TELUS International (CDA) Inc (TIXT) 2023 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the TELUS International fourth-quarter 2023 investor call.

My name is Jonathan and I will be your conference facilitator today.

(Operator Instructions) I would now like to introduce Jason Mayr, Head of Investor Relations and Treasurer at TELUS International.

Mr. Mayr, you may begin the call.

Thank you, Jonathan.

Good morning, everyone.

Thank you for joining us today for TELUS International's Q4 2023 investor call.

Hosting our call today are Jeff Puritt, President and Chief Executive Officer, and Vanessa Kanu, our Chief Financial Officer.

As usual, we'll begin with some prepared remarks where Jeff will provide an operational and strategic overview of the quarter and year, followed by Vanessa, who will provide some key financial highlights.

We'll then open the line to questions from pre-qualified analysts before turning the call back to Jeff for his closing remarks.

Before we begin, I'd like to direct your attention to slide two of the supplementary presentation available for download on this webcast and also available on our website at telusinternational.com/investors.

The statements made during this call may be forward-looking in nature, including all comments reflecting expectations, assumptions, or beliefs about future events or performance that do not relate solely to historical periods.

These forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections.

We assume no obligation to update any forward-looking statements.

Jeff and Vanessa will also discuss certain non-GAAP measures that the management team considers to be (technical difficulty) GAAP measures, and the reconciliation to the comparable GAAP measures can be found in the appendices of today's supplementary presentation, along with the earnings news release issued this morning and regulatory filings available on SEDAR+ and EDGAR.

I'd also like to remind everyone that all financial measures we're referencing on this call and in our disclosure are in US dollars, unless specified otherwise, and relate only to TELUS International results and measures.

With that, I'll now pass the call over to our President and CEO, Jeff Puritt.

Thank you, Jason.

Good morning, everyone.

TELUS International performed well to close what was a very challenging year for our industry.

In the fourth quarter, TI grew revenues 10% year-over-year and, importantly, saw a continued improvement in our adjusted EBITDA margin to exit the year at 23.7%, demonstrating the efficacy of our cost efficiency programs that we discussed over the past two quarters.

Despite the continuing challenging macroeconomic environment, TI secured several new client wins this past quarter, including a North American customer engagement software and analytics company, Western Canada's premier heavy-duty truck and bus dealership, and a German research institution focused on innovative visual systems.

Additionally, our team at WillowTree also welcomed several new clients in the quarter, including a personal finance company, a US wireless provider, and an American biotech company.

We also continue to grow business with our existing clients, including with our largest client, TELUS Corporation, supporting their ongoing digital evolution of multiple areas, including TELUS Health in particular.

As well, we've secured new engagements with other existing clients, such as a Canadian multinational banking and financial services corporation, and Google, our second largest client.

Moreover, our team at WillowTree continues to gain incremental market share in the financial services vertical, in which we already count numerous Fortune 500 brands as clients.

And I'll share more details about one of these clients in particular in a case study shortly.

During the quarter, the WillowTree team also grew our business with existing clients, including an American hotel company and the world's largest brewing company that owns multiple global brands.

Although macroeconomic conditions continue to constrain the full potential of our cross-selling efforts, TI and WillowTree are making progress in fostering our fully integrated go-to-market strategy with several proposals in various stages of review with clients in the logistics, e-commerce, financial services, and technology industries.

To stay on WillowTree for a moment, last week, some of you may have tuned into a segment of the Today Show.

It covered the highly anticipated release of Apple's Vision Pro virtual reality headset.

Featured prominently during the show segment was the 3D volumetric capture studio located at Nova Southeastern University in Florida.

That studio was built by our team at WillowTree for Sony, and it runs on our virtual reality capture and render platform that enables 3D modeling used in virtual and augmented reality.

Specifically, our engineering team built the software platform and the camera interface for the studio.

We took the project from early-stage proof of concept to production ready within three months.

Our team also built additional tools that ensure the successful integration of hardware and software, including a new cloud render pipeline to leverage remote computing resources to produce 3D graphics and animations.

As an update on Fuel iX, while it's still early days, we're encouraged by the engagement with clients and the contracts that are in various stages of negotiation.

We believe our suite of GenAI offerings is a great enablement platform that provides enterprises with secure access to large language models, which would otherwise be too costly and time-consuming of an investment for many companies, especially those that are just getting started on their GenAI journeys.

In fact, IDC recently featured our GenAI Jumpstart Accelerator Program as an example of successful GenAI implementation in customer care business process services.

The specific use case featured WillowTree's engagement with one of North America's leading banks.

Over the span of eight weeks, our team developed a proof of concept to validate the feasibility and viability of a trustworthy AI-powered chatbot for this banking client's customer experience.

As a starting point, our WillowTree team facilitated audience workshops, determined best practices for AI, technical, and UX design, conducted product design and research around business outcomes, and presented functional solutions and prototype education to project stakeholders upon finalization of the proof of concept.

Through user interviews, testing strategy, risk analysis, and reporting, we were able to not only understand users' needs, mental models, expectations, and desires related to AI-powered chatbots, but we also established UX guidelines and added to the bank's bot experience knowledge base simultaneously.

The solution our WillowTree team worked on demonstrates the power of GenAI in enhancing customer service and empowering customers with a robust conversational financial literacy tool.

Across all of our client discussions on GenAI, of key concern is the security and confidentiality of their data.

With our Fuel iX platform, we ensure client data stays separated from the core LLM models.

Moreover, our clients can choose the right LLM tool for any given application, optimizing costs and reducing the risk of vendor lock-in within the rapidly evolving AI ecosystem.

As the Fuel iX platform is deployed with clients, we work with them to launch specific modules, for example, a CX agent support bot based on each client's data set and current IT tools and infrastructure.

