TELUS International (Cda) Inc. Subordinate Voting Shares

Good morning, ladies and gentlemen. Welcome to the TELUS International Third Quarter 2021 Investor Call. My name is Jonathan, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press the pound key. I would now like to introduce Jason Meyer, Senior Director, Investor Relations and Treasurer at Telus International. Mr. Meyer, you may begin the call.

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for Telus International's Q Street 2021 Investor Call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer, and Vanessa Canu, 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. followed by Vanessa who will provide some key financial highlights. We will then open the line to questions from pre-qualified analysts before turning the call back to Jeff for his closing remarks. Before I turn the call over to Jeff, 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 slash 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 consider to be useful in assessing our company's underlying business performance. An explanation of these non-GAAP measures and a reconciliation to the comparable GAAP measures can be found in the appendices of today's supplementary presentation, along with the earnings news release and MD&A available on CDAR and on EDGAR with the SEC. I'd also like to remind everyone that all financial measures we're referencing on this call and in our disclosure are in U.S. 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 Peart.

Thank you, Jason. Good morning, everyone, and thank you for joining us today. In the third quarter, TELUS International delivered a solid 30% year-over-year increase in revenue as we continue to win more business with existing and new clients alike. This growth was achieved both organically and with the benefit of contributions from prior acquisitions, particularly related to our AI data solutions division. As Vanessa will outline shortly in more detail, our strong performance this quarter should be considered in the context of our resilient execution in the same period of last year. Indeed, TELUS International is posting impressive growth from an already solid baseline established a year ago as we continue to successfully navigate the operational challenges of the pandemic. While we continue to deliver meaningful revenue growth, we're also achieving exceptional profitability with a 23% year-over-year increase in adjusted EBITDA and an adjusted EBITDA margin of 24.6%. Our deliberate strategy of developing and acquiring higher-value digital capabilities, including premium content moderation and AI services, enable us to design, build, and deliver differentiated digital customer experiences on behalf of our over 600 global clients. Having strategically focused our investments and resources in key sectors of the digital economy, we continue to derive significant benefits, such as revenue diversification, as well as growth across each of our target verticals. In addition to our continued strength in tech and games, we're also experiencing increasing traction within e-commerce and fintech. To highlight some of our sales team's multi-year, multi-million dollar contract wins this quarter, we welcomed a leading North American financial institution as a new client. We also expanded our scope with Barclays, one of the first clients in our new North Charleston, South Carolina location. In tech and games, we welcomed a rapidly growing games company as well as one of the fastest growing startups in the world focused on event technology. We also had a key win from an existing client in consumer electronics that entails program expansion into a new geography. Notably, we also secured new programs from our largest client by revenue, the world's leading social media network, in an expanded mandate of our AI data solutions team. One of our projects for this client is enabling a more customized and targeted delivery of digital advertising to their different audiences. This is more critical for brands than ever before, given the proliferation of online content available to consumers, as well as their heightened expectations to only be served content that is both useful and contextually relevant to them. As a result, brands must have a strategy in place and the right people to execute upon it in order to remain relevant and competitive. Leveraging our industry-leading AI capabilities, TELUS International reviews over 1 million ads per month for this client. Our team recruits, educates, and manages over 4,000 evaluators in more than 10 geographic markets. With our proprietary people and project management platform, we're able to ensure the diversity and high quality of AI training data for the client's algorithm in order to boost ad relevance on a global scale. Our team also provides custom reporting, which includes detailed statistics about evaluator performance, output quality, and more. Through continuous process improvement, our team of project managers has worked closely with the client to assemble teams of annotators in new markets, as well as improve their in-house evaluation tools. The geographic and demographic diversity of our evaluator pool has proven invaluable to our client's AI training model. Our over 1 million strong globally scaled AI community enables the delivery of highly personalized region-specific ads, which directly contributes to this client's commercial success. This is also a great example of our approach to combining our AI data solutions with our content moderation expertise at scale to create a powerful and differentiated go-to-market offering. Our highly effective AI solutions provide a digital first line of identification and help enable a robust content moderation framework for our clients. The AI layer enables our content moderation team members to dedicate their time and judgment on higher value aspects of the engagement with clear benefits for both the client and for Telus International. Our scale in both areas amplify to our highly strategic acquisitions positioned us as having one of, if not the, largest data annotation platform globally. In addition to making strategic, high-impact acquisitions that complement and build upon our digital capabilities, we also continue to cultivate next-gen digital CX solutions internally through our innovative iLabs team. We established iLabs as a dedicated space where TELUS International innovators, researchers, and visionaries could collaborate and co-innovate to explore emerging customer experience tech that is poised to disrupt the future. Our iLabs team are amongst our thousands of team members who have completed hundreds of projects tackling unique challenges that we've leveraged to accelerate the design and development of customized solutions for our clients that have helped to redefine a human technology relationship in digital customer experience. As an example, our iLabs team developed AI and machine learning-based accelerators to automate elements of our customer-facing team members' daily workflows, such as simple repetitive tasks, thereby enabling our team members to focus