TELUS International (Cda) Inc. Subordinate Voting Shares

Good morning, ladies and gentlemen. Welcome to the TELUS International First Quarter 2023 Investor Call. My name is Lateef, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star 1-1 on your telephone keypad. If you would like to withdraw your question, press star 1-1 again. I would now like to introduce Jason Meyer, Head of Investor Relations and Treasurer at TELUS International. Mr. Meyer, you may begin the call.

Thank you, Lateef. Good morning, everyone. Thank you for joining us today for TELUS International's Q1 2023 Investor Call. Hosting our call today are Jeff Pirrett, President and Chief Executive Officer, and Vanessa Canu, our Chief Financial Officer. As usual, we'll begin with some prepared remarks where Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa, who will provide some key financial highlights. We'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. Jack 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 US dollars, unless specified otherwise, and relate only to TELUS international results and measures. With that, I'll now pass the call over to our President and CEO, Jeff Pirrett.

Thank you, Jason. Good morning, everyone. To begin, I'd like to thank those of you who were able to join us for our inaugural Investor Day in February at the New York Stock Exchange. It was wonderful to finally connect with so many of you in person for the first time. I truly appreciated the opportunity to provide a more in-depth view of TI's vision, strategy, and operations than I'm typically able to on these quarterly calls. For those interested in accessing the Investor Day webcast recording and presentation materials, they continue to be available on our investor relations site. Let's turn now to our first quarter results. Despite persistent meaningful macroeconomic challenges, Talos International delivered solid performance in the first quarter of 2023 with revenue growth of 15% on a consolidated reported basis and 16% in constant currency. We also continued to grow profitably with our adjusted EBITDA increasing a healthy 9% year over year. These solid results are noteworthy given the volatility we continue to see in the broader market exacerbated by factors including interest rate uncertainty, banking sector concerns, and inflation. which in turn impacts broader economic growth, consumer confidence, and customer demand dynamics. Despite these challenges, the TI team executed very well in Q1, focusing our collective near-term efforts on operating as efficiently as possible while remaining agile as it relates to client demand. And while we anticipate that labor markets will likely start to ease in the latter part of 2023, we expect supply-side conditions will likely remain tight to the balance of Q2. Worthy of note this past quarter, TI has further diversified our delivery footprint into Africa, with an initial focus on meeting immediate demand from existing clients that are looking to grow their support in the region. We're proceeding carefully and thoughtfully, starting relatively small in South Africa and Morocco, and in financial terms, the investment to date is not material. Our longer-term goal is to ramp our presence more meaningfully in the years ahead, and I'm confident that our 18-year track record of successful global expansion will serve us well as we execute upon our plan. Another exciting milestone was our first quarter with Willowtree as part of our TI family. Integration efforts are progressing well, and we continue to engage on in-flight cross-sell opportunities with new and existing clients. This includes opportunities with our parent, TELUS Corporation, where, for example, we ramp new business in Q1, bringing Willowtree's premium digital design and build capabilities to help with TELUS's smart home design and engineering initiatives. We've also unlocked cost synergies related to IT and procurement savings to improve scale and leveraging of TI's purchasing power. Integration efforts related to sales incentive plan alignment are helping our joint go-to-market motion along with sales training and learning sessions. We've aligned our financial close process and are working through our ERP integration. We've also successfully launched our employee share purchase plan for WillowTree's U.S. and Canadian team members, providing an additional opportunity for the WillowTree team to participate in our collective success. Our sales funnel remains strong and well diversified across key verticals and service offerings. Our global sales team continues to replenish this pool of opportunities, working diligently with clients, tenured and new alike. A selection of our new logo wins this past quarter include a U.S. insurance provider focused on solutions for homeowners and renters, a rapidly growing e-commerce platform based in the United States who specifically approached TELUS International for a trusted and experienced offshore outsourcing partner, an exciting new sports streaming platform in Germany, a pioneer in the American solar power industry and global top-selling solar generator brand, and a leading software platform for digital media measurements and analytics based in the United States. Similarly, we continue to earn incremental and varied business with existing clients including the world's largest e-commerce company, an online game platform and game creation system, a cloud-based web development service provider, and a leading global logistics company and U.S.