Our platform enables clients to deploy, orchestrate, and administer multiple GenAI applications quickly off of the same foundation to deliver value for clients while maintaining the ability to scale up as fast as the client needs.

Fuel iX provides the flexibility and resiliency to avoid application obsolescence as the foundational model space rapidly evolves.

Indeed, the generative AI space remains very active with regulatory oversight a top priority to continue development and adoption in a responsible manner.

In early December, the European Parliament and Council of the EU reached an agreement on the shape and content of the EU regulation on artificial intelligence, the AI Act, which among other provisions restricts facial recognition and deepfake and defines how businesses can use AI.

While the details and the final form of the Act are still a work in progress, onus is on industry participants to establish their own AI governance programs and processes to ensure compliance.

At TI, we anticipated this event and proactively adopted data practices consistent with the draft Act.

For example, we have already established governance processes for new technologies, including AI, to continuously assess the compliance of our revolving solutions with regulatory requirements and industry standards.

Our global security and risk policy features an expanded segment on the acceptable use of AI tools, specifically including a dedicated section for generative AI with a focus on guardrails used in our approach to new technologies.

Elsewhere within our AI data solutions line of service, we're leveraging our scale from our million-plus crowdsourced AI community to serve clients with their generative AI development needs.

To build upon this, in December, we launched Experts Engine, a fully managed, tech-enabled, experts-on-demand sourcing solution for generative AI model builders to help them more quickly, more accurately, and more cost-effectively secure the high-quality training data sets they need to build the most demanding foundation models, including large language models.

At the core of Experts Engine is TI's proprietary machine learning model, conceived and built in-house here at TI.

Based on a client-specific project requirement, Experts Engine programmatically matches the tasks to be performed, such as data creation, collection, annotation, and validation, to the best-qualified individual and assigns the correct quality control workflows to the project.

Specifically for large-scale data projects, Experts Engine eliminates the over-allocation of expertise to simpler tasks by ensuring the right contributors are working on the right tasks at all times.

Ultimately, this enables us to better address more complex and customized data set requirements for our clients.

We've been seeing solid momentum in working with hyperscalers, such as Google in particular, in supporting the development of their large language models to enhance their respective GenAI products and services.

TI is playing a central role in the reinforcement learning from human feedback loop and supervised fine-tuning, which, thanks to our scale and resource management, enables our AI crowd community to be more efficient and effective.

Among other engagements, our AI data solutions team is currently supporting the development of an automatic speech recognition for pre-trained language models owned by a Santa Clara-based company in the chip industry that is also at the forefront of AI.

On a similar note, our computer vision team continues to work with several clients to advance autonomous driving technologies, as well as to provide data sets to help them develop and enhance various vehicle features, such as automated driving, collision avoidance systems, auto braking, lane departure warning, and parking assistance systems to assist with development of the hands-free systems for urban and suburban driving, as well as freeway automation.

With an eye on continuous improvement and efficiency, our team uses semi-automated type data tagging and selection algorithms, in some cases for more than a dozen metadata parameters, and we equip our data labeling platform with pre-labels to facilitate the optimization of computer vision annotation.

In a case study that spans both trust and safety and AI, there's incredibly important work we do for our client, Thorn, an international organization committed to addressing the role of technology in the facilitation of human trafficking and child sexual exploitation.

Founded in 2012, Thorn has data science and engineering teams focused solely on developing new technologies to use across the child safety ecosystem to accelerate victim identification, prevent re-victimization, and proactively prevent abuse.

TELUS International successfully completed an in-facility data annotation project for Thorn, annotating 90,000 images and text strings from the client's confidential database and the dark web over an eight-week period.

The labeled data was used to train one of their machine learning AI models to identify online sexual harms to children.

As this project required the annotation of highly sensitive material, we selected a team of annotators based on a number of key criteria, including seniority, skill profile, and emotional maturity.

The classification work required the annotators to determine which offensive material category an image or text string belonged to.

Due to the sensitive nature of the project, the team worked in secure rooms at a TELUS International facility using our in-house annotation platform.

For heightened security, we set up a secure API and file transfer system so that the images were not stored locally.

Our team members worked on a reduced schedule but at full pay to mitigate the impact of prolonged exposure to the material.

These team members also had access to our robust wellness program that included custom counseling and regular wellness check-ins.

Our team delivered the project on time and with minimal revisions required, achieving a 93% accuracy rate.

Our client noted how TI consistently demonstrated a dedication to both the wellness of annotators and the quality of the project delivery, as both aspects are critical for a successful annotation project.

For the final case study I'll share today, I'll focus on TELUS, our parent company.

As you likely know, we serve TELUS across hundreds of programs, helping to augment and digitize their customer experience ecosystem, leveraging technology and talent to help them outpace their competition.

To start, let me illustrate how TI's homegrown AI-enabled classification system is helping to manage TELUS' customers' inquiries.

Historically, customer inquiries, or tickets, were subject to a labor-intensive and rather inefficient process in which tickets were read, categorized, and triaged manually by humans.

With TI being a digital enabler for TELUS, we developed a proprietary and customized solution for them that automates this process, leveraging AI to allow technology to tackle most of this work.

We built a classification system, which is a combination of multiple customized models and an internally used language model.

I'd like to stress here that we're not using ChatGPT in this particular instance, but rather a TI solution that has been trained on user-specific data to improve the accuracy and understanding of the client data.

Each incoming ticket is analyzed by our AI model, which then categorizes the ticket into a specific topic bucket and then takes appropriate action without involving humans.

The classification is not limited solely to topic, but also includes parameters such as urgency of response, sentiment, or trend formation within larger groups of customers, language translation, and ticket closer success, whereas the model identifies and retains for future use the most successful resolution cases.