on higher value and more complex work. We developed an intelligent classification tool that automatically sorts incoming tickets or custom emails into relevant categories based on content and sentiment. This tool also is able to provide a precise, and meaningful summary for our team members, making reviews much more time efficient and effective. We use the same text analytics engine that sorts these inquiries to help our customer-facing team members compose a personalized, grammatically correct response to customer inquiries. Simultaneously, we also have a team member assistance bot that proactively recommends appropriate solutions for a customer inquiry, drawing from a knowledge database powered by semantic search that's easy to navigate and then importantly ensures high accuracy and consistent information that authorized team members can access at any time from anywhere. Not only do we see improvements to key performance indicators that measure quality of service and customer satisfaction, but this technology also results in a more personalized and empathetic customer experience. The work of our iLabs team is a very important part of our ability to stay ahead in the digital transformation landscape as well as helping to anticipate our clients' demands for disruptive solutions. As digital transformation accelerates, new technologies are becoming ubiquitous faster than ever. Take cloud infrastructure, for example. It was not that long ago that running systems in the cloud was a novelty, yet today it represents a key component of most companies' digital transformation journeys. Another example of a recent win I want to highlight is for a client in the hospitality sector who turned to Telus International for support with their existing Amazon Web Services cloud environment. Prior to partnering with TI, this client didn't have a managed services provider they felt they could rely upon to optimize their technology solutions. This client needed their technology environment to be secure, scalable, and cost-effective, and because the cloud can be complex, they sought an experienced strategic partner whose reliability freed them up to better focus on their customers. In this case, our goal was not to implement new technology for the client, but to apply our deep Amazon Web Services expertise in order to introduce efficiencies and added security. So there was both a consultative design element as well as an ongoing managed service relationship. To start, we conducted a thorough review of the client's environment security, resulting in the removal of unnecessary access and the introduction of enhanced protocols for data recovery. We then assumed full oversight of their environment with ongoing reviews and regular communication to keep the client well-informed of the system's operation. Our Telus International team monitors and manages workloads for this client, providing strategic recommendations and optimizing cloud performance, including around-the-clock support for AWS-related requests and issues, patching, backup, infrastructure and security monitoring, and reporting. Digitization not only transforms our commercial world, but also impacts other spheres, including government at all levels. As an example, one of our government clients is working with our digital solutions team on a ServiceNow IT service management deployment project. The project's scope was to design, configure, and transition this client to a best-in-class digital platform, providing benefits such as workflow automation, standardized processes, and extensive integration capabilities. With approximately 1,500 administrative and elected officials producing 31,000 requests per year, our client needed a service management solution to address process maturity issues, ad hoc tools, integration challenges, all while improving their service management standards. This focus on service quality was a key priority in this client's digital transformation ambitions, so naturally TELUS International was the right partner for them. To meet this ever-increasing demand from our existing and new clients, we have continued to recruit and hire new team members to our TELUS International family. With over 2,300 net new hires in the third quarter, we're faring extremely well in the ongoing challenging global labor market. Our success in attracting and retaining top talent continues to be driven by the unique and caring culture we've cultivated over many years. Undeniably, our philosophy and proven approach to building and developing our talented global team is directly contributing to our business growth. In our ongoing efforts to keep them safe and healthy, We continue to leverage our robust infrastructure and cloud technologies to enable approximately 80% of our global frontline team members to work remotely from their homes. We continue to monitor the environment at each region where we operate, taking a science-based methodical approach to inform when we can safely reopen offices and return our team members to our inspiring workspaces. Thanks to our team members' relentless efforts and commitment to excellence and innovation, Kellis International continues to be recognized as a global leader across various aspects of our company. This past quarter, we were named one of Fast Company's Best Workplaces for Innovators International for 2021, a prestigious ranking that positions us amongst the top companies globally that are successfully fostering a culture of innovation and empowering employees to improve processes, create new products, and invent new ways of doing business. Additionally, TELUS International was ranked third overall in the 2021 HFS report and ranking for top digital service providers. HFS is a leading global research consultancy firm, and they assessed and rated the world's largest service providers across a series of capabilities, including execution, innovation, and voice of the customer. Notably, respected lead analyst Melissa O'Brien highlighted our steady investments in technology innovation, including an intelligent assistance and automation, and the expansion of our new economy services portfolio, such as content moderation and AI data solutions. She also cited the value in our unique approach to digital services, which is organized around our design, build, deliver construct, and our ability to undertake end-to-end digital CX transformation engagements. And of course, another key driver of our top ranking was our highly skilled and engaged teams who consistently provide the high-quality brand experiences customers demand. As you've heard me say many times before, and I will never tire of repeating it, our team members are the driving force behind TELUS International's success, and it is extremely rewarding to see their passion for what they do and their significant achievements recognized across our industry and even more broadly among the top global brands. With that, Let me now pass the call to our Chief Financial Officer, Vanessa Cano, to take you through our detailed financial results, and then I'll look forward to answering your questions. Vanessa, over to you.

