This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk18: Good morning, ladies and gentlemen. Welcome to the TELUS International Fourth Quarter 2022 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'd like to ask a question during this time, please press star 11 on your telephone. If you would like to withdraw your question, simply press star 11 again. I would now like to introduce Jason Meyer, Senior Director, Investor Relations and Treasurer at TELUS International. Mr. Meyer, you may begin the call.
spk13: Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q4 2022 Investor Call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer, and Vanessa Canoe, 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 would 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 issued this morning and regulatory filings available on CDAR and EDGAR. I would 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 Pierret.
spk08: Thank you, Jason. Good morning, everyone, and thank you for joining us today. In the fourth quarter, TELUS International delivered a 5% year-over-year increase in revenue, or 9%, on a constant currency basis. For the full year, TI Group revenues 12%, or 16%, on a constant currency basis. As anticipated, near-term recessionary headwinds continue to impact the timing and velocity of new projects in Q4. However, TI once again delivered solid revenue growth performance. Our team also delivered on our commitment to operate a highly profitable business, with adjusted EBITDA in the quarter increasing by 10% year-over-year and an adjusted EBITDA margin of 24.9%. And for the full year, adjusted EBITDA growth was 12%, with margin at 24.6%. These results demonstrate TI's resilient and sustainable business model, which enables us to successfully manage factors that are within our control whilst concurrently navigating challenging headwinds. This model equips us to simultaneously win new client accounts as well as to secure incremental business from the brands we already support. Indeed, our global sales team has been working diligently to identify and qualify new opportunities to not only replenish our sales funnel as deals are won or lost, but to also continue to grow it. To this end, our sales funnel as of December 31st, 2022 stood at $2.7 billion. Notably, this does not include opportunities brought to us through our recent WillowTree acquisition. Among our key wins in the quarter, new logos included a consulting firm that supports complex government, defense, and intelligence projects. One of the fastest growing e-commerce companies in the travel and entertainment industry, a disruptive AI-powered developer and service provider in the sales and marketing space, and a leading digital investment platform. Across our existing client base, we increased our share of wallet with a highly diversified list of brands, including an online food ordering and delivery platform, a global professional services company focused on HR and project management, a leading video social media network, a top provider of heavy equipment and power generation, and the largest American multinational telecommunications conglomerate. Notably, despite challenging macroeconomic conditions throughout 2022, we've maintained our focus on operational excellence. Our track record of exceeding client KPIs and our reputation as a trusted and innovative partner have positioned us favorably in the current down cycle. Additionally, with the closing of the WillowTree acquisition last month, our client base has increased by over 50 well-known brands, including Fox, Anheuser-Busch InBev, PepsiCo, Synchrony, and Marriott. We've also become more diversified across strategic verticals such as telecommunications and media, healthcare and life sciences, financial services, consumer goods, travel and hospitality, and technology and software. On that note, Tobias Dengel has now joined our executive leadership team as president of the newly rebranded WillowTree, a TELUS international company. Together with Tobias, We've also secured an exciting infusion of digital talent at scale into our already robust end-to-end digital transformation capabilities, including premium content moderation services, AI data solutions, and IT lifecycle services. The WillowTree acquisition has further elevated and differentiated our ability to design, build, and deliver premium customer experiences and digital products for the world-leading brands. Meaningful discussions are already well underway with many of our key clients, including our parent company, TELUS Corporation, a world-leading communications technology company. In this regard, TI is uniquely positioned with TELUS as an anchor client, given its differentiated asset mix that includes exciting growth-oriented assets such as TELUS Health and TELUS Agriculture and Consumer Goods. Indeed, we're already pursuing several exciting opportunities to partner with these distinct businesses, which will also result in us displacing spend away from competitors thanks to WillowTree's premium digital design and build capabilities. The large-scale, long-term projects we're currently discussing represent counter-cyclical revenue opportunities to help insulate TELUS International during the ongoing recessionary challenges. Moving on to my favorite part of these calls, sharing some of our client case studies. In the first example, TELUS International's engagement began with process consulting to streamline operations and kickstart the digital transformation journey of a large US-based provider of financial services, property information, and business intelligence across consumer credit, real estate, and capital markets. The project then progressed to TI building and implementing the solution. Companies that have seen robust growth often encounter challenges around standardizing their processes and consolidating business units. These challenges can lead to inefficiencies that negatively impact the customer experience. This was the case for our client, who saw a significant growth period resulting in many dispersed customer support centers throughout the country. The client engaged TI to assist them in assessing their existing contact centers and provide innovative solutions to drive efficiencies, improve technology, and increase client satisfaction. The TELUS International team was able to identify quick win opportunities, enabling the client to consolidate resources and maximize its people, processes, and technology. We also uncovered ways to improve the client's existing IVR design including technology enhancements to address subpar call deflection capabilities and self-serve options. During the assessment, our team determined that findings focused on one area of the business could actually be applied across various divisions to further optimize the client's overall operations. These findings expanded the scope of our client engagement from a diagnostic exercise to a process design consultation in which we created a fulsome digital roadmap for the client's tax, real estate, and platform services units. By leveraging information and data gathered by our team in the diagnostic phase, we built an improved IVR system that achieved a 25% reduction in average handle time across all business units. Notably, we achieved a 49% call deflection rate for the tax services business unit. The client has since selected TELUS International as its digital transformation partner to continue its journey to transform the company's customer experience to a full-service, omnichannel digital environment. This multi-phase project will include developing a robust knowledge base and customer-facing chatbot, introducing additional support channels and automating select processes to drive further cost savings. Another client case study I'd like to share is focused on AI solutions. A leading technology client leveraged TELUS International's AI data solutions to build a multilingual data set that helps researchers scale natural language understanding technology. With long-standing linguistic data set development experience, a diverse AI community, and streamlined large-scale project management protocols, TELUS International offered critical support to build the dataset, the first of its kind. Our client, who is a pioneering innovator of conversational AI technologies, has long prided itself on advancing natural language processing capabilities and providing research communities with access to extensive datasets that fuel AI innovation. Although voice assistants have advanced tremendously in the past decade, their multilingual language understanding capabilities are still evolving. Our client is on a mission to extend conversational aptitudes to other languages via a multilingual approach. The idea is to enable cross-linguistic training where a single machine learning model understands inputs from many diverse languages. One challenge in executing this initiative was the lack of labeled data to assist with training and evaluating the models. The client required an AI data solutions partner with deep data collection expertise who could provide realistic contextual data for a specific task. The project demanded language experts with linguistic translation, validation, or localization abilities to create comprehensive and accurate conversational utterances in specified languages. Our team of experts supervised the project and delivered effective vendor qualification strategies that included preparing qualification quizzes for other participating vendors, building detailed instructions for tasks across more than 50 local languages, and ensuring the delivery of high quality data sets. We also custom engineered training and qualification materials to support frictionless data collection with carefully curated qualification tests, detailed training materials, and clear task instructions. This enabled our AI community, excuse me, to surpass accuracy targets across all of the deliverables. Our AI community produced approximately 60% of the utterances in the dataset. The project spanned nine months, during which time TI engaged approximately 650 language experts to deliver over 600,000 high-quality language prompts in more than 30 languages, or a total of 3.5 million individual language tasks. Tasks also included translating English utterances into local languages validating utterances or checking translations for accuracy and defining localized expressions for particular prompts the data set has many machine learning use cases and contains a million realistic parallel labeled text utterances spanning more than 50 languages as well as dozens of domains with the release of this large language data set along with the open source code our client continues to promote research collaborations for natural language processing and upgraded natural language understanding modeling to advance conversational AI systems. Excuse me. And to share one more example with you today, another client of ours, one of the biggest global financial services companies, turned to Telus International to help safeguard its financial platform by ensuring overall customer safety, including customer verification and fraud protection. With the growth of e-commerce and increasing use of credit, Financial institutions and consumers require rigorous security measures to help counter fraud. Our client was also driven by its desire to meaningfully enhance their customer experience journey through credit application, verification, fraud detection and investigation, as well as billing disputes. As their partner, TELUS International scaled its program more than ninefold, from under 100 team members to nearly 900 in the span of a year. distributed across three global locations, the Philippines, Guatemala, and the United States. Our team was proud to achieve an average quality score exceeding 90%, well above the target of 85, while reducing the client's exposure to loss of revenue from fraudulent activities. I'd like to stay on the topic of trust and safety for a moment to touch upon another key component of our portfolio, which continues to be a topic of discussion with our clients and across the broader industry. our premium content moderation services. With several providers having made the decision to exit the space either in whole or in part over the past three years or so, I think it's important to point out that TELUS International remains steadfast in our commitment to performing this important work and continuing to play a critical role in ensuring safer digital spaces and online experiences for all. We also see significant short and long-term opportunities to grow our market share in content moderation due to the exponential rise in user-generated content that's driven by a persistent influx of new social platforms and emerging virtual spaces like the metaverse, as well as the growing popularity and prevalence of augmented and virtual reality. Additionally, there's continued diversification of languages and dialects used online, and younger generations continue to increase their reliance on digital services for education, work, and social interaction. We're also encouraged by the evolution from more traditional content to more complex content types, such as live chat, audio, and video streams. We believe that new opportunities in content moderation will continue to emerge as the industry transitions from restrictive to punitive legislation, such as the Digital Services Act in Europe and several similar regulatory frameworks that are pending in the United States. And we expect to see a continued expansion of content moderation use cases as more and more brands grow their online presence. These factors and more are generating an increased demand for content moderation services. More importantly, however, is that the increasing complexity of content moderation work requires that it be completed by highly experienced, dedicated, and trusted providers like TI. At TELUS International, we respectfully refer to our content moderators as digital first responders, given the critical work they perform to help keep the internet safe. Working alongside AI technology, where TI has a meaningful capability at scale to bring to bear, they are at the core of our approach, which leverages human intelligence to handle more contextual moderation decisions in accordance with our clients' guidelines. Key to our success in this area is our robust recruiting practices, onboarding programs, and continued training and support. Like everything we do at TI, we leverage the strong foundation of our caring culture as a differentiator. These include individual and group counseling sessions, access to onsite fitness facilities, and quiet spaces and virtual and in-person social activities. Our global wellness team also focuses on providing preventative wellness practices and developing a curriculum to help educate and further empower our team members to take charge of their personal health and well-being needs alongside the strong support of their leaders. We see a highly skilled and engaged team as critical to our collective success, and as of December 31st, we had over 73,000 global team members, which represents a year-over-year increase of 18% and a sequential increase of 6% versus Q3. Some of this growth is attributable to team members joining TI in support of TELUS Health's ongoing integration activities. Heading into 2023, we will continue to leverage our virtual recruitment tools as part of our broader talent acquisition strategy, including SPACE, a virtual recruitment platform that provides job seekers with a fully immersive experience in an interactive digital environment. The platform also increases the speed of the recruitment and hiring process, broadens the global recruiting talent pool, and maximizes candidate engagement. On the flip side, excuse me, Many companies continue to contend with a prolonged, challenging macroeconomic environment, and the tech sector in particular has been disproportionately affected. According to layoffs.fyi, a website created in 2020 to track tech layoffs globally, close to 160,000 workers from 1,040 companies lost their jobs in 2022, with more than half of them incurring in November and December, and nearly 98,000 individuals have been laid off to date in 2023. Although many external factors, including a rapid series of interest rate hikes by central banks, have contributed to these job losses, TI's thoughtful and agile approach to recruitment, intentionally adjusting the pace of our new hires in line with our cost optimization efforts and near-term demand dynamics, has helped us avoid overhiring and minimize these difficult situations. Our intentional and sustained investment in upskilling and cross-training our team members has also helped in this regard. In 2022 alone, our team members completed or enrolled in nearly 16,000 courses on Udemy, an online learning platform featuring a curated collection of business and technical courses. More than 2,600 team members graduated from the TELUS International University with 65 different degrees and certificates. Over 850 team members from our sites in Guatemala and El Salvador graduated from our Language Academy at TI, improving their proficiency in English and French. Through our partnership with both Amazon Web Services and Google Cloud Platform, we now have hundreds of our team members who hold cloud certification along with AWS Cloud Practitioners and Solutions Architects Associates. And lastly, our team members also completed hundreds of tech certifications such as open JavaScript Node.js application developer, test automating engineering, and professional cloud architect certification. Not only has our approach enabled us to transition team members between client accounts, we've also been able to address company-wide skills gaps and drive high engagement rates. In fact, for the ninth consecutive year, TI has achieved a top quartile engagement score as a result of a company-wide global survey conducted by a third-party provider. Our focus on culture naturally leads to better team member retention and helps drive TI's resilient margin profile and is at the core of how we delight our clients. We've seen the benefits of these investments firsthand at TELUS International. For example, a global leader in tech real estate informed us that our commitment to culture and diversity was a major factor in their decision to initially do business with us and then to expand our partnership portfolio of support within the first year. Similar feedback was received from a global tech giant who felt we differentiated ourselves among their other partners for the thoughtful and direct ways we give where we live at events like our Telus Days of Giving, which are focused on strengthening social infrastructure and environmental stewardship across the globe. In this regard, I'm proud to share a sampling of events that were held in partnership with local charitable organizations that our team members volunteered for in Q4. 