majority of the board of directors and provides special approval rights over key decisions, including CEO selection and amendments to the company's articles147149 - The company qualifies as a "controlled company" under NYSE rules, exempting it from requirements for a majority-independent board and fully independent human resources and nominating committees153 - As a foreign private issuer, the company is not subject to certain U.S. securities law disclosure requirements, such as U.S. proxy rules and Section 16 reporting for insiders, which may limit the information available to shareholders158159 Company Information This section provides an overview of the company's business, including its service offerings, global presence, client base, and growth strategies Business Overview TELUS International delivers digital customer experience solutions, including AI data and content moderation, for global brands across high-growth industries, emphasizing its unique caring culture - The company's integrated solutions include digital strategy, IT lifecycle management, intelligent automation, end-to-end AI data solutions, and omnichannel CX and trust and safety services185 - As of December 31, 2022, the company has over 73,000 team members in 28 countries, with significant delivery centers in Asia-Pacific, Central America, and Europe189 - The company serves over 650 clients, with a focus on high-growth verticals like tech and games, communications and media, eCommerce and fintech, and healthcare197 - The company emphasizes its unique caring culture, which promotes diversity, inclusivity, and community giving, as a key driver of team member engagement and client satisfaction209 WillowTree Acquisition The company completed the acquisition of WillowTree for approximately $1.1 billion, enhancing its digital product capabilities, expanding geographic presence, and diversifying its client base - On January 3, 2023, the company completed the acquisition of WillowTree, a full-service digital product provider, for a total consideration of approximately $1.1 billion200204 - The acquisition adds over 1,000 digital strategists, designers, and engineers, and expands the company's geographic presence to 13 new global studios203 - WillowTree is expected to bolster client diversification by adding new marquee customers and enhance cross-selling opportunities, particularly in verticals like financial services, healthcare, and consumer goods202 Growth Strategy The company's growth strategy focuses on expanding existing client relationships, establishing new ones, leveraging technology for efficiency, and pursuing strategic acquisitions - The company's growth strategy is focused on four key pillars216 - Expand with Existing Clients: Deepen relationships by cross-selling existing services and developing new adjacent offerings - Establish New Client Relationships: Target new clients, particularly disruptors, that value customer experience as a brand differentiator - Leverage Technology: Continuously improve operational efficiency and enhance margins through technology and process optimization, such as using "Six Sigma" methodologies - Strategic Acquisitions: Enhance core capabilities through culturally aligned acquisitions, such as the recent purchase of WillowTree to add mobile development skills Operating and Financial Review This section provides a detailed analysis of the company's financial performance, including revenue, expenses, profitability, and liquidity position Operating Results In FY2022, the company achieved strong financial growth, with revenue increasing 12% to $2,468 million and net income rising 135% to $183 million, driven by client expansion despite foreign currency headwinds Key Financial Performance (FY 2022 vs. FY 2021) | Financial Metric | 2022 ($M) | 2021 ($M) | Change ($M) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $2,468 | $2,194 | +$274 | +12% | | Operating Income | $284 | $185 | +$99 | +54% | | Net Income | $183 | $78 | +$105 | +135% | | Adjusted EBITDA | $607 | $540 | +$67 | +12% | | Diluted EPS | $0.68 | $0.29 | +$0.39 | +134% | | Adjusted Diluted EPS | $1.23 | $1.00 | +$0.23 | +23% | - Revenue growth in 2022 was driven by expanded services to existing clients and new client additions, but was negatively impacted by an unfavorable foreign currency effect of approximately 4% due to the strengthening U.S. dollar275 - Net income saw a significant increase of 135% to $183 million in 2022, primarily due to higher revenues and a $50 million decrease in share-based compensation expense307291 Revenue Analysis This section details the company's revenue breakdown by industry vertical and geographic region, highlighting key client concentrations Revenue by Industry Vertical (in millions) | Industry Vertical | 2022 ($M) | 2021 ($M) | 2020 ($M) | | :--- | :--- | :--- | :--- | | Tech and Games | $1,148 | $999 | $617 | | Communications and Media | $581 | $537 | $481 | | eCommerce and FinTech | $285 | $259 | $171 | | Banking, Financial Services and Insurance | $166 | $97 | $68 | | Travel and Hospitality | $75 | $62 | $54 | | All others | $213 | $240 | $191 | | Total | $2,468 | $2,194 | $1,582 | Revenue by Geographic Region (in millions) | Geographic Region | 2022 ($M) | 2021 ($M) | 2020 ($M) | | :--- | :--- | :--- | :--- | | Europe | $880 | $921 | $636 | | North America | $621 | $502 | $346 | | Asia-Pacific | $591 | $455 | $337 | | Central America | $376 | $316 | $263 | | Total | $2,468 | $2,194 | $1,582 | - Revenue from the top three clients in 2022 was highly concentrated: