TELUS International(TIXT) - 2022 Q3 - Quarterly Report

Condensed Interim Consolidated Financial Statements (Unaudited) Condensed Interim Consolidated Statements of Income and Other Comprehensive Income (Loss) The company reported significant increases in revenue, operating income, and net income for both the three-month and nine-month periods ended September 30, 2022, compared to the prior year, leading to substantial growth in basic and diluted earnings per share Revenue Performance (US$ millions) | Period | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $615 | $556 | +10.6% | | Nine months ended Sep 30 | $1,838 | $1,594 | +15.3% | Operating Income (US$ millions) | Period | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $84 | $47 | +78.7% | | Nine months ended Sep 30 | $223 | $122 | +82.8% | Net Income (US$ millions) | Period | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $59 | $23 | +156.5% | | Nine months ended Sep 30 | $149 | $42 | +254.8% | Earnings Per Share (US$) | Period | 2022 (Basic) | 2021 (Basic) | Change (YoY) | 2022 (Diluted) | 2021 (Diluted) | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $0.22 | $0.09 | +144.4% | $0.22 | $0.09 | +144.4% | | Nine months ended Sep 30 | $0.56 | $0.16 | +250.0% | $0.55 | $0.16 | +243.8% | Condensed Interim Consolidated Statements of Financial Position As of September 30, 2022, total assets decreased by $153 million compared to December 31, 2021, primarily due to reductions in intangible assets and goodwill, while total liabilities also decreased by $216 million, resulting in a $63 million increase in owners' equity Financial Position (US$ millions) | As at | Sep 30, 2022 | Dec 31, 2021 | Change | | :--- | :--- | :--- | :--- | | Total assets | $3,473 | $3,626 | -$153 | | Total liabilities | $1,755 | $1,971 | -$216 | | Owners' equity | $1,718 | $1,655 | +$63 | Condensed Interim Consolidated Statements of Changes in Owners' Equity Owners' equity increased from $1,655 million at January 1, 2022, to $1,718 million at September 30, 2022, driven by net income of $149 million and share-based compensation of $23 million, partially offset by an other comprehensive loss of $109 million Changes in Owners' Equity (Nine months ended Sep 30, 2022, US$ millions) | Item | Amount | | :--- | :--- | | Balance as at January 1, 2022 | $1,655 | | Net income | $149 | | Other comprehensive loss | $(109) | | Share-based compensation | $23 | | Balance as at September 30, 2022 | $1,718 | Condensed Interim Consolidated Statements of Cash Flows Cash provided by operating activities significantly increased for both the three-month and nine-month periods ended September 30, 2022, while cash used in investing activities decreased for the three-month period but increased for the nine-month period, and cash used in financing activities increased across both periods, primarily due to debt repayments Cash Flow from Operating Activities (US$ millions) | Period | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $124 | $86 | +44.2% | | Nine months ended Sep 30 | $337 | $218 | +54.6% | Cash Flow from Investing Activities (US$ millions) | Period | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $(19) | $(40) | +52.5% (less cash used) | | Nine months ended Sep 30 | $(89) | $(78) | -14.1% (more cash used) | Cash Flow from Financing Activities (US$ millions) | Period | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $(78) | $(34) | -129.4% (more cash used) | | Nine months ended Sep 30 | $(206) | $(160) | -28.8% (more cash used) | Notes to Condensed Interim Consolidated Financial Statements (Unaudited) General application This section outlines the basis of presentation for the condensed interim financial statements, including adherence to IFRS-IASB and IAS 34, details a reclassification of certain liabilities, and discusses upcoming accounting policy developments with no expected material impact, also describing the company's capital management objectives and policies 1. Condensed interim consolidated financial statements - The condensed interim consolidated financial statements are presented in United States dollars and comply with International Financial Reporting Standards (IFRS-IASB) and International Accounting Standard 34 (IAS 34)[15] - The company reclassified certain current and non-current liabilities into 'Accounts payable and accrued liabilities' and 'Other long-term liabilities' for immaterial amounts, with comparative periods reclassified to conform[17][20] - Upcoming amendments to IAS 1, IFRS Practice Statement 2, IAS 8, and IAS 12, effective January 1, 2023, are not expected to materially affect the company's financial disclosure or performance[21][22] 2. Capital structure financial policies - The objective of capital management is to maintain a flexible capital