1,500 volunteers cleaned and refurbished the school in the Philippines in time to welcome back 9,000 students to attend in-person classes since the beginning of the pandemic. We helped build a 12th school in Guatemala, and 850 volunteers renovated the Child Development Center at an SOS children's village in El Salvador. Team members in India planted 3,500 trees in partnership with Safe Trees Environmental Trust. Our teams in North Charleston, Las Vegas, held toy drives for their local Toys for Tots programs over the holiday season. And in North Charleston, our team built a storage unit to house supplies for victims of domestic violence, while 200 volunteers in Las Vegas supported local food banks and soup kitchens over two weekends. We'll also be releasing our first standalone TELUS International Sustainability Report in early April, focusing on our company's environmental, social, governance priorities, commitments, policies, and progress. Last year, we included considerable ESG data in our 2021 annual report, which you can access from our website. TELUS International is a compelling ESG investing opportunity with our culture at the core of our commercial success, and we're excited to offer this new element of disclosure as we look to help investors see more clearly the value we're creating for all our stakeholders and striving to do our part in making our operations, partnerships, communities, and environment more sustainable. Our commitment to our team members' well-being contributed to Telus International being recognized for the sixth consecutive year on the Global Outsourcing 100, the annual listing of the world's best outsourcing service providers. Other contributing factors leading to this distinction included our impressive customer references, programs for innovation, CSR activities, and awards and certifications. Additional award highlights from 2022 included our company being named to the Forbes Best Employers for Diversity list Mogul's Top 100 Workplaces for Diverse Representation, and for the second year in a row, we won the Best Informational Bot Solution in AI Breakthrough Awards for the Intelligent Telus International Assistance Agent Assist Bot. On that note, our team has also been exploring the exciting possibilities of how we can leverage ChatGPT and other generative AI tools to further progress our proprietary intelligent bot platform, both for our clients and internal applications. Through our Telus International iLabs, our R&D initiative launched in 2020 to design and build disruptive solutions for customer interactions, we have long been developing in-house chatbot solutions, leveraging natural language processing, speech recognition, and semantic understanding, among other tools. The possibilities presented by ChatGPT and similar alternatives are seemingly endless in how we can leverage generative AI to design and build better bots that are more conversational can better answer follow-up questions and admit mistakes and even reject inappropriate requests. Our team at WillowTree, a Telus International company, have also started to experiment with various forms of AI in their digital build process and believe it will help to standardize our coding and enable us to increase our speed to market in delivering digital solutions to our clients. Of course, Generative AI technology also represents an attractive business opportunity from a supply perspective to TI, as even the smartest AI needs to be taught and tested with best-in-class data labeling that we provide to our human-in-the-loop AI data solutions. We'll have more to share on this topic of Chad GPT and generative AI more broadly at our investor day next week and in the months ahead as we continue to integrate the WillowTree and TI ecosystems which will lead to many new use cases and enable us to create increasingly innovative solutions that leverage this exciting technology. With that, I'll now invite our Chief Financial Officer, Vanessa Canoe, to take you through a detailed review of our financial results, after which I'll return to answer your questions. Vanessa, over to you.
spk28: Thank you, Jeff, and good morning, everyone. Thank you all for joining us today. As usual, in my review of the financial results, I will refer to some items that are non-GAAP measures. For descriptions and the reconciliation of our GAAPs and non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning. Let me now expand upon the components of our financial performance. In the fourth quarter, we delivered revenue of $630 million, up 5% year-over-year on a reported basis, and 9% in constant currency, landing at approximately the midpoints of our latest guidance range. For the full year, we generated revenue of $2.468 billion, up 12% on a reported basis and 16% in constant currency. Resilient double-digit growth is especially notable in what was a challenging year for a number of well-known reasons, such as high inflation, rising interest rates, volatile markets, and recessionary fears that impact consumer confidence. Let's look at our revenues a little closer, starting with revenues by verticals. In the first quarter, our largest vertical tech and games grew 4% year-over-year on a reported basis, but on a constant currency basis, it grew by 10%. Our leading social media network clients represented just under a third of the tech and games vertical revenues in Q4. Revenues from this particular client were down in Q4 and flat on a full year basis, although when adjusting for currency movements, revenues from this client were up 11% in constant currency on a full year basis. For the full year, tech and games increased 15% on a reported basis and a strong 21% in constant currency, driven by continued growth with existing clients for services ranging from AI data solutions and trust and safety to customer experience management. Within our e-commerce and FinTech vertical, revenues in Q4 declined year-over-year by 12% on a reported basis and 9% in constant currency terms due to challenges experienced by certain FinTech clients. For the full year, e-commerce and FinTech revenue increased 10% on a reported basis and 15% in constant currency. Growth in our communications and media vertical remains solid, driven by higher volumes and the breadth of services we provide for our parent company, Telus Corporation, with revenues in the quarter increasing 6% year-over-year and growing 8% for the full year. Banking, financial services, and insurance, or BFSI, continue to grow healthily with revenue in the fourth quarter increasing 39% year-over-year and 71% for the full year driven by a large global financial institution that was added to our client roster at the end of 2021. Lastly, our travel and hospitality vertical grew 5% year-over-year and 21% for the full year. Looking at our revenues by geography in Q4, Asia Pacific and Central America continue to deliver strong growth, each up 21%. Revenues in North America grew 18% year-over-year, while in Europe, we continue to see recessionary pressures coupled with a weaker euro relative to the U.S. dollar, with a revenue decline in Q4 of 15% year-over-year, while on a constant currency basis, a decline was 5%, primarily due to lower volumes with some of our tech and games and e-commerce clients. For the full year, Asia Pacific posted a strong 30% growth in revenue, while North America was up 24%, followed by Central America at 19%, and revenues in Europe declined for the year by 4% on a reported basis, but grew at approximately 8% in constant currency. Moving on to operating expenses, salaries and benefits in the fourth quarter were $349 million, up 5% year-over-year. For the full year, salaries and benefits increased 14% to $1.393 billion. Increases in both periods were due to higher team member counts to support business growth and higher average employee salaries and wages partially offset by the lower average exchange rates across a variety of currencies relative to the U.S. dollar. In 2022, salaries and benefits as a percentage of revenue overall remained steady at 56%. Our goods and services purchase were $124 million in the fourth quarter, a decrease of 1% year over year, while for the full year, goods and services increased 8% to $468 million, with these increases coming from our business growth, including higher crowd contractor costs from the expansion of our AI business. Share-based compensation expense in the fourth quarter was $5 million, a decrease of $4 million year over year, while for the full year, it decreased by $15 million to $25 million. The decrease was primarily due to the lower average share price during the quarter and for the year overall compared to the prior year. Acquisition, integration, and other charges in the fourth quarter were $23 million, an increase of $18 million, while for the full year it increased by $17 million to $40 million, with the increase in the quarter and the year primarily due to the transaction costs incurred in Q4 in connection with the WillowTree acquisition. Our depreciation and amortization expense in Q4 was $68 million, slightly above 66 million in the same quarter last year. For the full year, depreciation and amortization expense was 258 million, in line with the 257 million for the prior year, with our investment in capital and intangible assets being offset by the lower average euro to US dollar exchange rates on assets held in our European subsidiaries, where the functional currency is the euro. Our interest expense in the fourth quarter was 12 million, compared with 8 million in the same quarter last year, driven by higher interest rates. For the full year, interest expense decreased 7% to $41 million, primarily due to lower average debt balances on our credit facility, partially offset by higher interest rates. Interest on our credit facility is based on SOFR, plus a credit spread that is tied to our leverage ratio. In the fourth quarter, we recorded an income tax recovery of $3 million, compared with an income tax expense of $21 million in the same quarter last year. under effective tax rates decreased from 36.8% to a negative 9.7%. The Q4 recovery is primarily due to a change in the foreign tax differential that is driven by a change in income mix in the quarter, in addition to recovery that is not expected to be recurring. For the full year, income tax expense increased $3 million to $67 million, while the effective tax rate decreased from 45.1% to 26.8%, primarily due to a change in the foreign tax differential and a decrease in non-deductible items, which in the prior year were a result of our IPO. Moving on to profitability. Our adjusted EBITDA was $157 million in the fourth quarter, a year-over-year increase of 10% driven by business volume growth and operational efficiency improvements and other cost realizations. For the full year, adjusted EBITDA was $607 million, up 12%, driven by growth in revenue, partially offset by higher salaries and benefits and goods and services purchased to support overall growth in our business. We achieved an adjusted EBITDA margin for the full year of 24.6%, which was consistent with a year ago, a tremendous result given the challenging macroeconomic backdrop. Adjusted net income for the fourth quarter was $95 million, and on a per-year basis, this translated into an adjusted diluted earnings per share of $0.35 of 25% year over year. For the full year, adjusted net income increased 24% to $332 million, and adjusted diluted earnings per share for the year was $1.23, up 23%. Turning now to cash flows and our balance sheets, I wanted to point out some disclosure in the 20F related to the presentation of cash interest paid, which changed in the fourth quarter of 2022. It is now included in cash flows from financing activities, while previously it was in operating activities. This change is permitted by IAS 7 Statement of Cash Flows, and you can find further details in our audited financial statements filed earlier today. As a result of this change, all free cash flow amounts for comparative periods have been reclassified to conform with current period presentation. In the fourth quarter, we generated free cash flow of $60 million, up 62% year-over-year, driven by higher cash provided by operating activities for business growth and lower share-based compensation payments and lower capital expenditures. As a percentage of revenue, free cash flow was 9.5% of revenue in Q4, compared to 6.2% in the same quarter a year ago, an increase of 330 basis points. For the full year, free cash flow was $333 million, up 59%, driven by higher operating profits generated from our business, lower net outflows from working capital, and lower share-based compensation payments. And as a percentage of revenue, free cash flow was 13.5% in 2022, an increase of 390 basis points versus the prior year. Capital expenditures for the full year increased 3% to $104 million, with the increase primarily due to additional investments in our Asia-Pacific region, as well as in our AI data solutions business. And for the full year, capital expenditures as a percentage of revenues was 4.2%. We also continued to reduce our leverage, lowering our net debt to adjusted EBITDA leverage ratio, as defined per our credit agreement to 1.1x. as of December 31st, a further improvement from 1.3x as of September 30th, 2022. Our total available liquidity as of December 31st, 2022 was approximately $1.383 billion compared to $831 million a year ago. Liquidity increased in Q4 due to the timing of our upsize and extended credit facility. Our credit facility was extended for a full five years and now matures in January, 2028. The overall facility size was increased to $2 billion to accommodate the WillowTree acquisition with a consistent pricing grid and an improvement on certain terms, such as higher cash netting for leverage. Following the close of the WillowTree acquisition in early January, our net debt to adjusted EBITDA leverage ratio, as per our credit agreement, increased to 2.9x and remains within the target steady state range of 2 to 3x. We believe our robust cash flow profile will once again drive meaningful deleveraging a proven ability we've demonstrated following large strategic acquisitions in the past. Now turning to our outlook. We anticipate continued robust double-digit profitable growth in 2023, amplified by our WillowTree acquisition. Our outlook for revenue is in the range of 2.97 to 3.03 billion, which represents revenue growth of 20.3% to 22.8% on a reported basis, and includes the contributions from WillowTree in the range of 255 to 260 million. Excluding Willow Tree, we expect organic growth of 10 to 12% for the year. Within this outlook range, we are anticipating some near-term softness in revenues from our second-largest clients, offset by meaningful incremental opportunities with our largest clients, Telus, and other enterprise clients. We also assume an average exchange rate of 1 euro to 1.08 US dollars, reflecting current rates. For adjusted EBITDA, we expect a range of $705 to $725 million, or 16% to 19% year-over-year growth, with adjusted EBITDA margins of 23.7% to 23.9%. This includes WillowTree's adjusted EBITDA margins of approximately 20% of revenues. Our outlook calls for adjusted deleted earnings per share in the range of $1.20 to $1.25, which includes certain near-term dilutive impacts from the WillowTree transaction. Interest costs are naturally higher as a result of the debt financing, and as mentioned previously, our credit agreement pricing grid is based on SOFR plus the credit spread that is tied to our leverage ratio. For 2023, we expect an average interest rate of approximately 6%, which assumes a continued near-term increase in SOFR, partially offset by an improvement in the credit spread as our leverage ratio continues to decline throughout the year. Also factored into adjusted deleted earnings per share in 2023 is the equity issued in connection with the Willow Tree acquisition in January in the amount of 6.5 million subordinated voting shares. Our outlook assumes a weighted average deleted share counts of approximately $277 million in each of the quarters. And finally, for the full year 2023, we expect our effective tax rates to be in the range of 24% to 28%, reflecting the expected jurisdictional mix of earnings. While we do not provide quarterly guidance, I would like to call out certain seasonality factors that should be helpful in modeling seasonal cadence. We expect revenue seasonality of approximately 47% in the first half and 53% in the second half of 2023, and adjusted EBITDA seasonality of approximately 45% in the first half and 55% in the second half. Both skews reflecting our current expectation of the macro environment, in addition to normal revenue ramp timing and the accretive nature of such revenue ramps on EBITDA in the back half of the year, and continued realization of cost efficiency programs. Furthermore, our willow tree cross-sell opportunities will naturally contribute to revenue on EBITDA more meaningfully in the back half, given normal contracting cycles and project ramp periods. Finally, our effective tax rate is also subject to seasonality, being higher in the first half of the year and lower in the second half. In summary, while there continues to be broader near-term macroeconomic uncertainty, we feel confident that TELUS International is well-positioned to continue executing with resilience and growing the business profitably in 2023. With that, let's move over 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.