Any issue or ticket that is beyond the model's classification parameters is automatically routed to an administrator, a human, who manually assigns it to the correct category.

This human-in-the-loop process helps train our model so that there's no need for human intervention for similar tickets in the future.

The beauty of the solution is that it can adapt and start understanding the nuances and language of our client's business, in this case, TELUS, in a matter of just a few hours, not months or days, but hours.

Reliable and specific sample data and the variety of this data for training our model are critical elements to ensure the classification accuracy.

Our deep partnership and history with TELUS has certainly enabled TI to develop expertise within the telecommunications space in particular and, indeed, helped us better engage with some of the world's leading communications and media companies with AI-enabled CX solutions, a suite of network optimization solutions, and, of course, robust digital transformation capabilities.

In the fourth quarter, TELUS International was once again recognized externally with industry awards.

In addition to being featured in the IDC report on GenAI applications in CX that I mentioned a moment ago, TI was named a leader in the IDC MarketScape for worldwide data-labeling software for 2023.

This global assessment evaluated vendors offering data-labeling software technologies and capabilities, including TELUS International's proprietary AI data-labeling platform.

Earlier this week, Five9, our strategic partner for our intelligent cloud-native context center as a service application platform, recognized TI as its Canadian partner of the year and, notably, its global partner of the year for 2023.

With Five9, we're working to reimagine CX in the cloud with TI's agile and scalable solutions, harnessing the power of generative AI to deliver for our clients and their customers end-to-end CX experiences and innovation and, at the same time, drive better performance and cost efficiencies.

And to start the new year, US recruitment platform RippleMatch selected WillowTree as a 2024 Campus Forward Award winner for our unwavering commitment to recruiting and hiring early career tech talent and the investments we continue to make in nurturing and retaining the next generation of diverse talent.

Offering opportunities for advancement and career growth set within our global footprint of inspiring facilities will continue to play a meaningful role in our team member satisfaction, engagement, and retention.

Increasingly, environmental impacts of our footprint are top of mind.

In November of 2023, we announced our new site in Casablanca, Morocco, with a capacity for 800 team members providing AI data solutions and CX services.

Completed in three phases, the construction of our state-of-the-art facility combines cutting-edge technology with our environmentally friendly ethos.

The building was constructed to triple green certification standards and designed with numerous sustainable features, integrating the use of renewable energy to 2,000 square meters of solar panels on the roof to produce more energy than the building consumes and with more than 11,000 square meters of green space.

Elsewhere at TI in the fourth quarter, our team members kept their commitment to give back to communities where we live and work.

For example, in October, our team in Essen, Germany, hosted their first TELUS Days of Giving, where our team refurbished a transitional refugee home for women and children, while our US team members in Las Vegas refurbished Gray Elementary School.

Meanwhile in Ireland, our volunteers established the first community garden in Mahan, an area to the southern east side of Cork.

Personally, I had the great pleasure of attending one of our Days of Giving events in Central America in November, where more than 800 team members rolled up their sleeves to build our 13th school in Guatemala City.

Over the course of just eight hours, we built nine classrooms, two principal offices, a computer lab, a kitchen, two sets of bathroom, and a multi-sports court that will benefit 950 students.

As well in El Salvador, our more than 1,100 volunteers refurbished the SOS Children's Village Child Development Center in Santa Tecla.

It's these tangible contributions by our team members and making our communities better that truly inspire me and are foundational to our differentiated culture at TI and reflect our broader approach to sustainability.

To that end, we plan to release our second sustainability report in the spring, where you can learn more about our team's and company's progress towards our goals and achievements in 2023, as well as our priorities in 2024 and beyond, to continue to address the environmental, social, and governance aspects of our business, global operation, and stakeholder engagement.

And finally, as you will have seen in our earnings release issued this morning, our Chief Financial Officer, Vanessa Kanu, has made the decision to leave TELUS International at the end of March.

Before I turn the call over to her this morning, I'd like to take a moment to acknowledge and thank her for her many contributions to our company since she joined in 2020.

It's difficult to summarize her achievements in the short time I have now, as Vanessa has been a pivotal member of my executive team, helping us navigate a period of rapid growth for TELUS International, including our successful IPO in February 2021.

I was honored to stand shoulder to shoulder with her and many of our senior leaders last year as we finally had the opportunity to ring the closing bell at the New York Stock Exchange to commemorate the accomplishment.

I greatly appreciated Vanessa's counsel and support as we've developed, iterated, and executed upon our strategy amidst challenging global macroeconomic conditions.

Just as importantly, I've admired Vanessa's indefatigable work ethic, exceptional intellect, expertise, and insights, as well as her ability to forge and sustain excellent relationships with our stakeholder community.

Vanessa, it goes without saying, but I'll say it anyway, you will indeed be missed here at TI.

Now over to you, Vanessa, to share the details of our financial results.

Thank you very much, Jeff.

Very much appreciated.

And good morning, everyone.

Thank you all for joining us today.

In the fourth quarter, we delivered revenue of $692 million, up 10% year over year on a reported basis, and 9% in constant currency.

On an organic basis, our quarterly revenue grew 3% year over year.

For the full year, we generated revenue of $2.7 billion, up 10% on a reported basis, and also 9% in constant currency, and up 2% on an organic basis.

Taken in the context of a very challenging year, this is a solid result, supported by the expansion in services provided to existing clients like TELUS Corporation and Google, amongst others, and the addition of new clients.

This growth was tempered by meaningfully lower revenues from one of our largest clients, a leading social media company, as well as a global financial institution client.

Looking at our top three clients, revenue from TELUS and Google increased 31% and 32% respectively in Q4, while revenue from our third largest client, a leading social media network, declined 31% year over year.