structure that optimizes cost and availability of capital at acceptable risk levels[23] - Capital includes owners' equity (excluding accumulated other comprehensive income), long-term debt, and cash and cash equivalents[24] - Capital is managed by monitoring financial covenants in the credit facility and may involve issuing new shares or debt, or paying down debt with cash flows from operations[24][25] Consolidated results of operations focused This section details the company's revenue disaggregation by industry vertical and geographic region, provides summaries of share-based compensation plans, breaks down interest and income tax expenses, and explains the calculation of basic and diluted earnings per share 3. Revenue Revenue by Strategic Industry Vertical (Nine months ended Sep 30, US$ millions) | Vertical | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Tech and Games | $856 | $719 | +19.1% | | Communications and Media | $432 | $397 | +8.8% | | eCommerce and FinTech | $221 | $186 | +18.8% | | Banking, Financial Services and Insurance | $127 | $69 | +84.1% | | Travel and Hospitality | $55 | $43 | +27.9% | | Other | $147 | $180 | -18.3% | Revenue by Geographic Region (Nine months ended Sep 30, US$ millions) | Region | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | | Europe | $667 | $669 | -0.3% | | North America | $456 | $362 | +26.0% | | Asia-Pacific | $441 | $331 | +33.2% | | Central America | $274 | $232 | +18.1% | 4. Share-based compensation - Share-based compensation expense for the nine months ended September 30, 2022, was $20 million, down from $66 million in the prior year[3] (a) Restricted share unit plan Restricted Share Unit Activity (Nine months ended Sep 30, 2022) | Item | Number of units (Non-vested) | Number of units (Vested) | Weighted average grant-date fair value | | :--- | :--- | :--- | :--- | | Outstanding, January 1, 2022 | 1,850,807 | — | $21.94 | | Granted or exchange of rights | 806,395 | 59,512 | $26.52 | | Vested | (520,717) | 520,717 | $17.76 | | Exercised | — | (579,157) | $18.93 | | Forfeited | (188,256) | — | $17.70 | | Outstanding, September 30, 2022 | 1,948,229 | 1,072 | $25.48 | - As at September 30, 2022, outstanding restricted share units comprised 1,286,634 RSUs, 408,321 PSUs, and 253,274 Phantom RSUs[30] (b) Share option award plan Share Option Award Activity (Nine months ended Sep 30, 2022) | Item | Number of share option award units (Non-vested) | Number of share option award units (Vested) | Weighted average exercise price | | :--- | :--- | :--- | :--- | | Outstanding, January 1, 2022 | 1,084,185 | 2,096,582 | $10.74 | | Vested | (293,860) | 293,860 | $8.46 | | Exercised | — | (293,860) | $8.46 | | Forfeited | (157,336) | — | $6.80 | | Outstanding, September 30, 2022 | 632,989 | 2,096,582 | $11.21 | - As at September 30, 2022, the exercise price for outstanding options ranged from $4.87 to $8.95 for 2,233,471 options (4.4 years remaining life) and $25.00 for 496,100 options (8.4 years remaining life)[33] 5. Interest expense Interest Expense (US$ millions) | Periods ended September 30 | 2022 (Three months) | 2021 (Three months) | 2022 (Nine months) | 2021 (Nine months) | | :--- | :--- | :--- | :--- | :--- | | Interest on long-term debt, excluding lease liabilities | $6 | $5 | $17 | $23 | | Interest on lease liabilities | $3 | $4 | $10 | $11 | | Amortization of financing fees and other | $1 | $1 | $2 | $2 | | Total Interest expense | $10 | $10 | $29 | $36 | 6. Income taxes Income Tax Expense (US$ millions) | Periods ended September 30 | 2022 (Three months) | 2021 (Three months) | 2022 (Nine months) | 2021 (Nine months) | | :--- | :--- | :--- | :--- | :--- | | Current income tax expense | $30 | $22 | $74 | $62 | | Deferred income tax expense (recovery) | $(4) | $(7) | $(4) | $(19) | | Total Income tax expense | $26 | $15 | $70 | $43 | Effective Income Tax Rate | Periods ended September 30 | 2022 (Three months) | 2021 (Three months) | 2022 (Nine months) | 2021 (Nine months) | | :--- | :--- | :--- | :--- | :--- | | Income taxes computed at applicable statutory income tax rates | 23.3% | 23.9% | 23.5% | 23.7% | | Effective income tax rate | 30.6% | 39.5% | 32.0% | 50.6% | 7. Earnings per share (a) Basic earnings per share Basic Earnings Per Share (US$) | Periods ended September 30 | 2022 | 2021 | | :--- | :--- | :--- | | Net income for the period | $59 | $23 | | Weighted average number of equity shares outstanding (millions) | 266 | 266 | | Basic earnings per share | $0.22 | $0.09 | (b) Diluted earnings per share Diluted Earnings Per Share (US$) | Periods ended September 30 | 2022 | 2021 | | :--- | :--- | :--- | | Net income for the period | $59 | $23 | | Weighted average number of equity shares outstanding (millions) | 266 | 266 | | Dilutive effect of