spk18: Thank you, Ms. Ganou. And if you have a question at this time, please press star 1-1 on your telephone keypad. If you'd like to withdraw your question, simply press star 1-1 again. Once again, we kindly ask that you limit yourselves to one question at a time. You may get back in the queue as time allows. One moment for our first question. And our first question comes from the line of Ramsey LSL from Barclays. Your question, please.
spk32: Hi, good morning. Thanks for taking my question. I wanted to ask about the e-commerce and fintech vertical. I mean, not surprisingly, we're seeing some incremental weakness there. I was just wondering if you could give us some color on the sort of drivers and dynamics, what types of projects are slipping, and also whether you're seeing some stabilization there or whether we should expect kind of headwinds to continue to intensify going forward in that vertical.
spk07: Hey, Ramsey. Nice to hear your voice. Looking forward to seeing you next week, hopefully. Absolutely.
spk08: I think we're cautiously optimistic that we're sort of stabilized in that portfolio. As I shared last time, our exposure there is not huge for the business. And obviously, as Vanessa just shared, a little bit of challenge in terms of continued growth relative to previous trajectories. But I think we've kind of, as I said, stabilized. The kind of work we're doing for them, as you might expect, is around trust and safety principally and support more broadly to help customers access their platforms, secure access access to financial payments on both sides of the borrowing and lending equation. So I think what we're expecting for this year is fairly flat in terms of year-over-year growth. And then hopefully towards the end of 2023, we'll start to see more meaningful recovery there.
spk23: Perfect. Thank you. Thanks, Ramzi.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Tenshin Huang from JP Morgan. Your question, please.
spk34: Hi, thank you. Appreciate the chance here to ask a question. And good morning. I wanted to ask on the, Jeff, the TELUS, you sounded quite bullish on the potential for work there. I'm curious how much of that is just on the base business itself, Willowtree, CrossSell. I know there's a big opportunity there. And maybe can you just elaborate on the counter cyclical Nature, I heard you mention that a few times. Maybe you can just elaborate on that. That'd be great. Thanks.
spk08: Sure. Thanks, Tenjin. Looking forward to seeing you next week as well, hopefully. There are multiple drivers in the TELUS relationship that have been hugely helpful to TI over our history and I think get even more exciting in 2023 and beyond. and admittedly turbocharged, if you will, off the back of our WillowTree capability. Over our tenure, we have steadily displaced legacy incumbent partners that TELUS has relied upon for technology enablement, digital transformation, where at the time, TI simply didn't have the requisite experience and expertise to support TELUS and its ambitions of transformation. As we, over the years, have continued to improve, extend, expand, increase our capability set, we've had to compete with those incumbents in order to displace them. And once demonstrating our capabilities, have indeed taken over that work and successfully so, hence the continued growth of our franchise, if you will, and enabling TELUS across a myriad of services. The Willowtree addition on the mobile access and design and build component of our ecosystem in particular, this is going to be an even bigger game changer for us as we can displace even more incumbent legacy spend and really help to accelerate TELUS's ongoing digital transformation journey. We've got nine really exciting shovel-ready initiatives that we're already digging into and starting to ramp up. These are all pretty exciting, and they are multi-million dollar, multi-month or year programs. And I think this was one of the primary drivers of our excitement on the WillowTree transaction at first instance because we recognized out of the gate the kinds of opportunities we had with sort of our anchor customer and partner at TELUS, TELUS Ag, TELUS Health, et cetera. And when I say counter-cyclical, what I mean is, we're all seeing, reading, and unfortunately experiencing some of the macroeconomic headwinds and challenges, uncertainty, reduced consumer volume, driving at a minimum indecision or delayed decision-making, if not diminished demand in the near term, from sort of the broader customer base, tech in particular, but not exclusively. And while that's going on, this trend, opportunity to serve TELUS in its ongoing transformation needs really is helping us to overcome some of those challenges inoculating us from those macro cycles right now.
spk34: Got it.
spk18: Appreciate that. See you all next week.
spk06: Look forward to it. Thanks, Ginger.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Keith Bachman from BMO. Your question, please.
spk11: hi good morning and uh i feel a little left out i don't think i'm gonna i'll see you next week keith um but i wanted to ask about uh europe in particular and europe degraded from the september quarter and the variances with the rest of the geos widened and yet it doesn't seem like the economic data would support it. And so really it's a two-part question. A, what's going on in Europe that made the degradation, so to speak, more significant? And then secondly, and I'd say argue more importantly, you gave the guidance for the year and just, you know, what's your confidence level that the rest of the GOs don't veer towards Europe as opposed to the inverse? In other words, does Europe represent a risk profile that we should be thinking about for the rest of Europe? And that's it for me. Thank you.
spk28: Thank you, Keith. It's Vanessa. I'll start and Jeff certainly top off as appropriate. Europe has been a challenged region, I think, even macro-wise. But you're right, I don't think there was a particularly singular event that happened in Europe macro-wise in Q4. What we are seeing, however, in our results for Europe is a lot of that decrease that we saw in Europe is actually from the tech and game sector. So I'm not sure if you picked it up from my commentary, but that actually was what affected Europe disproportionately. A lot of the work that we do for that second largest client of ours actually is done out of Europe. So as that client saw softness in Q4, that obviously drags down the overall European performance. So it is macro-wide, but it's also very specific to the clients that we're serving from that particular geography. To answer the second part of your question, so I think as we go into 2023, we've continued to assume you know, that we will continue to see softness in Europe keep. Our guidance actually has factored that, we've taken that into consideration. We don't think that, you know, our large social media clients is going to bounce up anytime soon. So we've built that softness into our guidance, as I mentioned in my remarks. However, we have tremendous other offsetting factors as well, like other enterprise clients that we continue to see growth from, like the opportunities with Telus Corporation that we've also talked about. But those are going to be in other geos. They're not going to be in Europe. So we do expect to see a bit of a shift in our geographic mix of revenues in 2023, and we factor that in.
spk11: And Vanessa, just to push on that for one second, if I could, within the 10 to 12 organic guidance that you provided, is Europe remains at these levels, or does Europe improve against the negative 15?
spk28: Yeah, so we don't guide by geo, so I don't think I want to get to that level of specificity, but we have assumed softness in Europe, so you can take that to mean we expect a decline. I wouldn't get into the quantum of the decline, but overall, again, our guidance is not by geo, but it's a weighted view of what we expect to happen in this geography. So while we expect Europe to decline, we've also factored in growth in other regions from, again, the opportunities that I just talked about. And let's remember as well, as we kind of think about the overall guidance, it is a robust guidance, but there are a number of factors that give me confidence, whether it's in the Americas or elsewhere. Number one, ample opportunities that we've talked about in supporting Telus Corporation. through their own digital transformation journey that Jeff just spoke to and the counter cyclical nature of that opportunity, which is offsetting some of the risks that we're seeing in the tech sector and the e-commerce sector that you just heard Jeff talk about. But two, a very robust funnel. You also just heard Jeff talk about the funnel being 2.7 billion. It's a very, very healthy and robust funnel. And that's across multiple geos. And of course, we again just talked about the willow tree cross-sell and upsell opportunities and the capabilities rather that that brings to us now. And so, yes, while we do have the softness in Europe, there's a lot of reason for us to be confident and optimistic in the overall guide in terms of, you know, where we expect to see growth prospectively.
spk11: Okay.
spk18: Many thanks, Vanessa.
spk26: Thanks, Keith.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Maggie Nolan from William Blair. Your question, please.
spk19: Hi, everyone. This is Kate Kronstein. I'm from Maggie Nolan. Congrats on the nice quarter. So I wanted to quickly talk about hiring levels. Last quarter, we saw a scale back in hiring following the higher levels in the first half. But it looks like you guys hired quite a bit this quarter, despite some demand headwinds. Were those new hires primarily to help with TELUS health integration that you mentioned? or what was the biggest driver behind the increase versus the third quarter?
spk08: Hey, Kate. Welcome to the call. Thank you. Yes, you're exactly right.
spk10: Meaningful hiring associated with the TELUS Health integration effort that we are in the middle of enabling for TELUS and TELUS Health as a result of the LifeWorks acquisition that they completed late last year.
spk19: Okay. Great. Thank you for taking my question, and we look forward to seeing you all next week.
spk18: Me too.