Thank you, Jeff, and good morning, everyone. Thank you for joining us today. In my overview, I will review our summarized results for the quarter, and as Jason mentioned at the start of the call, some of these items are non-GAAP measures. You can view our more detailed three- and nine-month financial results, including a reconciliation of our gap to non-gap measures in the financial statements and MD&A filed earlier this morning. As Jeff summarized, we achieved solid revenue and earnings growth in Q3. Total revenue increased 30% year-over-year, with continued growth across all of our geographic regions and industry verticals. Adjusted EBITDA increased 23% year-over-year, and adjusted deleted earnings per share was up 13% year-over-year. Let me now expand on these components. Revenues for the quarter were $566 million, up 30%, driven by solid momentum in our organic business and contributions from acquisitions. Our organic growth was $58 million, or 14%, reflecting increasing demand in services provided to existing and new clients. Prior acquisitions contributed 71 million or 16% of the year-over-year growth in the quarter and related to our acquisition of what is now called Telus International AI data solution. Our total revenue growth included FX tailwinds of under 1% when compared to the same period in the prior year. Once again, it is important to put these results into perspective. Telus International delivered strong performance in Q3 of last year when our business model showed remarkable resilience in financial performance during the pandemic. Our results today build from that very strong prior year compare. Looking at revenues by geography, we grew in every single one of our regions, with Asia Pacific posting the highest percentage growth this quarter at 39%, closely followed by Europe at 34%, North America at 29%, and finally, Central America at 11%. The strong growth across all of our regions was driven by growth in our digital CX solutions, growth in content moderation, growth in digital IT services, and of course, last but not least, our AI data solutions. From an industry vertical's perspective, we saw this growth reflected across all of our key verticals. Tech and Games, our largest vertical, was up 46% year-over-year, with growth attributed to our AI data solutions and robust demand across all of our service lines. We continue to see great momentum in our e-commerce and FinTech verticals, with revenue growth of 56% year-over-year. Finally, our communications and media verticals showed healthy growth of 11% year-over-year, while all other verticals, including travel and hospitality and healthcare, similarly posted strong double-digit growth year-over-year. Moving on to operating expenses, salaries and benefits expense was $309 million, up 24%, due to growth in our team member base to support increased client demand and higher average employee salaries and wages. Previously, I shared our expectation for our second half cost base to increase due to planned and merit increases. These increases have and continue to be an asset and are captured in our full-year outlook. Our goods and services purchased were $110 million in the quarter, an increase of 64%. This was largely driven by AI data solutions, and in particular, the costs related to our crowdsource contractors, for which the contracted labor costs are recognized in goods and services purchased. The balance of the increase was due to higher software and other costs to support the continued growth and expansion of our business. Moving down to P&L, share-based compensation expense in the third quarter was $21 million, an increase of $16 million year-over-year. The increase was due to the vesting of share compensation awards and mark-to-market adjustment on historical cash-settled awards due to the increase in our share price. Acquisition, integration, and other charges in the third quarter were $6 million, a decrease of $2 million. The current period cost primarily related to the integration of TELUS International AI data solutions and the secondary offering of subordinate voting shares that we successfully completed in September, while the prior year costs were primarily related to incremental costs incurred in connection with the COVID pandemic, as well as integration costs related to the CCC acquisition. Income tax expense in the quarter was $15 million of $2 million from the same quarter last year. Our effective tax rate increased from 31.7% to 39.5%, primarily due to an increase in withholding and other taxes and an increase in non-deductible items, partially offset by a reduction to the foreign tax differential. A reminder that our ETR, which is income tax expense as a percentage of accounting net income before tax, can vary due to factors including but not limited to the jurisdiction mix of our earnings in any given period and the tax deductibility of certain expenditure items. Moving on to our profitability performance, we delivered adjusted EBITDA of $137 million in the quarter, posting strong year-over-year growth of 23%. Our adjusted EBITDA margin was 24.6%. Adjusted net income for the quarter was $70 million, up 32% year-over-year. On a first-year basis, this translated into adjusted deleted earnings per share of 26 cents, up 13% year-over-year. Our strong profitability performance reflects our growing top line scale, our shift to higher value and higher margin business lines, and our ongoing focus on improving efficiencies. Additionally, as has been our history, we continue to remain relentlessly focused on driving a healthy balance between top line growth and leading profitability. While the demand environment continues to be very strong, we are making deliberate choices about the types of work that we pursue and deliver. a discipline that is ever more important in these current market dynamics. Looking at our year-to-date results, our year-to-date revenues are up 40% year-over-year, adjusted EBITDA is up 51% year-over-year, and adjusted deleted earnings per share is up 71% year-over-year. We are highly pleased with this year-to-date growth and profitability performance. Now moving on to the balance sheet. Cash and cash equivalents were $130 million as of September 30th. Our total available liquidity grew to approximately $828 million compared to $285 million at year end. This includes available capacity under our revolving credit facilities of $698 million up from $132 million at year end. This amount of liquidity continues to provide us meaningful flexibility and capacity for potential strategic acquisitions to advance our growth objectives at the right time. We continue to reduce our debt in Q3, lowering our net debt to adjusted EBITDA leverage ratio, as defined per our credit agreement, to 2.2x as of September 30th. This positions us at the lower end of our communicated steady state target range of 2 to 3x, while we continue to maintain significant flexibility to go beyond this range for the right type of strategic acquisition. Now turning over to cash flow. Free cash flow, which we define as cash from operations, less capital expenditures, was $63 million in line with $64 million in the prior year. Cash from operations of $86 million were up $2 million from the prior year, reflecting higher net income adjusted for non-cash items, offset in part by higher income tax and share-based compensation payments. Capital expenditures of $23 million were up $3 million from the prior year to support increased capacity and growth across our business. Capital expenditures as a percentage of revenue was approximately 4.1% down from 4.7% in the same quarter of the prior year. Now turning to our team member count. In Q3, we continued to manage well through global labor supply pressures. Competition for highly skilled talent has always been fierce, and in many ways, unique by region. It is a constant feature of our industry, more so now than ever. Despite these challenges, and as Jeff mentioned earlier, in the third quarter, we welcomed 2,356 net new team members, bringing our total team member counts to 58,527, an increase of 21% year over year, reflecting growth across all of our major geographies to meet increased client demands and business expansion. To echo what Jeff said at the start of the call, we believe our differentiated culture certainly remains a key competitive advantage, allowing us to attract and retain high-quality global talent, especially in the current labor environment. Now onto our outlook. Following an increase in the full-year guidance that we shared with you on our prior quarterly call, today we are reaffirming our outlook for strong double-digit growth this year. For the full year of 2021, we continue to expect revenues in the range of 2.17 to 2.21 billion, reflecting growth in the range of 37 to 40% over last year. It is worth noting that compared to our July guidance, the strengthening US dollar against the Euro has created a negative FX impact on our top line. We have absorbed this negative FX impact within our reiterated guidance. For adjusted EBITDA, we expect the range of 530 to 540 million, a growth of 36 to 38% over last year. We expect to deliver adjusted deleted earnings per share in the range of 92 to 97 cents, which reflects growth of 30 to 37% over last year. With that, we will now open the line for questions. And as usual, I would kindly ask you to keep to one question at a time so that everyone can participate. Jonathan, over to you.