share-based compensation (millions) | 3 | 3 | | Weighted average number of diluted equity shares outstanding (millions) | 269 | 269 | | Diluted earnings per share | $0.22 | $0.09 | Consolidated financial position focused This section provides detailed information on accounts receivable, financial instruments, property, plant and equipment, and intangible assets and goodwill, including the announced acquisition of WillowTree, also covering long-term debt, share capital, and contingent liabilities 8. Accounts receivable Accounts Receivable (US$ millions) | As at | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Accounts receivable – billed | $203 | $213 | | Accounts receivable – unbilled | $209 | $175 | | Other receivables | $16 | $28 | | Allowance for doubtful accounts | $(1) | $(2) | | Total | $427 | $414 | Allowance for Doubtful Accounts Activity (Nine months ended Sep 30, US$ millions) | Item | 2022 | 2021 | | :--- | :--- | :--- | | Balance, beginning of period | $2 | $5 | | Recovery | — | $(3) | | Write-off | $(1) | — | | Balance, end of period | $1 | $2 | 9. Financial instruments - The fair values of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate their carrying values due to their short-term maturity[44] - Derivative financial instruments used to manage currency risks are measured at fair value on a recurring basis using significant other observable inputs (Level 2)[45][46] 10. Property, plant and equipment Property, Plant and Equipment Net Book Value (US$ millions) | As at | Dec 31, 2021 | Sep 30, 2022 | | :--- | :--- | :--- | | Owned assets | $215 | $227 | | Right-of-use lease assets | $190 | $190 | | Total | $405 | $417 | 11. Intangible assets and goodwill (a) Intangible assets and goodwill Intangible Assets and Goodwill Net Book Value (US$ millions) | As at | Dec 31, 2021 | Sep 30, 2022 | | :--- | :--- | :--- | | Customer relationships | $1,009 | $880 | | Crowdsource assets | $105 | $94 | | Software | $26 | $24 | | Brand and other | $18 | $9 | | Total intangible assets | $1,158 | $1,007 | | Goodwill | $1,380 | $1,288 | | Total intangible assets and goodwill | $2,538 | $2,295 | (b) WillowTree - TELUS International announced a definitive agreement to acquire WillowTree, a digital product provider, for an enterprise value of $1,225 million, including $210 million of assumed debt[51] - The acquisition consideration includes $125 million in TELUS International subordinate voting shares, approximately $160 million retained by management (performance-based), and the balance in cash[51] - The acquisition is anticipated to close in January 2023 and will be partially funded by an expanded $2 billion credit facility[51][54] 12. Long-term debt Long-term Debt (US$ millions) | As at | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Credit facility | $786 | $941 | | Lease liabilities | $206 | $215 | | Deferred debt transaction costs | $(6) | $(8) | | Total Long-term debt | $986 | $1,148 | (a) Credit facility - The credit facility's effective interest rate increased to 4.57% as at September 30, 2022, from 1.87% at December 31, 2021[56] - The company was in compliance with all financial covenants, including Net debt to EBITDA ratio (not to exceed 4.50:1.00 for fiscal 2022) and EBITDA to debt service ratio (not less than 1.50:1.00), as at September 30, 2022[59][60] - Subsequent to September 30, 2022, the company secured a commitment to expand its credit facility to an aggregate $2 billion (comprising $800 million revolving and $1.2 billion term loans) to fund the WillowTree acquisition[61] (b) Long-term debt maturities Anticipated Long-term Debt Maturities (Principal and Interest, US$ millions) | Fiscal year ending Dec 31 | Long-term debt, excluding leases | Leases | Associated interest and like carrying costs | Total Undiscounted Contractual Maturities | | :--- | :--- | :--- | :--- | :--- | | 2022 (remainder) | $236 | $5 | $3 | $249 | | 2023 | $30 | $20 | $44 | $84 | | 2024 | $30 | $12 | $30 | $72 | | 2025 | $490 | $11 | $21 | $522 | | 2026 and thereafter | — | $20 | $27 | $65 | | Total | $786 | $68 | $93 | $1,085 | 13. Share capital Authorized and Issued Share Capital (millions) | Share Type | Authorized (Sep 30, 2022) | Issued (Sep 30, 2022) | | :--- | :--- | :--- | | Preferred Shares | unlimited | — | | Multiple Voting Shares | unlimited | 200 | | Subordinate Voting Shares | unlimited | 66 | - As at September 30, 2022, 18 million subordinate voting shares were reserved for share-based compensation plans and 5 million for the employee share purchase plan[64] 14. Contingent liabilities (a) Indemnification obligations - The company provides indemnification in certain transactions, with no maximum limit in some cases, but has not made significant payments historically, and no liability was recorded as of