spk06: Thanks.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Cassie Chan from Bank of America. Your question, please.
spk24: Hey, guys. I just wanted to switch gears and ask a little bit about margins. So, you know, you guys are expecting 2023 margins to be lower. Is that just purely due to willow tree or are there any other factors such as like pricing or labor costs or attrition utilization offsetting any of that and any way to quantify? Thank you.
spk28: Hey, Kathy. It's Vanessa. I'll take this question. You're absolutely right. The 2023 margin guide does incorporate the willow tree margins. So that is a little bit diluted. So that's the impact that you're seeing. But in terms of any other factors, there's always going to be client and portfolio mix impacts. As I mentioned earlier, as we were talking about revenue, we expect certain clients to flex down a little bit and other clients to flex up. So the weighted balance of that margin profile is reflected in our guide. But in terms of pricing specifically, just given that you asked, as I think you know and others know, in 2022, we were pretty successful in passing on price increases, along with other measures to help neutralize the impact of inflation. In 2023, while we do assume that the labor markets will start to get a little freer, particularly towards the later part of the year, compared to the last two years, we're still assuming a level of inflation. But we've taken a more conservative view to our expectations of pricing increases relative to what we did in the past, just given the macro environment. So I think you're seeing a little bit of that caution reflected in our margin guidance as well.
spk22: Got it. Thank you. Thanks, Cassie.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Davia Goyle from Scotia. Your question, please.
spk25: Good morning, everyone. So I had a quick question here, Jeff and Vanessa, on the acquisition expense for the quarter. I do see that the number for the quarter is at $23 million. That seems pretty high for a due diligence. I understand military is a large enough acquisition. We were projecting a higher number in this coming quarter for the integration cost. I would appreciate if you could provide some guidance from a modeling standpoint and provide some color on the Q4 number there.
spk28: Yeah, Divya, and we can certainly spend more time on the one-on-one callback later on. So we haven't incurred any integration costs in Q4 because we didn't build in close until January 3rd. So what we're referencing was actually BL transaction costs. So M&A advisory, et cetera. So those costs hit us in Q4 2022, and those were significant. And that's what you heard in my commentary. But in terms of integration costs, you're absolutely right. Those will start in Q1, just given the timing of when the deal closed on January 3rd.
spk25: Thanks, Vanessa. Yeah, like I think we were projecting a slightly lower number. That's why it came as a bit of a surprise for us. from a due diligence cost standpoint. But thanks a lot for the color. I look forward to speaking to you later today. Thank you.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Stephanie Price from CIBC. Your question, please.
spk36: Hi. Good morning. Jeff, I was hoping you could talk a little bit about the early conversations you've had with WillowTree customers and just in terms of what TI products are resonating the most with them.
spk35: And then maybe related to the last question, Vanessa, how do you think about the timeline to get WillowTree onto the TI margin here?
spk08: Hey, Stephanie. We've had some very exciting conversations with WillowTree clients and candidly equally have got more exciting conversations with our clients about bringing WillowTree capabilities to bear. But on that former topic, it's a combination of our content moderation capabilities in particular that seem to be attracting the most attention to several of the WillowTree clients, as well as more broadly TI's, what we call our deliver or run capabilities. The WillowTree historically has intentionally stayed away from that part of the client experience ecosystem. So they get engaged on the design front, the build front principally, and then once they've completed their work, on many occasions their customers have invited them to continue to stay involved in terms of supporting the end user community, modernizing the back office support that's connected to those front end applications. they have intentionally said that's not our core competency, we're staying away from that. And now, given TI's expertise at scale, we're now having a much more holistic end-to-end conversation with the WillowTree customer community, saying now we can actually bring the entire package to bear on their behalf. So we're pretty darned excited about how quickly we're going to realize the synergy thesis
spk10: for the cross-sell opportunity, our services to their customers, their services to ours. Vanessa, over to you for the second question from Stephanie.
spk28: Thanks, Stephanie. So your question was, you know, how quickly can we get the willow tree margins to the TI margins? We see willow tree being accretive in 2024, and we'll talk about that a little bit later at our investor next week where we'll actually talk a lot more about willow tree as well. And we see it being accretive in 2024 for a number of reasons. You know, economies of scale as they grow, and they're not going to need to add on some of the incremental SG&A, for example, that they normally would have as a standalone entity, leveraging the broader TI, leveraging our global footprint in terms of, you know, cost management, etc. In addition to, obviously, as the revenue synergies continue to build up, that also comes with a margin uplift as well. So, We are quite bullish, and we do think that, you know, we'll be accretive here in 2024. Thanks so much. Thank you.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Dan Perlin from RBC. Your question, please.
spk14: Thanks. You know, Jeff, I don't want to steal a lot from next week's event, but I did have a question just around AI and chat, GPT in particular. As to why you think, one, it's an opportunity maybe versus a threat for content moderation and your digital CX business, we are obviously getting a lot more of these questions from investors. So I would just like to get your view on that. And then just, Vanessa, did you say interest expense? I think you said it was 6%. Are you level setting that at a little over $100 million if we think about it from an absolute dollar amount for 23? Thank you.
spk08: Vanessa, do you want to go first? And then I'll come back to the chat GPT.
spk28: sure um i i said about six percent interest rates um that'll be a little north of 100 million for 2023 about 110 ish in that ballpark yep okay thank you that's perfect so dan i think that gpt is getting all kinds of media attention and understandably so given um really the exciting uh
spk08: natural language capability, which I think admittedly is probably the more revolutionary, for lack of a better word, attribute of this capability. I mean, chatbots and that capability more broadly have been around for years and years now. What I think really has ChatGPT standing out and why I think they had a couple hundred million downloads just in the first two months of its launch is really what it's able to do in terms of sounding so human-like, so natural, and so much so that I think even millennials might be persuaded to actually ask for help now. Where we see the opportunity though is, as I said in my prepared remarks, the nature of AI is inherently retrospective in that you take a data set, you annotate it, tag it, label it, You feed that information into your machine learning algorithm, and then you invite AI to make predictions, if you will, to offer outcomes predicated on that historical data set. But by definition, if the data set is static, then the answers you're going to get will not necessarily be helpful if, for example, there was no historical reference. So let me give you a specific example. If you asked ChatsGPT right now, how to swap your SIM card out of your iPhone. It would, in a very effortless, accessible way, talk to you like you're talking to an expert at your phone provider and invite you to take a paperclip and stick it into the little hole inside of your phone and a little tray would pop out and you would manually remove the SIM card and then insert it in the same way into your new phone. The problem with all of that, though, is that iPhone 14s, which came out after 2021, do not have SIM card trays. And so you would actually be entirely misled, despite how believable, how compelling, how accessible that instruction was, because the data set that ChatGPT ran its AI on is stale dated and simply didn't know that iPhones would change their construct. So where we see the opportunity as we have done with our clients for many years now is it's our annotation, labeling, tagging capability at scale that can be used by OpenAI and other generative AI partners like Google, like Meta and others to ensure that those data sets continue to be refreshed on a reoccurring basis so that they're providing accurate information. And then bidirectionally, There's no question that incorporating that more comprehensive, accessible, natural language processing capability into our own chatbot community prospectively is going to create even more opportunity for us to win more business. And the disintermediation of traditional live agent support that will be a consequent in part of this evolution I think this is just a natural evolution of that dynamic that's been going on for several years now as automation and process improvement has naturally pushed the humans in the loop further up the food chain because simple, predictable, repeatable interactions can and frankly should be automated because it's a better user experience, never mind more cost effective. So we don't see this as a threat at all. We see this as an opportunity. to be partnering bidirectionally with them and others similar to them. And we will indeed talk a lot about it at the Investor Day next week. Excellent. Look forward to seeing you. Me too.
spk18: Thank you. And our next question comes from the line of Richard from National.
spk17: Your question, please.
spk16: I wanted to talk about the current attrition levels of the employee base. How does it compare to the prior year? How does it compare to the industry in context with some of the comments you made earlier about the competitive landscape?
spk08: Hey, Richard. Thanks for the question. It's hard to compare like for like with the competitive landscape. I think, unfortunately, attrition has been one of those metrics that's has so many variables in it and folks take, I guess, a differentiated or self-serving view sometimes, whether it includes or excludes voluntary, involuntary, total, frontline, including training, not including training, so on and so forth. So what we tend to do is focus really inside TI and across each of those elements compared to prior quarters, prior years, et cetera. And where Q4 for us landed was continued improvement from prior quarters. Still not quite yet back to pre-pandemic levels, but thank goodness, getting closer still. Always, in my view, a critical element of our success is managing attrition effectively. A combination of the ever more complex work that we're invited to undertake on behalf of our clients, requiring more competent, capable, experienced, tenured talented people to do the work and getting them keeping them is just so critically important to deliver great service on a sustainable basis to our customers but equally importantly is the cost to replace them if they attrit re-recruit retrain wait for proficiency i think we've been fortunate in that regard and intentional and hence why we continue to enjoy the margin profile that we do relative to others because i think we do a better job than most but always room to do better still.
spk15: Okay, great. Thank you for the insight. Appreciate it. Pleasure.
spk18: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Jeff Peart for any further remarks.
spk08: Thanks, Jonathan, and thank you all for your engagement and questions as always. Despite the concurrence of a recessionary environment, rising inflation and geopolitical conflicts i believe that at telus international we've just barely scratched the surface of the opportunities ahead of us thanks to our resilient business model and focus on profitable growth innovation and our unique caring culture we believe that we're at the beginning of a tech super cycle that will impact all industries primarily driven by huge leaps forward in next-gen tech like the generative ai revolution augmented and virtual reality applications, and a metaverse that bridges the digital and physical worlds. TI is well positioned to build deep relationships with existing and new clients as they seek to streamline, optimize, and modernize their processes to enable scalable digital solutions. Furthermore, today's clients are looking for innovation and proactivity from third-party providers. They expect exceptional partners for human-centered design thinking, customer journey mapping and digital roadmap prioritization, and full-cycle product development, including rapid prototyping. Through organic growth and strategic acquisitions, TI has deeply embedded each of these capabilities into our highly synergistic service offerings, and we continue to attract and retain the best talent to design, build, and deliver our digital solutions, bolstered by our commitment to diversity, equity, and inclusion, including through our impact sourcing programs. Sustainability and social responsibility are increasingly as important to our clients as they are for us. In 2022, our team volunteered more than 75,000 hours, participating in 13 TELUS Days of Giving events and various other community activities focused on strengthening social infrastructure and environmental stewardship across the globe. Since 2007, TELUS International has meaningfully impacted the lives of more than 1.2 million people around the world, through volunteer activities and charitable giving, and our team is excited to do even more. I'd like to thank each and every one of our team members for giving back so meaningfully and becoming part of our company's strong legacy that will positively impact future generations. I'll end my closing remarks today by noting that TI is hosting our first Investor Day on February 16th next Thursday at the New York Stock Exchange. We're particularly looking forward to ringing the closing bell something we weren't able to do in person at the time of our IPO back in 2021 due to the pandemic. Vanessa and I hope to see many of you there in person where you'll also have the opportunity to meet members of the TI executive team and hear directly from them about the dynamic product portfolios they're running, how our technology and innovation drives our differentiated go-to-market approach, and how our ESG focus sets us apart in the market. I won't go through the whole agenda right now, but suffice to say, I can't wait for this exciting opportunity to discuss more about my favorite subject, TELUS International. We'll be webcasting the event live, and the webcast link is available on our investor relations site. Please feel free to reach out to our IR team if you've got any questions, and otherwise, I hope to see you all again on our next quarterly call in May. Thank you all again. Please keep yourselves and your families safe, and goodbye.
spk18: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
spk25: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1. Thank you. Thank you. you Thank you.
spk31: Bye. Thank you.