-based telecommunications company. We also continue to capture more business with our parents and anchor clients, TELUS Corporation, particularly in supporting TELUS Health, a leading global health and well-being company. This division of Pellis provides employee and family preventative health care and wellness solutions, relying upon innovative digital technologies, including AI and client service excellence, to improve health outcomes. You'll note in our disclosure this quarter that we now separate revenues generated from health care as a standalone vertical. This is now our fifth largest industry vertical accounting for 6% of our total revenue in Q1 and with year-over-year growth of 233%, specifically driven by TELUS's acquisition of LifeWorks. TI is well positioned as a digital enabler and innovator in the healthcare vertical where our expertise in CX digital transformation and tools powered by AI will play an ever more important role in how we track, analyze, and act on health data, focusing on prevention and wellness, not just on treatment and remediation in this regard i believe technology has a massive opportunity to transform our lives for the better and along this same thesis there's certainly an abundance of current discussion and debate about generative ai its applications and its impacts the discourse ranges from labeling it a danger to the public to celebrating gen ai as an advancement for humanity on par with the adoption of the internet but what it's worth My own views here are similar to those recently expressed by Sundar Pichai on 60 Minutes, somewhere in the optimistic middle. I believe two things are certain amidst all the noise. First, AI-driven algorithms must be trained and tested with trusted high-quality data, meaning diverse and near bias-free data sets. Second, humans must remain in the loop to address the ongoing governance and policy aspects of further developments. TI is well positioned to benefit from the continued proliferation of AI through our meaningful and ongoing investments in this space and to support the emerging ecosystem, including multiple key clients with the development of core generative AI data sets, an area experiencing extraordinary growth. TI's comprehensive solutions support our clients in the development and continuous optimization of their large language models, or LLMs, which fuel generative AI. We're able to assemble both industry and company-specific datasets to augment our clients' foundational models. Tapping into our AI community, we're well positioned to lead dataset collection, creation, and selection, engaging computational linguists, data scrapers, and data decontaminators. Our work in this area also includes labeling data for sentiment analysis, named entity recognition, parts of speech tagging, personally identifiable information or PII scrubbing, and identification of deepfake or otherwise not safe for work content. For our clients who have already developed an AI model, we lead the work on the validation and evaluation of AI output, as well as retraining data sets in multiple languages and for experimental task types. As part of our general AI software engineering services, we're advising clients contemplating the use of GenAI-based technology, and we're able to design, build, and deliver bespoke software engineering and data science services specifically geared for GenAI applications. We've also helped clients implement process automation for GenAI workflows. Regarding the establishment of policy guardrails for the successful and safer development of GenAI, we're helping to design content moderation rules and guidelines for our clients to limit the field of play for GenAI implementation. Continuing on the theme of AI, I'd like to share a recent case study regarding an end-to-end data collection, selection, and annotation project for an advanced driver assistance system, or ADAS, for an Asian multinational electronics company. The current project involves collecting data from 30 countries covering approximately 25,000 kilometers using multiple vehicles provided by our clients equipped with the requisite technology for data capture called VS-30. Two drivers are onboard each car with one driver operating the vehicle for data collection, while the other acts as a co-pilot to tag data. Following the validation and selection process, we used about 30% of the data collected and annotated for several use cases covering 2.3 million frames, which is a standard measuring unit of data in computer vision. To give you a sense of the revenue scale here, a project like this is billed up to approximately $1 million. In addition to finishing up this project, we're also in talks with this client for an extension of further mileage and across even more countries, leading to a potential tripling of the project contract and revenue value. Speaking more broadly, our AI team at CI has been working diligently to expand our end-to-end AI services from data collection and management to selection and annotation. We're equipped to address all of our clients' needs in the development of an advanced driver assistance system. Our agnostic approach to managing clients' data ensures that we're able to work with all data storage mechanisms, like Azure Data Disk, external hard drives, Amazon Web Services, Snow devices, and more, benefiting from the deep enterprise-grade relationship we enjoy with multiple cloud providers. In data selection, We use automated and manual data selection of edge case events and detailed analytics of class and attribute distribution from each data set. And when it comes to annotation, we're able to provide full sensor fusion annotation, automated labeling, and quality control. The next use case I'll highlight involves our trust and safety services, which services are now nearly ubiquitous across all industry verticals. For example, in travel and hospitality, Safe travels is a common expression that, while often used lightheartedly, makes reference to a very real and critical issue, personal safety. One of our clients, a global tech company, turned to