TELUS Corporation (17.3%), a leading social media company (15.0%), and Google (11.9%)277 Expense Analysis This section analyzes the company's key operating expenses, including salaries, goods and services, share-based compensation, and acquisition-related costs - Salaries and benefits increased by 14% to $1,393 million in 2022, driven by a higher team member count (from 62,141 to 73,142) and wage increases285282 - Goods and services purchased rose 8% to $468 million, mainly due to higher crowdsourced contractor costs for the TIAI business288 - Share-based compensation expense decreased by $50 million to $25 million in 2022. This was primarily due to a decline in the company's share price, which lowered the expense on liability-accounted awards291 - Acquisition, integration and other costs increased by $17 million to $40 million, mainly due to transaction costs related to the WillowTree acquisition294 Liquidity and Capital Resources As of December 31, 2022, the company maintained strong liquidity of $1,383 million and a healthy leverage ratio, further enhancing its financial flexibility by expanding its credit facility to $2,000 million for future growth and acquisitions Liquidity Position as of Dec 31, 2022 | Component | Amount ($M) | | :--- | :--- | | Cash and cash equivalents | $125 | | Available borrowings under credit facility | $1,258 | | Total Available Liquidity | $1,383 | Cash Flow Summary (in millions) | Cash Flow | 2022 ($M) | 2021 ($M) | 2020 ($M) | | :--- | :--- | :--- | :--- | | Cash from Operating Activities | $437 | $311 | $297 | | Cash used in Investing Activities | ($119) | ($110) | ($1,872) | | Cash (used in) provided by Financing Activities | ($300) | ($235) | $1,657 | - The Net Debt to Adjusted EBITDA Leverage Ratio was 1.1x as of Dec 31, 2022. However, on a pro-forma basis reflecting the WillowTree acquisition financing, the ratio was 2.9x363365 - In December 2022, the company amended and expanded its credit facility to an aggregate of $2,000 million to support the WillowTree acquisition and provide future flexibility259350 Governance and Management This section outlines the company's leadership, executive compensation practices, corporate governance structure, and employee demographics Directors and Senior Management The company's leadership includes President and CEO Jeffrey Puritt, a key executive team, and an 11-member Board of Directors chaired by Darren Entwistle of TELUS Corporation - Key executive officers include Jeffrey Puritt (President & CEO), Vanessa Kanu (CFO), Maria Pardee (CCO), Marilyn Tyfting (Chief Corporate Officer), and Michael Ringman (CIO)390410 - The Board of Directors is chaired by Darren Entwistle, President and CEO of TELUS Corporation. Josh Blair serves as Vice-Chair390398399 Executive and Director Compensation The company's executive compensation aligns pay with performance through base salaries, annual bonuses, and long-term incentives (RSUs and PSUs), while director compensation includes cash retainers and equity awards - The compensation philosophy is market-based and performance-based, with a focus on aligning executive pay with shareholder value creation and promoting sound risk-taking411412 - For 2022, the annual performance bonus (PBP) for NEOs was weighted 70% on corporate performance and 30% on individual performance (80/20 for the CEO). The corporate scorecard multiplier for 2022 was 70%436459 - Long-term incentives for 2022 were granted as 50% RSUs (time-vesting) and 50% PSUs (performance-vesting). PSU vesting is tied to EPS Growth CAGR (60% weight) and Organic Revenue Growth CAGR (40% weight) over a three-year period447453 2022 NEO Base Salaries | Name | Title | 2022 Annual Base Salary ($) | | :--- | :--- | :--- | | Jeff Puritt | President & CEO | 850,000 | | Vanessa Kanu | CFO | 468,430 | | Maria Pardee | CCO | 450,000 | | Marilyn Tyfting | CCO-CHRO | 350,766 | | Michael Ringman | CIO | 350,000 | - Independent directors receive an annual cash retainer of $80,000 and an equity award of $150,000. TELUS-employed directors receive an annual equity award of $230,000532 Board Practices and Corporate Governance The company's corporate governance is shaped by its 'controlled company' status under TELUS, impacting board independence and committee structures, while adhering to a board diversity policy - The company is a "controlled company" under NYSE rules, as TELUS holds over 50% of the voting power, and thus relies on exemptions from certain governance requirements, such as a majority-independent board554 - The Board of Directors has 11 members, of which four are determined to be independent (36%)547556 - The board has an Audit Committee, a Human Resources Committee, and a Governance and Nominating Committee. The Audit Committee is composed entirely of independent directors570572 - The company has a board diversity policy and aims for at least 30% of its board members to be women. As of the report date, three of ten directors (30%) were women589 Employees As of December 31, 2022, the company employed over 73,000 team members globally, primarily in service delivery, emphasizing its caring culture and commitment to diversity and inclusion for talent management Employee Headcount by Function | Function | Dec 31, 2022 | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | :--- | | Delivery of our services | 67,664 | 59,493 | 48,948 | | Corporate, support and administrative | 5,478 | 2,648 | 1,670 | | TOTAL | 73,142 | 62,141 | 50,618 | - The company's talent strategy focuses on its caring culture, training and