Certainly. Ladies and gentlemen, if you do have a question at this time, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Once again, please limit your questions to one at a time. You may get back in the queue as time allows. Our first question comes online of Paul Steep from Scotia Capital. Your question, please.

Great morning, Jeff. We're a year on from the acquisition of Lionbridge. Can we get you to maybe reflect on where you're at in terms of integration of AI into the business and some of the successes that you've had with it and then how we think about maybe further doubling down on either AI or another digital service line. Thanks.

Sure. Thanks for the question, Paul. Nice to hear your voice. We're making really good progress on the integration. I'm always frustrated, as you've heard me say before. We can go faster and do better, but here we are approaching month 11, almost the anniversary, as you said, of the acquisition. and I'm seeing very, very exciting realization of the synergy thesis that underpinned why we chose to make that investment in the first place. Not only is the former LAI now TI AIDS team well integrated into the TI team in terms of reporting structure, but the back-end integration is almost complete. We had planned for and targeting end of calendar year to wrap all of that up, But excitingly, we have successfully gone to market together, as I mentioned in my comments earlier, in terms of selling combined content moderation and data annotation solutions. And we've seen terrific traction, both selling into former LAIs, customer base, into TIs, incumbent customer base, and together winning new customer opportunities. And that's sort of exactly what we were anticipating. As we look into not just balance of this year, but 2022 and beyond, the appetite, the thirst for these kinds of AI-driven solutions seems near insatiable. And so we're very, very pleased with the almost prescient timing of our investment there. And in terms of what you should expect from us prospectively, not only just made a further investment in July, a bit of a tuck in the acquisition of Playment and the computer vision enabled capabilities that they brought to our AI portfolio. But prospectively, I think you should expect that we will continue to look for extended capabilities in order to meet the growth opportunity that exists there.

Thank you.

Thank you. Our next question comes from the line of Stephanie Price from CIBC. Your question, please.

Hi. I was hoping you could talk a little bit about your delivery footprint. So the company opened its third delivery center in the U.S. in Q3. Just curious how you see that delivery footprint evolving and whether the pandemic has generated more demand for nearshore operations.

Hey, Stephanie. Nice to hear your voice as well. Thanks for the question. So there has certainly been sort of yo-yoing onshore, offshore, nearshore over my 16 years in this industry. And, uh, interesting pressures that underpin that, whether it's traditional economic cost pressures and or geopolitical pressures, tax-driven considerations, etc. I think there was certainly a recognition at the onset of the quarantine lockdowns off the back of the pandemic that certain jurisdictions simply didn't have the same level of robust infrastructure across the at-home landscape of frontline team members. And so there was a perception that in the long run, maybe we need to reduce our footprint, our exposure to those markets as a consequence. I could tell you for TELUS International, whilst there was a bit of a scramble, admittedly, in March and April of 2020 to virtualize support. And in many cases, we did absolutely need to bolster, support, extend the connectivity infrastructure for the at-home ecosystem. We've now 19, 20 months into this with over 80% of our global footprint successfully enabled in an at-home environment with no diminution in performance, productivity, nor concerns around privacy and confidentiality. Our perspective is that we can continue to successfully deliver for our clients from anywhere and everywhere. But specifically to your question, I think there are still some residual perspectives that suggest we probably would prefer to have a little more of our delivery footprint closer to home, so to speak. But obviously there are tradeoffs when one thinks about those considerations in terms of the operating cost structure, not just labor rates, but certainly that as well as the other operating costs. We think we've got a really good balance today of onshore, nearshore, and offshore, but having said that, there's always room for growth. There continues to be this appetite for more, and so we certainly have a willingness to meet our customers where they want us to be, whether it's additional U.S. onshore delivery capabilities, more nearshore, and more offshore. I would say the one thing to be Cognizant of the TI, we have never pursued a build it and they will come strategy in terms of delivery. We want to be thoughtful and disciplined and responsive as we extend our footprint. And when, where, and how we have existing or prospective demand, that's when we'll make the capital investments in order to extend our delivery footprint. So does that mean we're going to have more sites in the U.S. in the mid to longer term? Perhaps. but I think you should expect that we'll continue to look for areas of opportunity to meet that customer demand and get closer to deeper, broader talent pools as well.