spk18: Good morning, ladies and gentlemen. Welcome to the TELUS International Fourth Quarter 2022 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'd like to ask a question during this time, please press star 11 on your telephone. If you would like to withdraw your question, simply press star 11 again. I would now like to introduce Jason Meyer, Senior Director, Investor Relations and Treasurer at TELUS International. Mr. Meyer, you may begin the call.
spk13: Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q4 2022 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 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 would 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 issued this morning and regulatory filings available on CDAR and EDGAR. I would 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 Piran.
spk08: Thank you, Jason. Good morning, everyone, and thank you for joining us today. In the fourth quarter, TELUS International delivered a 5% year-over-year increase in revenue, or 9%, on a constant currency basis. For the full year, TIGOO revenue is 12%, or 16%, on a constant currency basis. As anticipated, near-term recessionary headwinds continue to impact the timing and velocity of new projects in Q4. However, TI once again delivered solid revenue growth performance. Our team also delivered on our commitment to operate a highly profitable business, with adjusted EBITDA in the quarter increasing by 10% year-over-year and an adjusted EBITDA margin of 24.9%. And for the full year, adjusted EBITDA growth was 12%, with margin at 24.6%. These results demonstrate TI's resilient and sustainable business model, which enables us to successfully manage factors that are within our control whilst concurrently navigating challenging headwinds. This model equips us to simultaneously win new client accounts as well as to secure incremental business from the brands we already support. Indeed, our global sales team has been working diligently to identify and qualify new opportunities to not only replenish our sales funnel as deals are won or lost, but to also continue to grow it. To this end, our sales funnel as of December 31st, 2022 stood at $2.7 billion. Notably, this does not include opportunities brought to us through our recent WillowTree acquisition. Among our key wins in the quarter, new logos included a consulting firm that supports complex government, defense, and intelligence projects. One of the fastest growing e-commerce companies in the travel and entertainment industry, a disruptive AI-powered developer and service provider in the sales and marketing space, and a leading digital investment platform. Across our existing client base, we increased our share of wallet with a highly diversified list of brands, including an online food ordering and delivery platform, a global professional services company focused on HR and project management, a leading video social media network, a top provider of heavy equipment and power generation, and the largest American multinational telecommunications conglomerate. Notably, despite challenging macroeconomic conditions throughout 2022, we've maintained our focus on operational excellence. Our track record of exceeding client KPIs and our reputation as a trusted and innovative partner have positioned us favorably in the current down cycle. Additionally, with the closing of the Willowtree acquisition last month, our client base has increased by over 50 well-known brands, including Fox, Anheuser-Busch InBev, PepsiCo, Synchrony, and Marriott. We've also become more diversified across strategic verticals such as telecommunications and media, healthcare and life sciences, financial services, consumer goods, travel and hospitality, and technology and software. On that note, Tobias Dengel has now joined our executive leadership team as president of the newly rebranded WillowTree, a TELUS international company. Together with Tobias, We've also secured an exciting infusion of digital talent at scale into our already robust end-to-end digital transformation capabilities, including premium content moderation services, AI data solutions, and IT lifecycle services. The WillowTree acquisition has further elevated and differentiated our ability to design, build, and deliver premium customer experiences and digital products for the world's leading brands. Meaningful discussions are already well underway with many of our key clients, including our parent company, TELUS Corporation, a world-leading communications technology company. In this regard, TI is uniquely positioned with TELUS as an anchor client, given its differentiated asset mix that includes exciting growth-oriented assets such as TELUS Health and TELUS Agriculture and Consumer Goods. Indeed, we're already pursuing several exciting opportunities to partner with these distinct businesses, which will also result in us displacing spend away from competitors, thanks to WillowTree's premium digital design and build capabilities. The large-scale, long-term projects we're currently discussing represent counter-cyclical revenue opportunities to help insulate TELUS International during the ongoing recessionary challenges. Moving on to my favorite part of these calls, sharing some of our client case studies. In the first example, TELUS International's engagement began with process consulting to streamline operations and kickstart the digital transformation journey of a large US-based provider of financial services, property information, and business intelligence across consumer credit, real estate, and capital markets. The project then progressed to TI building and implementing the solution. Companies that have seen robust growth often encounter challenges around standardizing their processes and consolidating business units. These challenges can lead to inefficiencies that negatively impact the customer experience. This was the case for our client, who saw a significant growth period resulting in many dispersed customer support centers throughout the country. The client engaged TI to assist them in assessing their existing contact centers and provide innovative solutions to drive efficiencies, improve technology, and increase client satisfaction. The Telus International team was able to identify quick win opportunities, enabling the client to consolidate resources and maximize its people, processes, and technology. We also uncovered ways to improve the client's existing IVR design including technology enhancements to address subpar call deflection capabilities and self-serve options. During the assessment, our team determined that findings focused on one area of the business could actually be applied across various divisions to further optimize the client's overall operations. These findings expanded the scope of our client engagement from a diagnostic exercise to a process design consultation in which we created a fulsome digital roadmap for the client's tax, real estate, and platform services units. By leveraging information and data gathered by our team in the diagnostic phase, we built an improved IVR system that achieved a 25% reduction in average handle time across all business units. Notably, we achieved a 49% call deflection rate for the tax services business unit. The client has since selected TELUS International as its digital transformation partner to continue its journey to transform the company's customer experience to a full-service, omnichannel digital environment. This multi-phase project will include developing a robust knowledge base and customer-facing chatbot, introducing additional support channels and automating select processes to drive further cost savings. Another client case study I'd like to share is focused on AI solutions. A leading technology client leveraged TELUS International's AI data solutions to build a multilingual data set that helps researchers scale natural language understanding technology. With long-standing linguistic data set development experience, A diverse AI community and streamlined large-scale project management protocols, TELUS International offered critical support to build the dataset, the first of its kind. Our client, who's a pioneering innovator of conversational AI technologies, has long prided itself on advancing natural language processing capabilities and providing research communities with access to extensive datasets that fuel AI innovations. Although voice assistants have advanced tremendously in the past decade, their multilingual language understanding capabilities are still evolving. Our client is on a mission to extend conversational aptitudes to other languages via a multilingual approach. The idea is to enable cross-linguistic training where a single machine learning model understands inputs from many diverse languages. One challenge in executing this initiative was the lack of labeled data to assist with training and evaluating the models. The client required an AI data solutions partner with deep data collection expertise who could provide realistic contextual data for a specific task. The project demanded language experts with linguistic translation, validation, or localization abilities to create comprehensive and accurate conversational utterances in specified languages. Our team of experts supervised the project and delivered effective vendor qualification strategies that included preparing qualification quizzes for other participating vendors, building detailed instructions for tasks across more than 50 local languages, and ensuring the delivery of high-quality data sets. We also custom engineered training and qualification materials to support frictionless data collection with carefully curated qualification tests, detailed training materials, and clear task instructions. This enabled our AI community, excuse me, to surpass accuracy targets across all of the deliverables. Our AI community produced approximately 60% of the utterances in the dataset. The project spanned nine months during which time TI engaged approximately 650 language experts to deliver over 600,000 high quality language prompts in more than 30 languages or a total of 3.5 million individual language tasks. Tasks also included translating English utterances into local languages validating utterances or checking translations for accuracy, and defining localized expressions for particular prompts. The dataset has many machine learning use cases and contains a million realistic parallel labeled text utterances spanning more than 50 languages, as well as dozens of domains. With the release of this large language dataset, along with the open source code, our client continues to promote research collaborations for natural language processing and upgraded natural language understanding, modeling to advance conversational AI systems. Excuse me. And to share one more example with you today, another client of ours, one of the biggest global financial services companies, turned to Telus International to help safeguard its financial platform by ensuring overall customer safety, including customer verification and fraud protection. With the growth of e-commerce and increasing use of credit, Financial institutions and consumers require rigorous security measures to help counter fraud. Our client was also driven by its desire to meaningfully enhance their customer experience journey through credit application, verification, fraud detection and investigation, as well as billing disputes. As their partner, TELUS International scaled its program more than ninefold, from under 100 team members to nearly 900 in the span of a year. distributed across three global locations, the Philippines, Guatemala, and the United States. Our team was proud to achieve an average quality score exceeding 90%, well above the target of 85, while reducing the client's exposure to loss of revenue from fraudulent activities. I'd like to stay on the topic of trust and safety for a moment to touch upon another key component of our portfolio, which continues to be a topic of discussion with our clients and across the broader industry. our premium content moderation services. With several providers having made the decision to exit the space either in whole or in part over the past three years or so, I think it's important to point out that TELUS International remains steadfast in our commitment to performing this important work and continuing to play a critical role in ensuring safer digital spaces and online experiences for all. We also see significant short and long-term opportunities to grow our market share in content moderation due to the exponential rise in user-generated content that's driven by a persistent influx of new social platforms and emerging virtual spaces like the metaverse, as well as the growing popularity and prevalence of augmented and virtual reality. Additionally, there's continued diversification of languages and dialects used online, and younger generations continue to increase their reliance on digital services for education, work, and social interaction. We're also encouraged by the evolution from more traditional content to more complex content types, such as live chat, audio, and video streams. We believe that new opportunities in content moderation will continue to emerge as the industry transitions from restrictive to punitive legislation, such as the Digital Services Act in Europe and several similar regulatory frameworks that are pending in the United States. And we expect to see a continued expansion of content moderation use cases as more and more brands grow their online presence. These factors and more are generating an increased demand for content moderation services. More importantly, however, is that the increasing complexity of content moderation work requires that it be completed by highly experienced, dedicated, and trusted providers like TI. At TELUS International, we respectfully refer to our content moderators as digital first responders, given the critical work they perform to help keep the internet safe. Working alongside AI technology, where TI has a meaningful capability at scale to bring to bear, they are at the core of our approach, which leverages human intelligence to handle more contextual moderation decisions in accordance with our clients' guidelines. Key to our success in this area is our robust recruiting practices, onboarding programs, and continued training and support. Like everything we do at TI, we leverage the strong foundation of our caring culture as a differentiator. These include individual and group counseling sessions, access to on-site fitness facilities, and quiet spaces and virtual and in-person social activities. Our global wellness team also focuses on providing preventative wellness practices and developing a curriculum to help educate and further empower our team members to take charge of their personal health and well-being needs alongside the strong support of their leaders. We see a highly skilled and engaged team as critical to our collective success, and as of December 31st, we had over 73,000 global team members, which represents a year-over-year increase of 18% and a sequential increase of 6% versus Q3. Some of this growth is attributable to team members joining TI in support of TELUS Health's ongoing integration activities. Heading into 2023, we will continue to leverage our virtual recruitment tools as part of our broader talent acquisition strategy, including SPACE, a virtual recruitment platform that provides job seekers with a fully immersive experience in an interactive digital environment. The platform also increases the speed of the recruitment and hiring process, broadens the global recruiting talent pool, and maximizes candidate engagement. On the flip side, excuse me, many companies continue to contend with a prolonged, challenging macroeconomic environment, and the tech sector in particular has been disproportionately affected. According to layoffs.fyi, a website created in 2020 to track tech layoffs globally, close to 160,000 workers from 1,040 companies lost their jobs in 2022, with more than half of them incurring in November and December, and nearly 98,000 individuals have been laid off to date in 2023. Although many external factors, including a rapid series of interest rate hikes by central banks, have contributed to these job losses, TI's thoughtful and agile approach to recruitment, intentionally adjusting the pace of our new hires in line with our cost optimization efforts and near-term demand dynamics, has helped us avoid overhiring and minimize these difficult situations. Our intentional and sustained investment in upskilling and cross-training our team members has also helped in this regard. In 2022 alone, our team members completed or enrolled in nearly 16,000 courses on Udemy, an online learning platform featuring a curated collection of business and technical courses. More than 2,600 team members graduated from the TELUS International University with 65 different degrees and certificates. Over 850 team members from our sites in Guatemala and El Salvador graduated from our Language Academy at TI, improving their proficiency in English and French. Through our partnership with both Amazon Web Services and Google Cloud Platform, we now have hundreds of our team members who hold cloud certification along with AWS Cloud Practitioners and Solutions Architects Associates. And lastly, our team members also completed hundreds of tech certifications such as open JavaScript, Node.js application developer, test automating engineering, and professional cloud architect certification. Not only has our approach enabled us to transition team members between client accounts, we've also been able to address company-wide skills gaps and drive high engagement rates. In fact, for the ninth consecutive year, TI has achieved a top quartile engagement score as a result of a company-wide global survey conducted by a third-party provider. Our focus on culture naturally leads to better team member retention and helps drive TI's resilient margin profile and is at the core of how we delight our clients. We've seen the benefits of these investments firsthand at TELUS International. For example, a global leader in tech real estate informed us that our commitment to culture and diversity was a major factor in their decision to initially do business with us and then to expand our partnership portfolio of support within the first year. Similar feedback was received from a global tech giant who felt we differentiated ourselves among their other partners for the thoughtful and direct ways we give where we live at events like our Telus Days of Giving, which are focused on strengthening social infrastructure and environmental stewardship across the globe. In this regard, I'm proud to share a sampling of events that were held in partnership with local charitable organizations that our team members volunteered for in Q4. 