September 30, 2022[65] (b) Claims and lawsuits - The company is involved in various legal proceedings and claims, the ultimate outcome of which is uncertain and could adversely affect financial results if resolved for amounts exceeding management's estimates[66] Other This section covers related party transactions, including significant dealings with TELUS Corporation, and provides additional financial information such as major customer revenue concentration and detailed cash flow components 15. Related party transactions (a) Transactions with TELUS Corporation - TELUS Corporation and its subsidiaries are related parties, receiving customer care and IT outsourcing services from TELUS International and providing various services to it[67][68] Transactions with TELUS Corporation and Subsidiaries (US$ millions) | Period | Item | 2022 | 2021 | Change (YoY) | | :--- | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | Revenues from services provided to subsidiaries | $108 | $90 | +20.0% | | | Goods and services purchased from subsidiaries | $(8) | $(7) | -14.3% | | Nine months ended Sep 30 | Revenues from services provided to subsidiaries | $302 | $258 | +17.1% | | | Goods and services purchased from subsidiaries | $(20) | $(23) | +13.0% | - As at September 30, 2022, amounts due from affiliated companies were $50 million, and amounts due to affiliated companies were $81 million[69] (b) Transactions with Baring Private Equity Asia - Baring Private Equity Asia exercises significant influence, but there were no balances due to or from, or recurring transactions with, Baring Private Equity Asia during the reported periods[71][72] (c) Transactions with key management personnel - Share-based compensation expense of $2 million was recognized for key management personnel during the three months ended September 30, 2022, and $10 million for the nine-month period[73][74] - During the nine months ended September 30, 2022, key management personnel were granted 301,190 RSUs and 229,627 PSUs (total grant-date fair value of $14 million) and exercised 338,499 equity-accounted awards and 330,456 liability-accounted awards (cash-settled for $7 million)[74] 16. Additional financial information (a) Statements of income and other comprehensive income Major Customer Revenue Concentration (Nine months ended Sep 30) | Customer | 2022 Revenue % | 2021 Revenue % | | :--- | :--- | :--- | | TELUS Corporation | 16.5% | 16.2% | | Leading social media company | 16.1% | 17.0% | | Google | 11.8% | 11.2% | (b) Statements of financial position Other Long-term Assets (US$ millions) | As at | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Lease deposits and other | $20 | $26 | | Other | $6 | $7 | | Total | $26 | $33 | Accounts Payable and Accrued Liabilities (US$ millions) | As at | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Trade accounts payable | $16 | $79 | | Accrued liabilities | $88 | $75 | | Payroll and other employee-related liabilities | $170 | $144 | | Share-based compensation liability | $9 | $22 | | Other | $12 | $16 | | Total | $295 | $336 | (c) Statements of cash flows—operating activities and investing activities Net Change in Non-Cash Operating Working Capital (US$ millions) | Periods ended September 30 | 2022 (Three months) | 2021 (Three months) | 2022 (Nine months) | 2021 (Nine months) | | :--- | :--- | :--- | :--- | :--- | | Accounts receivable | $(2) | $(25) | $(30) | $(98) | | Due to and from affiliated companies, net | — | $3 | $21 | $25 | | Prepaid expenses | $4 | $2 | $(2) | $(14) | | Accounts payable and accrued liabilities | $1 | $6 | $(22) | $63 | | Income and other taxes receivable and payable, net | $15 | $(3) | $8 | $(8) | | Total | $17 | $(11) | $(19) | $(29) | Cash Payments for Capital Assets (US$ millions) | Periods ended September 30 | 2022 (Three months) | 2021 (Three months) | 2022 (Nine months) | 2021 (Nine months) | | :--- | :--- | :--- | :--- | :--- | | Property, plant and equipment, excluding right-of-use assets | $(24) | $(22) | $(71) | $(63) | | Intangible assets | $(2) | $(1) | $(9) | $(3) | | Change in accrued payables related to the purchase of capital assets | — | $(6) | $4 | $(1) | | Total | $(26) | $(29) | $(76) | $(67) | (d) Changes in liabilities arising from financing activities Changes in Long-term Debt from Financing Activities (Nine months ended Sep 30, 2022, US$ millions) | Item | Beginning of Period | Issued or received | Repayments or payments | Foreign exchange movement | Other | End of Period | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Credit facility | $941 | — | $(155) | — | — | $786 | | Lease liabilities | $215 | — | $(52) | $(18) | $61 | $206 | | Deferred debt transaction costs | $(8) | — | — | — | $2 | $(6) | | Total | $1,148 | — | $(207) | $(18) | $63 | $986 |