For the full year, revenue from TELUS and Google increased 31% and 20% respectively, while revenue from our third largest client declined 22%.

Excluding impacts from that social media network client, our total revenue on an organic basis grew 9% in Q4, and 7% for the full year.

Looking at our revenues by vertical, in the fourth quarter and for the year overall, the reported revenue growth rates by vertical were not materially impacted by foreign currency movements.

Our largest vertical, Tech & Games, grew 1% year over year, while on a full year basis, Tech & Games grew 3%, with growth from Google driven by strong momentum in AI data solutions work, offsetting revenue declines from our third largest client.

Excluding, again, this leading social media network client, our revenue in the Tech & Games vertical grew by approximately 16% year over year in both Q4 and for the full year.

Revenues from the e-commerce and FinTech vertical increased 4% year over year, driven by higher volumes.

For the full year, e-commerce and FinTech revenue declined due to a decline in service volumes during the first half of the year, which subsequently improved during the second half of the year.

Our parent company, TELUS Corporation, continues to drive growth in our communications and media verticals, with quarterly revenues increasing 21% year over year, while growing at 11% for the full year.

TELUS also continues to drive year over year growth in our healthcare vertical, which was up 83% in the quarter and an impressive 174% for the full year.

Banking, Financial Services and Insurance, or BFSI, was largely flat year over year in Q4, reversing a declining trend seen over the prior two quarters as the impact of the volume reduction from a global financial institution client has now lapped starting this quarter.

For the full year, revenue declined 6% due to a reduction in service volume from the aforementioned client.

Finally, our revenue from all other verticals, which includes travel and hospitality, energy and utilities, retail and consumer packaged goods, amongst others, grew 8% year over year in Q4 and 24% for the full year.

Looking at our revenues by geography, revenues in North America grew by 27% year over year in Q4 and 28% for the full year, driven by growth in Google, expanded volume from our parent company, TELUS Corporation, and its business units, as well as the addition of WillowTree clients across several industry verticals.

We also saw strong growth in Central America, where revenues increased 26% in Q4 and 24% -- 23%, rather, for the full year, driven by TELUS, along with certain technology clients and growth in AI data solutions.

In Asia-Pacific, our revenue grew 5% and 7% in Q4 and the full year, respectively, with contributions from, again, TELUS and across several other industry verticals and clients.

Finally, and as expected, we saw a year-over-year decline in revenue from Europe of 8% in Q4 and 7% on a full year basis.

Moving on to operating expenses, salaries and benefits in the fourth quarter were $406 million, and for the full year, $1.66 billion, up 16% and 19%, respectively, year over year.

The increase in both periods was due to increased average employee salary wages and higher team member counts, including additional team members from our acquisition of WillowTree, as well as previously discussed cost imbalances earlier in the year, particularly in Europe.

These increases were offset by the positive impacts of our cost efficiency efforts initiated in the second quarter of 2023, including aligning our team member counts with service demand and adjustments of variable compensation accruals based on operating performance metrics.

Our goods and services purchased were $122 million in the fourth quarter, a decrease of 2% year over year, while for the full year, goods and services decreased by 1% to $461 million due to the lower use of higher-cost external contractors in our digital solutions business and the reduction of certain sales tax reserves based on our recent collection experience, which were partially offset by additional goods and services purchased in relation to WillowTree.

Share-based compensation expense in the fourth quarter was zero, while for the full year, it decreased by $4 million to $21 million.

This decrease was due to lower expense associated with awards granted in relation to our acquisitions and a downward revision on the estimated performance achievement on certain non-market performance conditions, which were both partially offset by the prior year, benefiting from a downward mark-to-market adjustment resulting from the decrease in our share price.

Acquisition, integration, and other charges in the fourth quarter were $7 million, a decrease of 70%, while for the full year were $55 million, up 38%, primarily due to expenses associated with our cost efficiency efforts, which included staff reduction to address lower service volume and acquisition and integration costs incurred in connection with our recent acquisitions.

Depreciation and amortization expense was $84 million in Q4 and $324 million for the full year, up 24% and 26% respectively, primarily due to capital and intangible assets arising from our acquisition of WillowTree, as well as additional organic capital investments over the year.

In the fourth quarter, we recorded a gain of $20 million related to changes in business combination-related provisions.

This gain was due to a downward revision of our estimates of certain performance-based criteria tied to the WillowTree business and a reduction of our provision for written put options related to the acquisition.

Our interest expense for the fourth quarter was $37 million, an increase of $25 million in the same quarter last year, and for the full year, interest expense increased $103 million to $144 million.

These increases were primarily due to higher average debt levels on our credit facility, higher average interest rates, and non-cash interest accretion recognized on the provision for written put options arising from the WillowTree acquisition.

In Q4, our income tax expense was $14 million and our effective tax rate was $26.9 million, compared with a negative ETR of $9.7 million -- 9.7%, rather, in the same quarter of the prior year, primarily due to a change in the foreign tax differential.

Income tax expense for the full year was $5 million, resulting in an effective tax rate or ETR of 8.5%, compared with 26.8% in the prior year, with a decrease primarily due to a change in income mix, as proportionately less income was earned in higher tax jurisdictions, while we also saw a reduction in adjustments recognized in the current period for income tax of prior period related to a favorable income tax settlement.

These were partially offset by an increase in withholding taxes as a proportion of net income before tax.

Moving on to profitability, adjusted EBITDA was $164 million in the fourth quarter, a year-over-year increase of 4%, benefiting from the favorable impacts of our cost efficiency efforts and certain other favorable items, including vendor volume rebates, lower variable incentives, and favorable customer mix in the quarter.

Further, there were increased volumes in AI data solutions, namely with Google, and digital enablement with TELUS.