1,500 volunteers cleaned and refurbished the school in the Philippines in time to welcome back 9,000 students to attend in-person classes since the beginning of the pandemic. We helped build a 12th school in Guatemala, and 850 volunteers renovated the Child Development Center at an SOS children's village in El Salvador. Team members in India planted 3,500 trees in partnership with Safe Trees Environmental Trust. Our teams in North Charleston, Las Vegas, held toy drives for their local Toys for Tots programs over the holiday season. And in North Charleston, our team built a storage unit to house supplies for victims of domestic violence, while 200 volunteers in Las Vegas supported local food banks and soup kitchens over two weekends. We'll also be releasing our first standalone TELUS International Sustainability Report in early April, focusing on our company's environmental, social, governance priorities, commitments, policies, and progress. Last year, we included considerable ESG data in our 2021 annual report, which you can access from our website. TELUS International is a compelling ESG investing opportunity with our culture at the core of our commercial success, and we're excited to offer this new element of disclosure as we look to help investors see more clearly the value we're creating for all our stakeholders and striving to do our part in making our operations, partnerships, communities, and environment more sustainable. Our commitment to our team members' well-being contributed to Telus International being recognized for the sixth consecutive year on the Global Outsourcing 100, the annual listing of the world's best outsourcing service providers. Other contributing factors leading to this distinction included our impressive customer references, programs for innovation, CSR activities, and awards and certifications. Additional award highlights from 2022 included our company being named to the Forbes Best Employers for Diversity list Mogul's top 100 workplaces for diverse representation. And for the second year in a row, we won the best informational bot solution in AI breakthrough awards for the Intelligent Telus International's Assistance Agent Assist bot. On that note, our team has also been exploring the exciting possibilities of how we can leverage chat GPT and other generative AI tools to further progress our proprietary Intelligent Bot platform, both for our clients and internal applications. Through our Telus International iLabs, our R&D initiative launched in 2020 to design and build disruptive solutions for customer interactions, we have long been developing in-house chatbot solutions, leveraging natural language processing, speech recognition, and semantic understanding, among other tools. The possibilities presented by ChatGPT and similar alternatives are seemingly endless in how we can leverage generative AI to design and build better bots that are more conversational can better answer follow-up questions and admit mistakes and even reject inappropriate requests. Our team at WillowTree, a Telus International company, have also started to experiment with various forms of AI in their digital build process and believe it will help to standardize our coding and enable us to increase our speed to market in delivering digital solutions to our clients. Of course, Generative AI technology also represents an attractive business opportunity from a supply perspective to TI, as even the smartest AI needs to be taught and tested with best-in-class data labeling that we provide to our human-in-the-loop AI data solutions. We'll have more to share on this topic of Chad GPT and generative AI more broadly at our investor day next week and in the months ahead as we continue to integrate the WillowTree and TI ecosystems which will lead to many new use cases and enable us to create increasingly innovative solutions that leverage this exciting technology. With that, I'll now invite our Chief Financial Officer, Vanessa Canoe, to take you through a detailed review of our financial results, after which I'll return to answer your questions. Vanessa, over to you.
spk28: Thank you, Jeff, and good morning, everyone. Thank you all for joining us today. As usual, in my review of the financial results, I will refer to some items that are non-GAAP measures. For descriptions and the reconciliation of our GAAPs and non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning. Let me now expand upon the components of our financial performance. In the fourth quarter, we delivered revenue of $630 million, up 5% year-over-year on a reported basis, and 9% in constant currency, landing at approximately the midpoints of our latest guidance range. For the full year, we generated revenue of $2.468 billion, up 12% on a reported basis and 16% in constant currency. Resilient double-digit growth is especially notable in what was a challenging year for a number of well-known reasons, such as high inflation, rising interest rates, volatile markets, and recessionary fears that impact consumer confidence. Let's look at our revenues a little closer, starting with revenues by verticals. In the first quarter, our largest vertical tech and games grew 4% year-over-year on a reported basis, but on a constant currency basis, it grew by 10%. Our leading social media network clients represented just under a third of the tech and games vertical revenues in Q4. Revenues from this particular client were down in Q4 and flat on a full year basis, although when adjusting for currency movements, revenues from this client were up 11% in constant currency on a full year basis. For the full year, tech and games increased 15% on a reported basis and a strong 21% in constant currency, driven by continued growth with existing clients for services ranging from AI data solutions and trust and safety to customer experience management. Within our e-commerce and FinTech vertical, revenues in Q4 declined year-over-year by 12% on a reported basis and 9% in constant currency terms due to challenges experienced by certain FinTech clients. For the full year, e-commerce and FinTech revenue increased 10% on a reported basis and 15% in constant currency. Growth in our communications and media vertical remains solid, driven by higher volumes and the breadth of services we provide for our parent company, Telus Corporation, with revenues in the quarter increasing 6% year-over-year and growing 8% for the full year. Banking, financial services and insurance, or BFSI, continue to grow healthily, with revenue in the fourth quarter increasing 39% year-over-year and 71% for the full year, driven by a large global financial institution that was added to our client roster at the end of 2021. Lastly, our travel and hospitality vertical grew 5% year-over-year and 21% for the full year. Looking at our revenues by geography in Q4, Asia Pacific and Central America continue to deliver strong growth, each up 21%. Revenues in North America grew 18% year-over-year, while in Europe, we continue to see recessionary pressures coupled with a weaker Euro relative to the US dollar, with a revenue decline in Q4 of 15% year-over-year, while on a constant currency basis, a decline was 5%, primarily due to lower volumes with some of our tech and games and e-commerce clients. For the full year, Asia Pacific posted a strong 30% growth in revenue, while North America was up 24%, followed by Central America at 19%, and revenues in Europe declined for the year by 4% on a reported basis, but grew at approximately 8% in constant currency. Moving on to operating expenses, salaries and benefits in the fourth quarter were $349 million, up 5% year-over-year. For the full year, salaries and benefits increased 14% to $1.393 billion. Increases in both periods were due to higher team member counts to support business growth and higher average employee salaries and wages, partially offset by the lower average exchange rates across a variety of currencies relative to the U.S. dollar. In 2022, salaries and benefits as a percentage of revenue overall remained steady at 56%. Our goods and services purchase were $124 million in the fourth quarter, a decrease of 1% year over year, while for the full year, goods and services increased 8% to $468 million, with these increases coming from our business growth, including higher crowd contractor costs from the expansion of our AI business. Share-based compensation expense in the fourth quarter was $5 million, a decrease of $4 million year over year, while for the full year, it decreased by $15 million to $25 million. The decrease was primarily due to the lower average share price during the quarter and for the year overall compared to the prior year. Acquisition, integration, and other charges in the fourth quarter were $23 million, an increase of $18 million, while for the full year it increased by $17 million to $40 million, with the increase in the quarter and the year primarily due to the transaction costs incurred in Q4 in connection with the WillowTree acquisition. Our depreciation and amortization expense in Q4 was $68 million, slightly above 66 million in the same quarter last year. For the full year, depreciation and amortization expense was 258 million, in line with the 257 million for the prior year, with our investment in capital and intangible assets being offset by the lower average euro to US dollar exchange rates on assets held in our European subsidiaries, where the functional currency is the euro. Our interest expense in the fourth quarter was 12 million, compared with 8 million in the same quarter last year, driven by higher interest rates. For the full year, interest expense decreased 7% to $41 million, primarily due to lower average debt balances on our credit facility, partially offset by higher interest rates. Interest on our credit facility is based on SOPR, plus a credit spread that is tied to our leverage ratio. In the fourth quarter, we recorded an income tax recovery of $3 million, compared with an income tax expense of $21 million in the same quarter last year. under effective tax rates decreased from 36.8% to a negative 9.7%. The Q4 recovery is primarily due to a change in the foreign tax differential that is driven by a change in income mix in the quarter, in addition to recovery that is not expected to be recurring. For the full year, income tax expense increased $3 million to $67 million, while the effective tax rate decreased from 45.1% to 26.8%, primarily due to a change in the foreign tax differential and a decrease in non-deductible items, which in the prior year were results of our IPO. Moving on to profitability. Our adjusted EBITDA was $157 million in the fourth quarter, a year-over-year increase of 10% driven by business volume growth and operational efficiency improvements and other cost realizations. For the full year, adjusted EBITDA was $607 million, up 12%, driven by growth in revenue, partially offset by higher salaries and benefits and goods and services purchased to support overall growth in our business. We achieved an adjusted EBITDA margin for the full year of 24.6%, which was consistent with a year ago, a tremendous result given the challenging macroeconomic backdrop. Adjusted net income for the fourth quarter was $95 million, and on a per-year basis, this translated into an adjusted diluted earnings per share of $0.35 of 25% year over year. For the full year, adjusted net income increased 24% to $332 million, and adjusted diluted earnings per share for the year was $1.23, up 23%. Turning now to cash flows and our balance sheets, I wanted to point out some disclosure in the 20F related to the presentation of cash interest paid, which changed in the fourth quarter of 2022. It is now included in cash flows from financing activities, while previously it was in operating activities. This change is permitted by IAS 7 Statement of Cash Flows, and you can find further details in our audited financial statements filed earlier today. As a result of this change, all free cash flow amounts for comparative periods have been reclassified to conform with current period presentation. In the fourth quarter, we generated free cash flow of 60 million, up 62% year-over-year, driven by higher cash provided by operating activities for business growth and lower share-based compensation payments and lower capital expenditures. As a percentage of revenue, free cash flow was 9.5% of revenue in Q4, compared to 6.2% in the same quarter a year ago, an increase of 330 basis points. For the full year, free cash flow was $333 million, up 59%, driven by higher operating profits generated from our business, lower net outflows from working capital, and lower share-based compensation payments. And as a percentage of revenue, free cash flow was 13.5% in 2022, an increase of 390 basis points versus the prior year. Capital expenditures for the full year increased 3% to $104 million, with the increase primarily due to additional investments in our Asia-Pacific region, as well as in our AI data solutions business. And for the full year, capital expenditures as a percentage of revenues was 4.2%. We also continued to reduce our leverage, lowering our net debt to adjusted EBITDA leverage ratio, as defined per our credit agreement to 1.1x. as of December 31st, a further improvement from 1.3x as of September 30th, 2022. Our total available liquidity as of December 31st, 2022 was approximately $1.383 billion compared to $831 million a year ago. Liquidity increased in Q4 due to the timing of our upsize and extended credit facility. Our credit facility was extended for a full five years and now matures in January, 2028. The overall facility size was increased to $2 billion to accommodate the WillowTree acquisition with a consistent pricing grid and an improvement on certain terms, such as higher cash netting for leverage. Following the close of the WillowTree acquisition in early January, our net debt to adjusted EBITDA leverage ratio, as per our credit agreement, increased to 2.9x and remains within the target steady state range of 2 to 3x. We believe our robust cash flow profile will once again drive meaningful deleveraging a proven ability we've demonstrated following large strategic acquisitions in the past. Now turning to our outlook. We anticipate continued robust double-digit profitable growth in 2023, amplified by our WillowTree acquisition. Our outlook for revenue is in the range of 2.97 to 3.03 billion, which represents revenue growth of 20.3% to 22.8% on a reported basis, and includes the contributions from WillowTree in the range of 255 to 260 million. Excluding Willow Tree, we expect organic growth of 10 to 12% for the year. Within this outlook range, we are anticipating some near-term softness in revenues from our second-largest clients, offset by meaningful incremental opportunities with our largest clients, Telus, and other enterprise clients. We also assume an average exchange rate of 1 euro to 1.08 US dollars, reflecting current rates. For adjusted EBITDA, we expect a range of $705 to $725 million, or 16% to 19% year-over-year growth, with adjusted EBITDA margins of 23.7% to 23.9%. This includes WillowTree's adjusted EBITDA margins of approximately 20% of revenues. Our outlook calls for adjusted diluted earnings per share in the range of $1.20 to $1.25, which includes certain near-term dilutive impacts from the WillowTree transaction. Interest costs are naturally higher as a result of the debt financing, and as mentioned previously, our credit agreement pricing grid is based on SOFR plus the credit spread that is tied to our leverage ratio. For 2023, we expect an average interest rate of approximately 6%, which assumes a continued near-term increase in SOFR, partially offset by an improvement in the credit spread as our leverage ratio continues to decline throughout the year. Also factored into adjusted deleted earnings per share in 2023 is the equity issued in connection with the Willow Tree acquisition in January in the amount of 6.5 million subordinated voting shares. Our outlook assumes a weighted average deleted share counts of approximately 277 million in each of the quarters. And finally, for the full year 2023, we expect our effective tax rates to be in the range of 24 to 28 percent, reflecting the expected jurisdictional mix of earnings. While we do not provide quarterly guidance, I would like to call out certain seasonality factors that should be helpful in modeling seasonal cadence. We expect revenue seasonality of approximately 47% in the first half and 53% in the second half of 2023, and adjusted EBITDA seasonality of approximately 45% in the first half and 55% in the second half. Both skews reflecting our current expectation of the macroenvironment. in addition to normal revenue ramp timing and the accretive nature of such revenue ramps on EBITDA in the back half of the year, and continued realization of cost efficiency programs. Furthermore, our willow tree cross-sell opportunities will naturally contribute to revenue on EBITDA more meaningfully in the back half, given normal contracting cycles and project ramp periods. Finally, our effective tax rate is also subject to seasonality, being higher in the first half of the year and lower in the second half. In summary, while there continues to be broader near-term macroeconomic uncertainty, we feel confident that TELUS International is well-positioned to continue executing with resilience and growing the business profitably in 2023. With that, let's move over 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.