Maybe just a quick follow-up on that. You mentioned the cost structure in the U.S. versus other regions. Can you talk a bit about the pricing environment and whether you can pass those additional costs on to customers?

Sure. So I wish I could give you a more perhaps satisfactory answer, Stephanie, but the answer, quite candidly, is it depends. And depending on the nature of the relationship that we enjoy with our customer, depending on the nature of the services we're providing, there are absolutely some circumstances where we have been successful in encouraging our customers to help us share the burden of wage inflation. In other cases, that just simply hasn't been available to us. And again, this is not new, although admittedly, the wage inflation dynamic we're all seeing around the world of late is sort of a heightened level of this dynamic that we've experienced previously. But the job is, has been, will always be, in my view, to find a way to mitigate those inexorable cost pressures, whether it's wage inflation or other cost inflation, and eating our own gourmet cooking, drinking our own champagne, as you've heard me say before, bringing automation and process efficiency into our business, Again, that's not new. That has been job one from day one. And we continue to quite effectively mitigate much of the labor inflation impacts in our business through the use of that automation and efficiency discipline. But we will continue to look for areas of opportunity to share that inflation with our customers. Interestingly, many of the customers, most of the customers we support, in many cases, are employing the very same labor, the very same skills that we are. And as a consequence, not only is there this notional competitive dynamic in that regard, but they are acutely aware of the very same labor, wage, inflation dynamics that we are. And so it creates a bit of, I don't know, sensitivity, acceptance, and in many cases, thanks to the strength of our relationship, a willingness to help us underwrite some of that cost inflation, because we're in this together prospectively.

Great. Thanks for the color.

Thank you. Our next question comes from Ramsey Ellis from Barclays. Your question, please.

Good morning, Jeff and Vanessa. Thanks for taking my question. I wanted to ask about revenue. It came in a bit lower in the quarter than we were anticipating. Did the quarter play out as you expected it would, or were there any other incremental headwinds that emerged? I don't know, macro environmental or client specific, anything like that? Hey Ramsey, a fair question.

We're, um, we're sort of right in the middle of our guidance and you'll remember we didn't really guide specifically by quarter, right? Uh, we, we guided for a year given we're still, uh, relatively new at this and want to make sure that we're getting things right. Um, I think it's fair to say, and I'll invite Vanessa to provide a little bit more color here, that we could have. We hoped to do slightly better than where we landed on the revenue front, but still very pleased with 30% growth, 14% on a constant currency basis organically. We have to make trade-offs, right? That's part of the job every day is balancing growth and profitability. And we're running this business for the long term, not forever. for the first or next quarter. And so could there have been a further upside on the revenue front in the quarter? Certainly. But at some point one has to decide what's more important mid, near, longer term. And so I'm pleased with the discipline that we demonstrated, the choices we made, the business we pursue and the business opportunities that we turn away. in order to ensure that we're continuing to have our eye on the prize longer term. And as I said, balancing those competing considerations is the job, is the challenge and the opportunity that we have here. Vanessa, do you want to top up a little bit there?

I think you've covered it well, Jeff. The only thing I would add to your question, Ramzi, in terms of were there any surprises, I would say probably the only other surprise or the only surprise was probably from an FX perspective. So as I mentioned earlier in my prepared remarks, and you guys have seen this in our financials, so about 36%, 37% of our revenues are Euro-denominated, and we started to see a softening of the Euro shortly after we issued guidance in July. So that would be the negative surprise there. But as Jeff mentioned, in totality, considering the demand-supply dynamics and everything else and the choices that we're making to pursue profitable long-term business, we're quite pleased with where things landed.

Yeah, and obviously still solid underlying organic growth. And how much of an FX headwind is baked into guidance?

So in fact, in Q4, we are expecting a headwind. For the full year, we'll end up with a tailwind just because we had a tailwind in the first half of the year. So for the full year, we'll end up with a tailwind of about 2.5%. But certainly in Q4, there is a headwind that offsets what we saw in the first half. And as I mentioned earlier, the impacts to Q3 were, frankly, immaterial.

All right, terrific. Thanks so much for your answers. It was very helpful. Thank you.

Thanks, Ramsey.

Thank you. Our next question comes from the line of Chansin Huang from J.P. Morgan. Your question, please.

Hey, thanks, Ari. Good morning. Thanks for all the details here. Just on the inflation front, I'll ask it differently on acquisitions. Jeff, with all these digital assets sort of getting marked up here in the public markets, I'm curious if that changes your thinking or philosophy on M&A. Has it changed your appetite or the pipeline in any way in terms of the deals you might be looking at?

Hey, Tenjin. Nice to hear your voice as well. Thanks for the question. So, again, as I know you've heard me say before, I don't want to overpay ever because I think when one overpays for an asset, it immediately leads one to start to do perhaps unnatural things around integration in order to try and compensate to make up as quickly as one can for having overpaid on the headline purchase price at first instance. And you're right. There continue to be some very lofty valuation expectations from sellers out there. Having said that, you know, pipeline for shopping opportunities is as robust as ever, as a consequence, I suspect, of the opportunity that this digital transformation landscape represents. And so my appetite, my ambition to continue to leverage inorganic growth activity to complement our strong organic growth continues to be as healthy as ever. I think there's you know, lots and lots of opportunities. There's deals to be had, deals to be made. It just requires, you know, again, part of our heritage at Telus International, the requisite discipline, creativity, and innovation to identify the right asset at first instance to secure it in a fashion that, you know, doesn't unnecessarily inflate the overall cost to purchase and that can indeed realize our, you know, accretive growth and value ambitions in the near to longer term. And you should absolutely expect, as we've telegraphed in the past, we went public in part to have a public transaction currency available to us to support our ambitions in this regard. You should count on us to continue to be really thoughtful about how we will leverage that opportunity prospectively.