This helped to more than offset the impact of reductions in service demand, principally in Europe, wage inflation, and accelerated ramp-up costs in the quarter for certain clients.

Correspondingly, our adjusted EBITDA margin in the fourth quarter was 23.7%, expanding by 200 basis points quarter-over-quarter, while contrasting 120 basis points year-over-year.

For the full year, adjusted EBITDA was $583 million, a decrease of 4%, primarily due to the increase in salaries and benefits, outpacing revenue growth, resulting from lower utilization of team members in certain regions, and changes in our revenue mix.

Adjusted EBITDA margin for the year was 21.5%, a contraction of 310 basis points from the prior year due to the previously mentioned cost imbalances, which were partially offset by cost efficiency efforts initiated in Q2 2023 and realized during the second half of the year.

Adjusted net income in the fourth quarter was $72 million, a decrease of 24%, while adjusted diluted earnings per share was $0.26, a decrease of 26% year-over-year, largely as a result of the higher operating expenses, interest expense, and tax expense, outpacing revenue growth.

For the full year, adjusted net income decreased by 24% to $252 million, while adjusted diluted earnings per share was $0.91, a decrease of 26%.

As an update to our cost efficiency efforts that I discussed with you in prior quarters, these programs, which again started in Q2 of 2023 and primarily encompassed team member count reductions in line with demand, rationalization of certain facilities, and a reduction in certain third-party vendor costs, have generated $104 million in annualized savings, up from the $96 million that I reported last quarter.

Approximately $46 million was recognized during the year, while the remaining $58 million will accrue to our benefit in 2024.

More on that later.

Now turning to the balance sheets and cash flow, at the end of the fourth quarter, cash and cash equivalents were $127 million, and our total available liquidity was $609 million.

We generated free cash flow of $115 million, up 92% year-over-year, driven by lower income tax payments and higher net inflows from working capital in the quarter.

For the full year, free cash flow was $405 million, up 22%, primarily due to higher net inflows from working capital, which included higher cash receipts from sellers' corporations, as well as lower income tax payments and share-based compensation payments.

These items were partially offset by lower operating profits and cash expenditures for transaction costs associated with the WillowTree acquisition.

As a percentage of revenue, free cash flow was approximately 15% in 2023.

Capital expenditures for the year decreased 11% to $93 million, primarily due to the deferral of non-critical sustaining spend and the rationalization of our facility's footprint, and as part of our cost efficiency efforts mentioned earlier.

For the year, capital expenditures as a percentage of revenue were 3.4%.

We also continue to reduce our leverage in Q4, lowering our net debt-to-adjusted EBITDA leverage ratio, as defined per our credit agreement, to 2.8x as of the end of December, and improvements from 2.9x as of the end of September 2023.

We believe our robust cash flow profile will continue to drive further deleveraging through 2024.

Speaking of 2024, let's turn to our outlook.

Much like our industry peers, we remain cautious given the ongoing challenging demand environment, with delayed decision-making expected to continue, contributing to headwinds in Q1 and Q2 in particular, while we're hopeful to start seeing broader demand improvement in the second half of 2024.

Our outlook for revenue for 2024 is in the range of $2.79 billion to $2.85 billion, which represents revenue growth of 3% to 5% on a reported basis.

We do not currently expect year-over-year foreign currency impacts on revenue to be material.

Within this outlook range, we continue to assume near-term softness in revenue from our third-largest client, offset by continued expansion of revenue with TELUS Corporation, and further momentum with other large clients, including Google.

As you may have seen in our earnings release, beginning in the first quarter of 2024, we will no longer exclude share-based compensation expense and changes in business combination-related provision, and the tax effect of these items in our presentation of adjusted EBITDA and adjusted diluted earnings per share.

The two charges which largely offset in 2023, and are expected to also largely offset in 2024, are currently expected to create a minimal net impact on adjusted EBITDA or adjusted EBITDA margins.

However, the tax effect of such adjustments will impact adjusted net income, while our weighted average diluted share counts have also been updated to reflect these adjustments.

Accordingly, the ranges I'm about to share with you for these metrics are aligned with the modified presentation.

For more information regarding this change, including a reconciliation of the previous and current presentations, please see the non-GAAP section of our earnings release.

We will also be posting additional quarterly reconciliations to assist with your modeling to our investor relations website.

For adjusted EBITDA, we expect a range of $623 million to $643 million, representing 7% to 10% year-over-year growth, with adjusted EBITDA margins of 22.3% to 22.6%.

Again, this includes the expectation of minimal net impact from the inclusion of both share-based compensation expense and changes in business combination-related provision to adjusted EBITDA.

We expect adjusted EBITDA growth to outpace revenue growth in 2024, in part due to the significant cost efficiency program we executed upon last year.

While those executed programs will generate tailwinds going into 2024, as I referenced earlier, we also plan to invest in our business in a meaningful way this year in two key areas.

First, we're investing meaningfully in our sales and marketing functions to the tune of $25 million in-year by hiring of additional sales and sales enablement personnel to increase our geographic footprint, account coverage, and vertical coverage as well.

Second, we're investing $6 million of OpEx, not including the CapEx investment, in internal transformation of our service delivery capabilities to enhance service quality and optimize our global cost of service, enabling us to further reduce our cost to serve on a longer-term basis.

Normalizing for this meaningful investment of $31 million we're making this year, our adjusted EBITDA margin for the year would have otherwise been 23.5% at the midpoint of our guide.

We believe these investments, while significant in 2024, are critical to our future revenue growth and indeed profitability trajectory well beyond 2024.

Our outlook calls for an adjusted diluted EPS range of $0.93 to $0.98, representing growth of 7% to 13%.

Our outlook assumes a weighted average diluted share accounts of approximately $292 million for the year.