spk18: Thank you, Ms. Ganou. And if you have a question at this time, please press star 1-1 on your telephone keypad. If you'd like to withdraw your question, simply press star 1-1 again. Once again, we kindly ask that you limit yourselves to one question at a time. You may get back in the queue as time allows. One moment for our first question. And our first question comes from the line of Ramsey LSL from Barclays. Your question, please.
spk32: Hi, good morning. Thanks for taking my question. I wanted to ask about the e-commerce and fintech vertical. I mean, not surprisingly, we're seeing some incremental weakness there. I was just wondering if you could give us some color on the sort of drivers and dynamics, what types of projects are slipping, and also whether you're seeing some stabilization there or whether we should expect kind of headwinds to continue to intensify going forward in that vertical.
spk07: Hey, Ramsey. Nice to hear your voice. Looking forward to seeing you next week, hopefully. Absolutely.
spk08: I think we're cautiously optimistic that we're sort of stabilized in that portfolio. As I shared last time, our exposure there is not huge for the business. And obviously, as Vanessa just shared, a little bit of challenge in terms of continued growth relative to previous trajectories. But I think we've kind of, as I said, stabilized. The kind of work we're doing for them, as you might expect, is around trust and safety principally and support more broadly to help customers access their platforms, secure access to financial payments on both sides of the borrowing and lending equation. So I think what we're expecting for this year is fairly flat in terms of year-over-year growth, and then hopefully towards the end of 2023, we'll start to see more meaningful recovery there.
spk23: Perfect. Thank you. Thanks, Ramzi.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Tenshin Huang from JP Morgan. Your question, please.
spk34: Hi, thank you. Appreciate the chance here to ask a question. And good morning. Just I wanted to ask on the, Jeff, the TELUS, you sounded quite bullish on the potential for work there. I'm curious how much of that is just on the base business itself, Willowtree, CrossSell. I know there's a big opportunity there. And maybe can you just elaborate on the counter cyclical Nature, I heard you mention that a few times. Maybe you can just elaborate on that. That'd be great. Thanks.
spk08: Sure. Thanks, Tenjin. Looking forward to seeing you next week as well, hopefully. There are multiple drivers in the TELUS relationship that have been hugely helpful to TI over our history and I think get even more exciting in 2023 and beyond. and admittedly turbocharged, if you will, off the back of our willow tree capability. Now, over our tenure, we have steadily displaced legacy incumbent partners that TELUS has relied upon for technology enablement, digital transformation, where at the time, TI simply didn't have the requisite experience and expertise to support TELUS and its ambitions of transformation. As we, over the years, have continued to improve, extend, expand, increase our capability set, we've had to compete with those incumbents in order to displace them. And once demonstrating our capabilities, have indeed taken over that work and successfully so, hence the continued growth of our franchise, if you will, and enabling TELUS across a myriad of services. The Willowtree addition on the mobile access and design and build component of our ecosystem in particular. This is going to be an even bigger game changer for us as we can displace even more incumbent legacy spend and really help to accelerate TELUS's ongoing digital transformation journey. We've got nine really exciting shovel-ready initiatives that we're already digging into and starting to ramp up. These are all pretty exciting, and they are multi-million dollar, multi-month or year programs. And I think this was one of the primary drivers of our excitement on the WillowTree transaction at first instance because we recognized out of the gate the kinds of opportunities we had with sort of our anchor customer and partner at TELUS, TELUS Ag, TELUS Health, et cetera. And when I say counter-cyclical, what I mean is, we're all seeing, reading, and unfortunately experiencing some of the macroeconomic headwinds and challenges, uncertainty, reduced consumer volume, driving at a minimum indecision or delayed decision-making, if not diminished demand in the near term, from sort of the broader customer base, tech in particular, but not exclusively. And while that's going on, this trend, opportunity to serve TELUS in its ongoing transformation needs really is helping us to overcome some of those challenges inoculating us from those macro cycles right now.
spk34: Got it. Appreciate that.
spk18: See you all next week.
spk06: Look forward to it. Thanks, Ginger.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Keith Bachman from BMO. Your question, please.
spk11: Hi, good morning. And I feel a little left out. I don't think I'm going to see you next week, Keith. But I wanted to ask about Europe in particular, and Europe degraded from the September quarter, and the variances with the rest of the geos widened. And yet, it doesn't seem like the economic data would support it. And so really a two-part question. A, what's going on in Europe that made the degradation, so to speak, more significant? And then secondly, and I'd say argue more importantly, you gave the guidance for the year and just, you know, what's your confidence level that the rest of the GOs don't veer towards Europe as opposed to the inverse? In other words, does Europe represent a risk profile that we should be thinking about for the rest of Europe? And that's it for me. Thank you.
spk28: Thank you, Keith. It's Vanessa. I'll start and Jeff certainly top off as appropriate. Europe has been a challenged region, I think, even macro-wise, but you're right. I don't think there was a particularly singular event that happened in Europe macro-wise in Q4. What we are seeing, however, in our results for Europe is a lot of that decrease that we saw in Europe is actually from the tech and game sector. So I'm not sure if you picked it up from my commentary, but that actually was what affected Europe disproportionately. A lot of the work that we do for that second largest client of ours actually is done out of Europe. So as that client saw softness in Q4, that obviously drags down the overall European performance. So it is macro-wide, but it's also very specific to the clients that we're serving from that particular geography. To answer the second part of your question, so I think as we go into 2023, we've continued to assume you know, that we will continue to see softness in Europe, Keith. Our guidance actually has factored that, we've taken that into consideration. We don't think that, you know, our large social media clients is going to bounce up anytime soon. So we've built that softness into our guidance, as I mentioned in my remarks. However, we have tremendous other offsetting factors as well, like other enterprise clients that we continue to see growth from, like the opportunities with Telus Corporation that we've also talked about. But those are going to be in other geos. They're not going to be in Europe. So we do expect to see a bit of a shift in our geographic mix of revenues in 2023, and we factor that in.
spk11: And Vanessa, just to push on that for one second, if I could, within the 10 to 12 organic guidance that you provided, is Europe remains at these levels, or does Europe improve against the negative 15?
spk28: Yeah, so we don't guide by geo, so I don't think I want to get to that level of specificity, but we have assumed softness in Europe, so you can take that to mean we expect a decline. I wouldn't get into the quantum of the decline, but overall, again, our guidance is not by geo, but it's a weighted view of what we expect to happen in this geography. So while we expect Europe to decline, we've also factored in growth in other regions from, again, the opportunities that I just talked about. And let's remember as well, as we kind of think about the overall guidance, it is a robust guidance, but there are a number of factors that give me confidence, whether it's in the Americas or elsewhere. Number one, ample opportunities that we've talked about in supporting Telus Corporation. through their own digital transformation journey that Jeff just spoke to and the counter cyclical nature of that opportunity, which is offsetting some of the risks that we're seeing in the tech sector and the e-commerce sector that you just heard Jeff talk about. But two, a very robust funnel. You also just heard Jeff talk about the funnel being 2.7 billion. It's a very, very healthy and robust funnel. And that's across multiple geos. And of course, we again just talked about the willow tree cross-sell and upsell opportunities and the capabilities rather that that brings to us now. And so, yes, while we do have the softness in Europe, there's a lot of reason for us to be confident and optimistic in the overall guide in terms of, you know, where we expect to see growth prospectively.
spk11: Okay. Many thanks, Vanessa.
spk26: Thanks, Keith.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Maggie Noland from William Blair. Your question, please.
spk19: Hi, everyone. This is Kate Kronstein. I'm from Maggie Nolan. Congrats on the nice quarter. So I wanted to quickly talk about hiring levels. Last quarter, we saw a scale back in hiring following the higher levels in the first half. But it looks like you guys hired quite a bit this quarter, despite some demand headwinds. Were those new hires primarily to help the TELUS health integration that you mentioned? or what was the biggest driver behind the increase versus the third quarter?
spk08: Hey, Kate. Welcome to the call. Thank you. Yes, you're exactly right.
spk10: Meaningful hiring associated with the TELUS Health integration effort that we are in the middle of enabling for TELUS and TELUS Health as a result of the LifeWorks acquisition that they completed late last year.
spk19: Okay, cool. Great. Thank you for taking my question, and we look forward to seeing you all next week.
spk18: Me too.
spk06: Thanks.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Cassie Chan from Bank of America. Your question, please.