Appreciate the discipline. Thank you.

Thank you. Our next question comes to the line. Keith Bachman from Bank of Montreal. Your question, please.

Hi. Many thanks. I wanted to go back to the labor situation, and perhaps I'll direct this to you, Vanessa, if I could. As you think about the weighted average wage inflation, what is it currently running, and how is it different from historic norms? In other words, is inflation... running for employees about 5% and it's normally running at 3%. And Jeff, you mentioned that to work really hard to offset those dynamics. How are you thinking about not just in the current quarter, the December quarter, but as we look out over the horizon into 22, do you think the labor situation impacts your margins or the enough variables or levers, so to speak, that you can offset the incremental wage inflation that you're currently experiencing? Many thanks.

So thanks for the question. And perhaps I'll start and then it was a many parts question, some for me, some for Jeff. I'll start and pass it over to Jeff. So we haven't and we probably I don't think we'll disclose for sensitive reasons what the overall average wage inflation is. As you would expect, it does vary by country. The wage inflation in certain countries like U.S. and Canada is a very different number than the wage inflation in a country like India, let's say. But from an overall perspective, we are seeing higher wage inflation in 2021 than we have in the past. And that's across the board, and that's even on a weighted average basis. So you're absolutely right there. As I have mentioned on previous calls, we did actually – see that coming into the year. So when we build our initial budget for last year for 2021 and give our initial guidance for 2021, we had already built in increased wage inflation. So what we're seeing now this year is actually very much in line with what we expected to see. I wouldn't say we got it perfect in every country, but on the whole, the aggregate weighted average has been within the same ballpark that we had built into our own models for this year. And we're tracking to that. And then maybe I'll quickly touch on next year before passing it on to Jeff for the second part of your question. We do think that the current dynamic will continue into next year. Will it continue long-term beyond that? I think that's up for debate. At some point, things will normalize. At some point, as Jeff mentioned, even as it pertains to our, inflation is impacting our clients as well. So we think it'll get to a point where things do start to normalize, but we do expect this dynamic to continue into next year. And when we get to our guidance for 2022, we certainly will factor that in, because that's not something that was the case when, say, around October, November last year, when we were talking to you guys around longer-term models. So that's definitely something that we'll be building into our models for next year. But as we said already, certain clients we're working with in terms of getting some of the cost pass-throughs to them, and in other cases, we're looking at ways to mitigate that within our own internal operations.

Okay, okay. Jack, Bob. Thank you. The only thing I would add in terms of longer term is this has been, will continue to be the challenge and the opportunity for a technology services provider in finding a way to surface that unique balance of technology and talent to deliver business outcomes of consequence to our customers. So as we continue to evolve the mix of services that we're providing to our clients, there's an area of opportunity for we to mitigate some of the wage inflation implications of the current and prospective market that we anticipate will continue, as Vanessa, I think, rightly just highlighted. I've heard some folks say, let's get to March and then everything is going to normalize. And others think, who knows when the labor market starts to stabilize, for lack of a better word. And I'm not sure exactly when this is going to happen, but I do know that You know, it is the ongoing responsibility of our leadership community to find a way to mitigate these inexorable inflationary costs in our business. And so, you know, I think talented people have a legitimate expectation of being well rewarded and rewarded more as they become more tenured and capable of contributing more value to the business. You know, it's our responsibility to be able to do that. And so a combination of working with customers that recognize the value of what we're providing to them and are willing to pay appropriately for that. And then in conjunction with that, leveraging this technology capability to complement, to support these talented team members, to assist them in being more productive, to deliver more value such that in return, our customers are willing to pay enough to cover the cost inflation in totality, and for we to continue to derive sort of a healthy margin. I think, you know, there tends to be a preoccupation perhaps in the near term around top-line revenue growth. But, you know, I can tell you my personal bias and our heritage from TELUS, you know, revenue is vanity and profit is sanity. And in the fullness of time, you know, we're generating profitable revenues and delivering meaningful free cash flow growth. that can ensure that we can service our debt and access the markets appropriately to take advantage of, you know, M and a activity to compliment our growth, extend our reach, uh, so that we have more available to share, uh, with our customers over time. I think that, you know, we'll prove in the, uh, in the near mid and long-term to be the more prudent, sustainable approach to running the business. No inflation, um, is here already. I think most people are anticipating that interest rates are going to start to climb in the not too distant future. Cost of capital is going to start to change. And I think those of us that have the requisite discipline and focus on profit and free cash will be rewarded appropriately. So, as I said before, finding that elusive balance between top line revenue growth of consequence, and I believe we are already there given the size and scale, together with focus on profitability and free cash, That is the secret sauce for sustained success, in my view.

All right. Many thanks, Jeff and Vanessa.

Thanks, Keith.

Thank you. Our next question comes from the line of Jason Kupferberg from Bank of America. Your question, please.