And finally, for the full year 2024, we expect our effective tax rates to be in the range of 22% to 26%, reflecting the expected jurisdictional mix of our earnings.

While we do not provide formal quarterly guidance, I would like to highlight certain seasonality factors that should be helpful in modeling quarterly cadence.

We expect revenue seasonality of approximately 48% in the first half and 52% in the second half of 2024, and adjusted EBITDA seasonality of approximately 45% in the first half and 55% in the second half.

The EBITDA skew for the second half of the year reflects the aforementioned new investments to support growth and efficiency being incurred starting in the first half, with the associated benefits ramping up throughout the year and beyond.

As a reminder, our annual wage increases also kick in during the first half of the year, consistent with previous years.

Both revenue and EBITDA skews reflect what we expect for our business, with the effect being more pronounced in the first quarter in particular, as we don't foresee the demand environment improving until later in the year.

Finally, our effective tax rate is also subject to seasonality being higher in the first half of the year and lower in the second.

Lastly, before we move on to questions, thank you, Jeff, for your kind words earlier.

It has been an absolute honor to serve as CFO of TELUS International for the last three and a half years, and to have helped to guide its resilient financial profile.

Indeed, our compound annual growth rate from 2020 to 2023 has been remarkable, and I'm honored to have been a part of that while further building our foundation for the future.

I have tremendous confidence in the company's leadership team, its strategy, and future prospects, and wish everyone at TI continued success.

I will indeed be rooting for the team from afar.

With that, let's move on to questions.

I kindly ask you to please keep it to one question at a time so that everyone can participate.

Jonathan, over to you.

Tien-tsin Huang, JPMorgan.

Thank you so much.

All the best to you, Vanessa.

Thanks for all the help here.

I wanted to ask, maybe if you don't mind, let's start with margin.

I know you're going to get a lot of questions on revenue.

Just a little bit more detail on the margin outlook and what levers you might be pulling to drive that second-half improvement.

I caught the investments, but I also heard things like some ramp-up costs.

I want to make sure that's just typical, and I think subcontractor usage, things like that, utilization, any other callouts there.

Thank you.

Thanks, Tien-tsin.

Absolutely.

I think I've called out the main items, and I think you're absolutely right.

So, our ramp-up costs are typically higher, particularly in Q1, and we actually started to see some of that in Q4.

Nothing unusual there.

That's our typical seasonal cadence, but we start to see that build up through the year.

And, of course, the revenue generation starts to accelerate.

So, we incur the ramp-up costs starting early, and then as the revenue starts to materialize and hit sort of run rate or proficiency levels, the EBITDA margin starts to pick up as a result of that.

So, all that very normal as part of our typical cadence.

I think what I would call out as being different this year, indeed, is the $31 million of investment that I called out.

And as mentioned in the preferred remarks, as we went through our planning for the year, whilst we do recognize that we want to get back to a 23%-plus EBITDA margin, it was also critically important that we set aside investment for our future growth and future profitability.

We do have a very strong and robust market, as we've discussed many times in the past.

So, whilst we're talking about macroeconomic headwinds in 2023 and short-term first-half 2024, we do think the market will recover through the balance of 2024 and beyond.

And so, making those critical investments in our sales and marketing functions now will position us in a better way to be able to participate in that growth.

And similarly, making the investment in our operations transformation will similarly enable us to have better agility to manage our delivery cost structure in the long term.

Understood.

Thank you.

Thank you.

Dan Perlin, RBC Capital Markets.

Thanks.

Good morning.

And Vanessa, all the best as well.

And again, just thank you for all the support through this process.

But the question that I have is, the sales and marketing investment that you're calling out here, I'm wondering how much of that, if any, is influenced by some of the year-end budget discussions that you're having with your clients?

And specifically here, I'm kind of tailoring it away from the top three?

So, if we exclude those for the moment and just think about the remainder and some of the new client wins.

Thank you.

Thanks, Dan.

So, we don't include TELUS as a recipient of our sales and marketing activity.

As you might expect, given the nature of the relationship, whilst we certainly work as hard, if not harder in some cases, to win and keep and grow TELUS business, given the proximity where we're not using traditional sales activity, we're certainly not commissioning salespeople in connection with that work.

Leaving aside the other top two, we continue to see an exciting and robust landscape for growth, particularly around next-gen AI-enabled solutions in particular.

And our significant increase in investment in sales, marketing, solution, the entire ecosystem to grow our capability is really a bit of a push-me-pull-you in terms of a belief and a confidence and a observation that this is going to be a target-rich, fertile environment for growth.

We just need more feet on the street to go out and capture those opportunities.

And cautiously optimistic that, as Vanessa mentioned a few moments ago, by the second half of the year, this elongated pause caused by uncertainty in the macro, whether it's, you know, when or if interest rates finally plateau, some hopefully better geopolitical global stability, et cetera, will unlock more meaningful transformational decision-making amongst our existing and targeted customer base in particular.

Great.

Thank you.

Thanks, Dan.

Ramsey El-Assal, Barclays.

Hi, guys.

Thank you for taking my question.

And echoing the same sentiments, Vanessa, it's been a real pleasure.

I wanted to ask about the large social media customer and how we should think about eventually growing over the headwind there.

Do you have visibility to an anniversarying point or period, or do they continue to kind of ramp down or delay or not engage with incremental projects such that it is pushing out that anniversary line into the future?

Just trying to think through that.

Thanks.

Great question, Ramsey.

Nice to hear your voice.

I can tell you that we are all hands-on deck trying to address that very issue and continue to be cautiously optimistic that we are indeed at let's call it the bottom, and looking to improve and turn around the opportunity.

It's been candidly a bit frustrating in that regard, but we understand both the responsibility and the opportunity associated with that engagement in particular.