development (e.g., TELUS International University), and diversity and inclusion to attract and retain employees597598601 - As of December 31, 2022, women represented approximately 48% of the total workforce and 42% of management positions602 Shareholders and Related-Party Transactions This section details the company's major shareholders, particularly TELUS and BPEA, and significant related-party transactions that highlight TELUS's controlling influence Major Shareholders The company's ownership is concentrated with TELUS Corporation and BPEA, who exert controlling influence through a dual-class share structure, with TELUS holding 72.4% of total voting power Beneficial Ownership (as of Dec 31, 2022) | Name of Beneficial Owner | % of Multiple Voting Shares | % of Total Voting Power | | :--- | :--- | :--- | | TELUS | 74.8% | 72.4% | | BPEA | 25.2% | 24.4% | - The company has a dual-class share structure where multiple voting shares have 10 votes per share, while subordinate voting shares have one vote per share662 Related-Party Transactions The company engages in significant related-party transactions with TELUS Corporation, including a Master Services Agreement generating $428 million in 2022 revenue, and a Shareholders' Agreement solidifying TELUS's control - The Master Services Agreement (MSA) with TELUS has a ten-year term from January 2021 and includes a minimum annual spend commitment of $200 million from TELUS617 Transactions with TELUS Corporation (in millions) | Transaction | 2022 ($M) | 2021 ($M) | 2020 ($M) | | :--- | :--- | :--- | :--- | | Revenue from TELUS | $428 | $353 | $310 | | Management Fees to TELUS | ($33) | ($30) | ($29) | - A Shareholders' Agreement grants TELUS significant control, including the right to nominate a majority of the board and special approval rights over key corporate actions as long as it holds at least 50% of the voting power633639 - The company's credit facility includes TELUS as a lender, and contains covenants tied to the relationship with TELUS, such as a change of control clause if TELUS ceases to hold more than 50% of the voting power626630 Additional Information This section provides details on the company's share capital structure, articles of association, and key U.S. and Canadian tax considerations for shareholders Share Capital and Articles of Association The company's share capital includes dual-class shares with varying voting rights, protected by a Coattail Agreement, and its articles specify forum selection for legal disputes - The company has an unlimited number of subordinate voting shares (1 vote each), multiple voting shares (10 votes each), and preferred shares661662 - Multiple voting shares automatically convert to subordinate voting shares if transferred to a non-Permitted Holder, or if the aggregate holdings of TELUS Permitted Holders or BPEA Permitted Holders fall below a 10% threshold of total outstanding shares663664 - A Coattail Agreement ensures that in a take-over bid, holders of subordinate voting shares are offered a price and terms at least as favorable as those offered to holders of multiple voting shares687688 - The articles contain a forum selection clause designating the Supreme Court of British Columbia for derivative actions and breaches of fiduciary duty, and the U.S. District Court for the Southern District of New York for claims arising under the U.S. Securities Act and Exchange Act693 Taxation Summary This section outlines U.S. and Canadian federal income tax considerations for shareholders, including the company's non-PFIC status and applicable dividend withholding tax rates under the U.S.-Canada tax treaty - For U.S. federal income tax purposes, the company does not believe it was a Passive Foreign Investment Company (PFIC) for its 2022 taxable year and does not expect to be classified as a PFIC in the near future726 - Dividends paid to U.S. Holders may be eligible for the favorable "qualified dividend income" tax rates, provided the company is not a PFIC and other holding period requirements are met721 - Dividends paid to non-resident holders are subject to Canadian withholding tax at a rate of 25%, which is generally reduced to 15% for U.S. residents under the U.S.-Canada income tax treaty736 Controls and Procedures Management confirmed the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2022, successfully remediating prior material weaknesses identified in FY2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022759 - Management assessed internal control over financial reporting as effective as of December 31, 2022, based on the COSO framework761 - The material weaknesses in internal control over financial reporting that were reported for the year ended December 31, 2021, have been successfully remediated during fiscal year 2022763 - The independent auditor, Deloitte LLP, issued an unqualified attestation report on management's assessment of the company's internal control over financial reporting762 Financial Statements Deloitte LLP issued unqualified opinions on the consolidated financial statements for the years ended December 31, 2022, 2021, and 2020, prepared under IFRS, and on the effectiveness of internal control over financial reporting - The independent registered public accounting firm, Deloitte LLP, issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2022791 - Deloitte LLP also issued an unqualified opinion on the Company's internal control over financial reporting as of December 31, 2022792798 - The financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB)791821