Yeah, thanks. I just wanted to ask a follow-up also on the people front. Just starting with the hiring piece, it sounds like hiring was strong in the quarter. Can you talk about what kind of experience level the new hires were concentrated in? in and any other color around the hiring mix? And then anything you can share around voluntary attrition, you know, where's that going right now directionally? What are you expecting there in the near term?

Thanks, Jason. So as you know, we have not yet started to provide detailed attrition data, and I'm not sure where we'll land on that for next year. I'll leave it to Vanessa to comment. In terms of the talent level, as Vanessa highlighted, we grew across all aspects of our business, tech and games, e-commerce and fintech. So the skills continue to be, this is university graduate level, this is technology savvy, folks that are capable of contributing meaningfully to the digital economy. And so these are expensive resources for the most part. And as we've just now discussed, and as you're hearing, reading, seeing across our peer group, they are in high demand everywhere because there is just such a recognition of the criticality of digital transformation, virtualization, automation. So we have to continue to fish in the same pond with all the rest of these folks. And as I mentioned in my earlier comments, I believe the reason why we're continuing to to attract our fair share of that talent to this platform is because of our unique and caring culture being a destination of choice for talent based on respectful workplace and inspiring workspaces and benefits programs that are focused not just on the team members but their families, including their parents. The list goes on and on and on. I think what we saw this quarter in terms of attrition just directionally, not surprisingly, certainly higher than this time last year, still in the zenith of the pandemic, not meaningfully higher than this time in 2019, which I think is a good sign because of the fact that I think most would agree that the labor market is certainly more competitive this time 2021 than it was this time 2019. So that we're not hugely inflated on attrition in that two-year-over-year profile is, again, a source of comfort for my leadership team and I. But the reality is, you know, this is not going to get easier. This is going to get harder every day. And so, again, the responsibility we have is to continue to find ways to mitigate those challenges. It's not just attracting our fair share of talent to the platform at first instance. As you say, Anitrisha, it's retaining them and finding a way to retain them that doesn't break the bank. Because, you know, you start inflating your cost structure on a one-time basis, and then, you know, there's a bit of a potential floodgates argument. And so, Again, that's the challenge is to balance those dynamics in the fullness of time so we continue to attract and retain and engage the right talent at the right levels and continue to deliver on our promises to our shareholder and stakeholders alike in terms of growth and profitability. Thanks, Jeff. Appreciate that.

My pleasure. Thank you. Our next question comes from the line over to Dave from National Bank. Your question, please.

Thanks. Just on these inflation questions, I have a longer-term view. You've made these acquisitions. As you look out, let's say, two, three years from now, how many points do you think you can pick up from, let's say, deploying technology to augment the workforce?

Wow, good question, Richard. Based on history, I think it's fair to say that there's several hundred BIPs of efficiency that are available to us through automation and process efficiency. We've had every single year of our existence we set targets for ourselves in terms of efficiency gain, savings, productivity improvements, and it is the collective responsibility of the leadership community across TELUS International to realize those efficiencies. So it's not just you know, our operations teams and have to go and find ways to do more with less. But, you know, our HR team, similarly so. So, for example, you know, at the start of the quarantine orders in the pandemic, we were able to successfully virtualize our recruiting process 100%. So, you know, literally in less than 120 hours, we can go from reviewing receipt of a resume to onboarding that individual, like in less than three days. And This is a scaled process that is hyper, hyper efficient. And now off the back of we employing our own AI to do the first line of evaluation on these hundreds of thousands of unsolicited resumes that we receive, it meaningfully improves our cost structure in our ability to get to the right talent, match to the right skill set requirements for the customer we want to serve. So finance is equally responsible for helping to do efficiency projects, leveraging tools and technology. There is no part of our business that is immune from these go-gets. And so prospectively, again, whether it's these AI-informed capabilities or automation more broadly, I mean, we probably have as many bots deployed inside TELUS International as we have on behalf of our customers. New joiners, when they join, are no longer – responded to in terms of their inquiries. How do I register for my benefits? When will my first payroll run be? That's all automated now for us and meaningfully improves the pace and progress, productivity, and mitigates the cost of historically having to address those issues manually. Going forward, I think we will continue to be looking for that same level of cost takeout, if you will, in order to be able to mitigate these traditional other labor inflation impacts. Okay, great. Thank you. Pleasure.

Thank you. Our next question comes from the line of Daniel Chan from TD Securities. Your question, please.

Hi, good morning. Can you talk to the mix of business in the pipeline, whether you're seeing more content moderation, data annotation, or customer experience, especially with the changing market backdrop with increasing criticism of social networks? And maybe as a follow-on, what is the impact on margins as that pipeline mix converts to revenue? Thank you.

Thanks, Dan. So we are absolutely seeing continued strong demand for content moderation in particular, and I think not surprisingly, right? I mean, I forget the last statistic I saw, but it's like 2.5 quintillion bytes of data being produced daily around the world now. And so content moderation is as you previously before not just you know for our social media clients and moderating Objectionable content right content moderation is anything and everything on the web in terms of helping to ensure a more predictable reliable transaction between buyer and seller and so today we are already seeing fantastic growth in our content moderation practice and prospectively our expectation is that will continue certainly for the next two three years and longer still i think the the news that you know talks about the potentially evolving regulatory landscape is only a net positive for us because that increased complexity means not just the social media giants but everybody needs to have a higher level of sensitivity to the demands the expectations that our our politicians our regulators our communities have of how these platforms how these ecosystems operate safely predictably reliably and that means they need to work with experts like us that have both the experience expertise and scale and global footprint to be able to support those ever-changing demanding complex requirements so Again, I think, thank goodness we were as prescient as we were when we decided to double-click on content moderation. We were already at it for several years, but 1,000 team members or so at a time, not nearly as skilled as we wanted, needed to be, and now we are thousands and thousands more of digital first responders in our community, and I think for the foreseeable future, for the next several years at least, AI is is not going to displace those humans in the loop, right? It's certainly a copilot. It's a critical first line of identification for content and ensuring that we can identify and place content proximate to other content that meets advertisers' expectations, for example. But there is nuance and context and complexity in that that ultimately will require, in my view, for the foreseeable future, a very, very sizable complement of highly skilled human beings to ensure the intended outcome of these ecosystems.