And we're working, as I say, all hands-on deck to see if we can't find a way to unlock and tap into what we see as continued significant opportunity there.

But right now, it is still a challenge.

And so, what's reflected in our outlook for 2024 is a conservative view of the current run rate.

Got it.

Thank you very much.

Stephanie Price, CIBC.

Morning.

Vanessa, echoing everybody else, it's been great working with you.

Good luck in the future.

I just want to hone in on AI.

So, a few weeks ago, Appen announced the loss of the Google contract, and it sounds like you've been broadening your relationship with Google.

Hoping you can talk a bit about Google and the AI side, and maybe more broadly throughout your customer base, what you're seeing around AI.

So, we too saw that announcement from Appen.

We've been the beneficiary of continued growth and opportunity in serving Google, indeed, around helping them on the generative AI front, as I mentioned in my prepared remarks earlier, Stephanie, and previously Bard, now Gemini.

We're quite proud of and excited about the participation role that we had there and continue to have.

And again, as Vanessa suggested, just similar from our competitor, we anticipate continued growth and opportunity serving them, and we continue to be the recipient of accolades and compliments for the quality and timeliness of our support for them.

And we're excited about not just continuing to grow that relationship, but the spin-offs, the repurposing, the follow-on opportunities where what we're learning in serving them and helping them to build their large language model, and looking for repurposing those applications into an enterprise-centric, private cloud-based large language model that gives enterprise clients like TELUS, for example, the opportunity to leverage the functionality and the overall efficiency, productivity, profitability, client experience enhancement benefits of that generative AI capability without having to run the risk of putting their confidential proprietary customer information into the public domain.

We see that as a very, very exciting opportunity going forward, and again, a source of competitive advantage and differentiation for us, given there are not a lot of us out there who have the kind of credentials and experience helping to build these hyperscaler-centric LLMs at first instance.

Thank you very much.

Divya Goyal, Scotiabank.

Good morning, everyone.

All the best, Vanessa, with the next things in future.

Building on to some of the questions here, Jeff and Vanessa, I wanted to actually get some color briefly on the revenue growth across all these clients.

TELUS and Google were very strongest clients.

You did mention good traction on WillowTree.

I'm thinking from a modeling standpoint, how should we expect Google and TELUS to continue to grow, given Meta is shrinking, and how should we expect the others revenue segment other than these three client segments to continue to grow over the next few quarters, not longer term?

Hi, Divya.

It's a good question.

I think we are going to refrain from guiding by client.

I think we also want to be cognizant of the more granular we get on a client-by-client basis, the more disclosure is out there.

Some of it is obviously competitive.

Obviously, not the TELUS piece, but Google and others.

I think all we can offer at this point is really go with the midpoint of our guide.

We don't expect the growth in TELUS to slow down.

We expect that to continue.

We expect the growth in Google, frankly, to continue.

As we just said, and as I shared in my prepared remarks, we're expecting a bit of a decline continuing in that third largest client.

For that particular third largest client, I would step it down a little bit from the Q4 exit rate, because we think there will be a bit more softness there, and then apply whatever is left to the balance of the client account.

I don't think we can offer much more specificity than that without getting into individual client by client guidance.

That's helpful.

Thank you.

Thank you, Divya.

Aravinda Galappatthige, Canaccord.

Good morning.

Thanks for taking my questions, and all the best to Vanessa.

I enjoyed working with you the time we had.

My question is actually on the cash flow.

You generated pretty good free cash flow, $400 million, which is meaningful.

It was a bit of a bump in terms of EBITDA conversion to free cash flow.

Given that you're looking for 7% to 10% EBITDA growth, and that's even with the definitional changes there, is it fair to assume that free cash flow can also grow in 2024, recognizing that there can be some timing issues around working capital?

Hi, Aravinda.

Absolutely.

Our free cash flow as a percentage of revenue was 15% in 2023.

I expect it to be in that range in 2024.

It's not even slightly better.

You are absolutely in the right ballpark.

Thank you.

As you know, this is a very critical priority for us for deleveraging reasons.

As we've talked in the past, we've got a number of initiatives around improving working capital, et cetera.

We are not slowing down on those.

Part of that free cash flow is going to contribute to significant deleveraging in 2024.

Cassie Chan, Bank of America.

Hey, guys.

As well, it's been a pleasure and best of luck.

I just wanted to ask, I mean, around the broader demand improvement that you're expecting in the back half, are you expecting that to come from specific verticals like high-tech or specific regions like Europe?

And does that also -- the '24 outlook, does that include any material impact from specific AI-related booking or services that you guys have booked this year?

Thank you.

Hey, Cassie.

Thanks for the question.

We're sort of anticipating uplift across the board.

The only area of continued softness through 2024 that is reflected in our guide is really Europe.

We have work to do, frankly, in terms of rebuilding our sales and marketing capability there and finding a better way to tap into the opportunity there.

Challenging for sure, but we have seen others out there that are successfully finding a way to grow their European-derived revenues.

And frankly, we have to do better in that regard.

Save for Europe, we're anticipating healthy growth across the board geographically.

And in terms of service line, again, we think all four service lines will see meaningful improvement, particularly in the back half of the year.

And for sure, AI is going to be the standout for us going through the entirety of 2024 and beyond, not just in the back half.

In terms of industry verticals, again, we're seeing really exciting growth in healthcare.

And those of you who have been following our story since our IPO debut will remember that I have been lamenting our failure to have better success in the growth there.

And I am so excited about what we derived last year, not just exclusively, but in fairness, significantly off the back of enabling TELUS Health and we then being able to repurpose that experience and expertise on behalf of other healthcare providers as well.

I think we well recognize that technology and patient experience excellence is going to be how we solve the world's challenges around affordability and access for healthcare.