spk24: Hey, guys. I just wanted to switch gears and ask a little bit about margins. So, you know, you guys are expecting 2023 margins to be lower. Is that just purely due to willow tree or are there any other factors such as like pricing or labor costs or attrition utilization offsetting any of that and any way to quantify? Thank you.
spk28: Hey, Kathy. It's Vanessa. I'll take this question. You're absolutely right. The 2023 margin guide does incorporate the willow tree margins. So that is a little bit diluted. So that's the impact that you're seeing. But in terms of any other factors, there's always going to be client and portfolio mix impacts. As I mentioned earlier, as we were talking about revenue, we expect certain clients to flex down a little bit and other clients to flex up. So the weighted balance of that margin profile is reflected in our guides. But in terms of pricing specifically, just given that you asked, as I think you know and others know, in 2022, we were pretty successful in passing on price increases, along with other measures to help neutralize the impacts of inflation. In 2023, while we do assume that the labor markets will start to get a little freer, particularly towards the later part of the year, compared to the last two years, we're still assuming a level of inflation. But we've taken a more conservative view to our expectations of pricing increases relative to what we did in the past, just given the macro environment. So I think you're seeing a little bit of that caution reflected in our margin guidance as well.
spk22: Got it. Thank you. Thanks, Cassie.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Davia Goyle from Scotia. Your question, please.
spk25: Good morning, everyone. So I had a quick question here, Jeff and Vanessa, on the acquisition expense for the quarter. I do see that the number for the quarter is at $23 million. That seems pretty high for a due diligence. I understand military is a large enough acquisition. We were projecting a higher number in this coming quarter for the integration costs. I would appreciate if you could provide some guidance from a modeling standpoint and provide some color on the Q4 number there.
spk28: Yeah, Divya, and we can certainly spend more time on the one-on-one callback later on. So we haven't incurred any integration costs in Q4 because we didn't build in close until January 3rd. So what we were referencing was actually BL transaction costs. So M&A advisory, et cetera. So those costs hit us in Q4 2022, and those were significant. And that's what you heard in my commentary. But in terms of integration costs, you're absolutely right. Those will start in Q1, just given the timing of when the deal closed on January 3rd.
spk25: Thanks, Vanessa. Yeah, like I think we were projecting a slightly lower number. That's why it came as a bit of a surprise for us. from a due diligence cost standpoint. But thanks a lot for the color. I look forward to speaking to you later today. Thank you.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Stephanie Price from CIBC. Your question, please.
spk36: Hi. Good morning. Jeff, I was hoping you could talk a little bit about the early conversations you've had with WillowTree customers and just in terms of what TI products are resonating the most with them.
spk35: And then maybe related to the last question, Vanessa, how do you think about the timeline to get WillowTree onto the TI margin here?
spk08: Hey, Stephanie. We've had some very exciting conversations with WillowTree clients and candidly equally have got more exciting conversations with our clients about bringing WillowTree capabilities to bear. But on that former topic, it's a combination of our content moderation capabilities in particular that seem to be attracting the most attention to several of the WillowTree clients, as well as more broadly TI's, what we call our deliver or run capabilities. The WillowTree historically has intentionally stayed away from that part of the client experience ecosystem. So they get engaged on the design front, the build front principally, and then once they've completed their work, on many occasions their customers have invited them to continue to stay involved in terms of supporting the end user community, modernizing the back office support that's connected to those front end applications. They have intentionally said, that's not our core competency. We're staying away from that. And now, given TI's expertise at scale, we're now having a much more holistic end-to-end conversation with the Willowtree customer community saying, now we can actually bring the entire package to bear on their behalf. So we're pretty darned excited about how quickly we're going to realize the synergy thesis
spk10: for the cross-sell opportunity, our services to their customers, their services to ours. Vanessa, over to you for the second question from Stephanie.
spk28: Thanks, Stephanie. So your question was, you know, how quickly can we get the willow tree margins to the TI margins? We see willow tree being accretive in 2024, and we'll talk about that a little bit later at our investor next week, where we'll actually talk a lot more about willow tree as well. And we see it being accretive in 2024 for a number of reasons. You know, economies of scale as they grow, and they're not going to need to add on some of the incremental SG&A, for example, that they normally would have as a standalone entity, leveraging the broader TI, leveraging our global footprint in terms of, you know, cost management, etc. In addition to, obviously, as the revenue synergies continue to build up, that also comes with a margin uplift as well. So, We are quite bullish, and we do think that, you know, we'll be accretive here in 2024. Thanks so much. Thank you.
spk18: Thank you. One moment for our next question. And our next question comes from the line of Dan Perlin from RBC. Your question, please.
spk14: Thanks. You know, Jeff, I don't want to steal a lot from next week's event, but I did have a question just around AI and chat GPT in particular. As to why you think, one, it's an opportunity maybe versus a threat for content moderation and your digital CX business, we are obviously getting a lot more of these questions from investors. So I would just like to get your view on that. And then just, Vanessa, did you say interest expense? I think you said it was 6%. Are you level setting that at a little over $100 million if we think about it from an absolute dollar amount for 23? Thank you.
spk08: Vanessa, do you want to go first? And then I'll come back to the chat GPT.
spk28: sure um i i said about six percent interest rate um that'll be a little north of 100 million for 2023 about 110 ish in that ballpark yep okay thank you that's perfect go ahead so dan i think that gpt is getting all kinds of media attention and understandably so given um really the exciting uh
spk08: natural language capability, which I think admittedly is probably the more revolutionary, for lack of a better word, attribute of this capability. I mean, chatbots and that capability more broadly have been around for years and years now. What I think really has ChatGPT standing out and why I think they had a couple hundred million downloads just in the first two months of its launch is really what it's able to do in terms of sounding so human-like, so natural, and so much so that I think even millennials might be persuaded to actually ask for help now. Where we see the opportunity, though, is, as I said in my prepared remarks, the nature of AI is inherently retrospective in that you take a data set, you annotate it, tag it, label it, You feed that information into your machine learning algorithm, and then you invite AI to make predictions, if you will, to offer outcomes predicated on that historical data set. But by definition, if the data set is static, then the answers you're going to get will not necessarily be helpful. If for example, there was no historical reference. So let me give you a specific example. If you asked chat GPT right now, how to swap your SIM card out of your iPhone. It would, in a very effortless, accessible way, talk to you like you're talking to an expert at your phone provider and invite you to take a paperclip and stick it into the little hole inside of your phone and a little tray would pop out and you would manually remove the SIM card and then insert it in the same way into your new phone. The problem with all of that, though, is that iPhone 14s, which came out after 2021, do not have SIM card trays. And so you would actually be entirely misled, despite how believable, how compelling, how accessible that instruction was, because the data set that ChatGBT ran its AI on is stale dated and simply didn't know that iPhones would change their construct. So where we see the opportunity, as we have done with our clients for many years now, is it's our annotation, labeling, tagging capability at scale that can be used by OpenAI and other generative AI partners like Google, like Meta and others to ensure that those data sets continue to be refreshed on a reoccurring basis so that they're providing accurate information. And then bidirectionally, there's no question that incorporating that more comprehensive approach accessible natural language processing capability into our own chatbot community prospectively is going to create even more opportunity for us to win more business and the disintermediation of traditional live agent support that will be a consequent in part of this evolution i think this is just a natural evolution of that dynamic that's been going on for several years now as automation and process improvement has naturally pushed the humans in the loop further up the food chain because simple predictable repeatable interactions can and frankly should be automated because it's a better user experience never mind more cost effective so we don't see this as a threat at all we see this as an opportunity to be partnering bi-directionally with them and others similar to them and we will indeed talk a lot about it Investor Day next week. Excellent. Look forward to seeing you. Me too.
spk18: Thank you. And our next question comes from the line of Richard from National.
spk17: Your question, please.
spk16: I'm wondering if you could sort of talk about the current attrition levels of the employee base. Like, how does it compare to the prior year and how does it compare the industry in context with some of the comments you made earlier about the competitive landscape?
spk08: Hey, Richard. Thanks for the question. It's hard to compare like for like with the competitive landscape. I think, unfortunately, attrition has been one of those metrics that has so many variables in it and folks take I guess a differentiated or self-serving view sometimes, whether it includes or excludes voluntary, involuntary, total, frontline, including training, not including training, so on and so forth. So what we tend to do is focus really inside TI and across each of those elements compared to prior quarters, prior years, et cetera. And where Q4 for us landed was continued improvement from prior quarters Still not quite yet back to pre-pandemic levels, but thank goodness, getting closer still. Always, in my view, a critical element of our success is managing attrition effectively. A combination of the ever more complex work that we're invited to undertake on behalf of our clients, requiring more competent, capable, experienced, tenured, talented people to do the work, and getting them, keeping them is just so critically important to deliver great service on a sustainable basis to our customers. But equally importantly is the cost to replace them if they attrit, re-recruit, retrain, wait for proficiency. I think we've been fortunate in that regard and intentional and hence why we continue to enjoy the margin profile that we do relative to others because I think we do a better job than most, but always room to do better still.
spk15: Okay, great. Thank you for the insight. Appreciate it. Pleasure.
spk18: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Jeff Puritt for any further remarks.
spk08: Thanks, Jonathan, and thank you all for your engagement and questions as always. Despite the concurrence of a recessionary environment, rising inflation, and geopolitical conflicts, I believe that at Telus International, we've just barely scratched the surface of the opportunities ahead of us, thanks to our resilient business model and focus on profitable growth, innovation, and our unique caring culture. We believe that we're at the beginning of a tech super cycle that will impact all industries, primarily driven by huge leaps forward in next-gen tech, like the generative AI revolution, augmented and virtual reality applications, a metaverse that bridges the digital and physical worlds ti is well positioned to build deep relationships with existing and new clients as they seek to streamline optimize and modernize their processes to enable scalable digital solutions furthermore today's clients are looking for innovation and proactivity from third-party providers they expect exceptional partners for human-centered design thinking customer journey mapping and digital roadmap prioritization, and full-cycle product development, including rapid prototyping. Through organic growth and strategic acquisitions, TI has deeply embedded each of these capabilities into our highly synergistic service offerings, and we continue to attract and retain the best talent to design, build, and deliver our digital solutions, bolstered by our commitment to diversity, equity, and inclusion, including through our impact sourcing programs. Sustainability and social responsibility are increasingly as important to our clients as they are for us. In 2022, our team volunteered more than 75,000 hours, participating in 13 TELUS Days of Giving events and various other community activities focused on strengthening social infrastructure and environmental stewardship across the globe. Since 2007, TELUS International has meaningfully impacted the lives of more than 1.2 million people around the world, through volunteer activities and charitable giving, and our team is excited to do even more. I'd like to thank each and every one of our team members for giving back so meaningfully and becoming part of our company's strong legacy that will positively impact future generations. I'll end my closing remarks today by noting that TI is hosting our first Investor Day on February 16th next Thursday at the New York Stock Exchange. We're particularly looking forward to ringing the closing bell something we weren't able to do in person at the time of our IPO back in 2021 due to the pandemic. Vanessa and I hope to see many of you there in person where you'll also have the opportunity to meet members of the TI executive team and hear directly from them about the dynamic product portfolios they're running, how our technology and innovation drives our differentiated go-to-market approach, and how our ESG focus sets us apart in the market. I won't go through the whole agenda right now, but suffice to say, I can't wait for this exciting opportunity to discuss more about my favorite subject, TELUS International. We'll be webcasting the event live, and the webcast link is available on our investor relations site. Please feel free to reach out to our IR team if you've got any questions, and otherwise, I hope to see you all again on our next quarterly call in May. Thank you all again. Please keep yourselves and your families safe, and goodbye.
spk18: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
Disclaimer