And then Dan, just to touch on your question around, you know, how that impacts margin in terms of these dynamics that we're seeing, content moderation is a high margin business for us. It's actually one of our highest margin service lines. So it will impact so that the fact that we're seeing growth in content moderation, not only in our current revenues, but in the pipeline should be margin accretive, prospectively. Now, obviously, that has to be balanced against many other dynamics, some of which we've already touched on this call. But certainly, you know, the increase in content moderation is margin accretive. AI, I've talked to you in the past about that being a fairly low overhead business, just in terms of the crowdsource model. So as that business grows, we should actually see a lot of operating leverage as well. So again, you know, that shift in the mix should continue to be margin accretive, which will help to somewhat, you know, absorb the impact of some of the other dynamics that we spent a lot of the call talking about already.

Thank you.

Thanks, Dan.

Thank you. Our next question comes from the line of Maggie Nolan from William Blair. Your question, please.

Hi, thank you. I wanted to ask about your clients number four through ten and and the momentum that you have there, the dynamics, you know, in the last couple of quarters, and then the momentum into 2022. And then any important contract renewals coming up at the end of the year here or in the near term that we should be thinking about?

So, hi, Maggie. It's Vanessa. Hope you're doing well. In terms of clients, so we do disclose clients one to three, and you've seen those numbers in our financials. In terms of clients that you know, 4 to 10, good performance during the quarter. So obviously not every single client is going to hit, you know, your expectation. But as a whole, those clients performed very, very well. You know, I'm just thinking about whether I'm actually permitted to say some of the names. I'm looking at my IR team. But, you know, one of the, you know, another very large social network organization, not the largest, but one of the very, the other very large ones, is in fact, you know, on our top client list and has performed tremendously well. And that is also a content moderation service and now also doing data annotation work for that client. You know, another client that, you know, when you travel and you stay and you use their system, again, another very, very fast grower doing quite well for us. We've also talked about, you know, the largest e-commerce, you know, company on the planet also is in that 4 to 10 bucket, again, continues to perform very, very well. So feeling really good about clients number 4 through 10. In terms of any major renewals coming up next year, you know, I would say nothing of note, Maggie. We've talked in the past about our revenue retention rates and our client retention rates, and those have been historically very, very high. So we're not, you know, foreseeing any issues from a, you know, renewals perspective, you know, next year.

Thanks, Vanessa. Congrats, all. Thank you.

Thank you. And we have time for one more question. Our final question for today comes from the line of Dave Koenig from Baird. Your question, please.

Yeah. Hey, guys. Thanks. Nice job. And I guess my first question, just when we look at guidance, I think sequentially Q4 at the midpoint is up something like 7% or 8%, which is pretty good sequential growth. Is there anything – different in your business now with Lionbridge or anything else that's kind of, you know, allowing, you know, pretty fast sequential growth seasonally in Q4?

Hey, Dave, it's Vanessa here. Yeah, I mean, we've got, we typically do have, you know, better seasonality in Q4, but you're absolutely right where, you know, 7% sequential growth, 7% to 8% sequential growth is fairly strong. I think that really demonstrates, Dave, some of the momentum that Jeff spoke to earlier and Some of these accounts do take, you know, several weeks to ramp up. So I think what you're seeing in Q4 in terms of that, you know, level of sequential growth is some of it is seasonality, but most of it is also just, you know, the account ramps that we're working through. Some of those big names that we mentioned earlier, like, you know, Barclays and others that we've, you know, we've named publicly are in fact ramping, and that's contributing to the sequential growth that you're seeing there.

Thank you. This does conclude the question and answer session of today's program. I'd now like to hand the program back to Jeffrey Pruitt for any further remarks.

Thanks, Jonathan, and thank you, everyone, for your questions. In closing, growth, innovation, and value creation remain at the core of TELUS International's success, and I could not be more excited about the trajectory we're on The key takeaway of this quarter for me was our ability to not only grow, but to also maintain our strong profitability profile amidst a challenging global labor supply environment, and this was not by accident. Our culture and premium services ensure that we're delivering real value for our very successful, high growth, digitally focused clients, and that is clearly bearing fruit in our own ability to consistently execute on our profitable growth plan. We focus on complex mission-critical projects. We rely on best-in-class technology to power everything we do, and we are keenly focused on efficiency, including technology innovation and automation within our own business operations. All of this was showcased once again in the results we shared with you today. With our next quarterly update taking place in early 2022, I want to take this opportunity to wish you and your families a safe and festive holiday season that will soon be fast upon us. And in the meantime, Vanessa and I look forward to meeting with many of our shareholders at our investor events planned for the remainder of this year. Thank you for joining us today, and take care.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.