And the EAP solutions that TELUS provides in particular via its LifeWorks acquisition, we think is going to be a fantastic engine for continued growth across the board.

So again, I think in totality, we're not sort of stingling out one area in particular.

We think it's going to be across the board.

Thank you.

Thanks, Cassie.

Daniel Chan, TD Cowen.

Hi, good morning.

With some of your large customers talking about implementing more AI to drive efficiency, is there a risk of a structural change to some programs like search quality ratings, content moderation, that they'll be completely displaced by AI?

I guess this is a question related to the app and Google disengagement.

Just want to make sure it's a vendor consolidation play rather than, let's say, a structural shift in some of the work that they provide them.

Good question.

I mean, I can tell you we've certainly not heard from Google in particular or others, suggesting that the spend is going away.

So to that point, specifically just raised about the competition, we've enjoyed already some of that work from them.

Maps program in particular, for example, that had been supported by them is now supported by us.

And based on the conversations that we have, and as you can imagine, given the magnitude, complexity and tenure of the relationship, we have regular ongoing daily, weekly conversations with them.

We're seeing upside.

There's no question that technology disruption is a risk across the landscape, whether it's in legacy data annotation for search activity or for content moderation.

We obviously have a bit of an Achilles heel around our third largest client.

And as I said before, working diligently to find a way to mitigate that.

But outside of that, we continue to believe in the thesis that underpinned our investment back four years ago now that got us into content moderation at scale with tools and platforms and capabilities.

And we continue to see meaningful upside opportunities there.

And goodness, you can't read a news article today without seeing someone somewhere talking about the shifting regulatory landscape, the understandable sensitivity and concern about the impact of content on the audience, not just for the youth of the world, but for all of us.

And we continue to believe that we have a meaningful opportunity to participate in that ecosystem as a consequence of our skills experience scale and in particular, our bifurcated but concurrent focus not just on the efficacy of the outcomes we can produce through the use of our digital-first responders, but our focus on the wellness of that digital-first responder community as well, which again, I think is a source of differentiation and competitive advantage.

Thanks, Jeff, and best of luck, Vanessa.

Richard Tse, National Bank Financial Markets.

Yes, thank you.

All the best here, Vanessa, and thanks for all your help.

With respect to the competitive environment, I think a few quarters ago, you talked about sort of the pricing environment or intimated that it was a little bit more competitive.

Perhaps you can sort of update us in terms of where that stands today.

Sorry, one more time.

I'm not sure I understood the question.

Yeah, I think a few quarters ago, you sort of suggested that the pricing environment from a competitive standpoint had become a little bit more fierce, and I'm not sure if you have any updates on that, but just kind of curious to see where that would stand today.

Yeah, thanks for the reminder.

Indeed, I think that continues to be the case.

I don't see sort of an exacerbation, a worsening of that, if you will, but I'm certainly not seeing a safety valve or a relaxation of that sensitivity.

I think what I was referencing before, it continues to be a pervasive feature across the landscape, whether it's hyperscalers, enterprise, or even down market somewhat.

I think we are well and truly in a world where everybody is expecting more/better for less, and therefore, it's incumbent upon we, service providers, to find a way to step up to that challenge.

And that's, again, why I continue to be optimistic about our opportunity given the credentials we have, the experience we have, and the head start we garnered in terms of investing in tools and technology where, again, you've heard me say this before, drinking our own champagne, eating our own gourmet cooking.

As Vanessa pointed out, the ongoing investments inside TI to continue to enhance and amplify our ability to serve our customers, not just in terms of quality, but to do it in a way that creates the headroom we need to continue engendering the profitability returns that we're looking for, again, I think it's a sign of the times, and I don't see that changing anytime soon.

Thank you, and as that's all the time that we have for questions, we will conclude the question-and-answer session.

I'd like to hand the program back to Jeff Puritt for any further remarks.

Thanks, Jonathan.

As always, I appreciate all of the thoughtful questions and continued engagement.

The team at TI has worked diligently over the past two quarters to improve our performance in the second half of 2023, and as we said we would, we exited the year with a margin profile much closer to our historical average with improved cost base that sets us up much better for the year ahead.

While the macro environment remains challenging and the sentiment across our industry is still cautious, we will continue to deliver strong profitable growth and free cash flow yield as the demand environment recovers.

Before we end our call, I'd like to provide some additional details regarding our CFO transition.

I'm thankful indeed that Vanessa has agreed to remain at TI until the end of March to help ensure a smooth handover to her successor, Gopi Chande, who will officially assume the role of CFO beginning on March 4.

Over the past 14 years, Gopi has proven herself a trusted leader, advisor, and advocate at TELUS with an evolving portfolio of responsibilities.

As Vice President, Finance and Controller, she contributed significantly to transformative projects such as TELUS' $7 billion multi-year rollout of its award-winning pure fiber network across Canada and supported the operational and financial transformation of TELUS' customer service delivery and customer experience teams.

Most recently as Senior Vice President and Treasurer, Gopi led a comprehensive portfolio across TELUS' treasury, corporate development, investor relations, pension, and sustainability teams.

Prior to TELUS, Gopi developed 10 years of experience with KPMG working in Vancouver, Budapest, and the Silicon Valley.

I look forward to welcoming Gopi to my executive team.

She brings a wealth of experience as we continue to drive growth and diversification across TELUS International with an ongoing focus on profitability and industry-leading free cash flow yield in 2024 and beyond.

We look forward to meeting many of you in the near future, be it at investor conferences or other opportunities, and otherwise we'll be back to report on our progress in early May when we release our first-quarter 2024 results.

Thank you all for your continued interest in and support of TI, and for those of you celebrating it, happy Lunar New Year.

May the year of the dragon bring all of us and our families good health and happiness.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.