Telus International to reduce incidents of fraud on their travel accommodation platform. Our client is committed to the trust and safety of its customers when on their platform and during their travel. And that begins with the fundamental steps to verify the identities of their users and preventing fraud from occurring during their on-platform payment process. TELUS International solution addresses both aspects. For identity verification, when new users join our client platform, they're required to submit government identification and an additional photo. TELUS International provides the client with a dedicated team responsible for overseeing this important checkpoint. As a testament to our strong partnership, this was the first time the client ever outsourced this aspect of their operations to a third party vendor. We earned their trust during the initial engagement with this client several years back specifically on providing background checks and other crucial verification processes from our core Ireland-based center, which subsequently became the center of excellence for our clients' broad prevention efforts. During nine years of our partnership with this client, DI has scaled this team of originally just six to now hundreds of dedicated specialists supporting this particular program while sustaining operational excellence and world-class tenures. All payments on our client's platform take place online, and while this makes payments traceable, it also creates opportunities for fraud. Six months after we began supporting our client's anti-fraud operation, our partnership expanded to deploy team members focused on online scam and payment fraud prevention. In particular, our client relies upon TI to prevent and detect chargeback fraud and unauthorized transactions, the two most common forms of payment fraud. Over the course of our partnership, we've consistently found new ways to strengthen our clients fraud prevention framework and our client relies on TELUS International to address any issues related to trust and safety on their platform. The next example comes from our TI Digital Solutions team and illustrates how TELUS International's managed cloud services help the client, a large telecommunications company, with the migration of virtual machines from their on-premises data center to Google Cloud, leveraging Google Cloud's Migrate for Compute Engine, or M4CE, to unlock new levels of cloud transformation. TELUS International's managed cloud services help the client understand Google's ecosystem, modernize the environment, and reduce technical debt by utilizing native Google Cloud services such as Cloud SQL, cloud logging, and load balancers to reduce managed operations costs and move to a no-op model. This means complete automation such that the IT environment can become so automated and abstracted from the underlying infrastructure that there's no need for a dedicated team to manage software in-house. This project requires thoughtful, methodical, timely, and non-disruptive migration of the client's existing virtual machines or VMs and their associated critical workloads. The Telus International team led the planning of the end-to-end execution strategy, a first at the client's site. In the end, our team migrated 100 VMs or 14 applications within six months with no downtime, while ensuring the client's infrastructure has dynamic capacity management to meet their demands. This enabled the deployment of new services in hours versus days. Notably, our initial success for this client led to us winning a subsequent contract to migrate an even larger, more complex scope of dynamic workflows. One final example I'll share with you today provides insight into how our Intelligent TELUS International Assistance Platform, or ITIA, delivers increased efficiency and engagement for our client CX personnel. Our client is a household name in the innovative world of consumer robotics, seeking to scale up to meet increasing consumer demand. To do so, Our client required increased ongoing training and a solution to make it easy for team members to find answers to customer questions. Our client already had an established and informative knowledge base, but it wasn't easy for frontline team members to find the content and context they were looking for while actively supporting customers. They needed relevant data retrieval to be quicker and to fit within their workflow. Our team of automation experts suggested the implementation of our ICIA platform to empower their CX operation with agent assist chatbots. Having trained the technology with the information housed within the client's existing knowledge base, the bots were then capable of effortlessly surfacing the correct information, as well as providing tips, scripts, and reminders. The intuitive automation platform helps to accelerate workflows and improve resolution rates. Importantly, our solution brought the necessary visibility to bot performance, helping this plane to evaluate analytics and generate operational insights. The bots also added value outside of the context of support interaction by reducing the learning curve for new hires. At any time, team members can look to the bots for help in navigating company and product information, offering every opportunity to solidify their knowledge in preparation for their next customer interaction. Our solution eliminates team member involvement in low-value processes and provides business intelligence data and insights into frequently asked questions that can be added to the knowledge base. With our solution, the clients saw an improvement in average handle time by 28%, while their target was only 15%, and team member satisfaction was higher by 37%, above the target of 35%, resulting in lengthened tenure for in-house team members and reduced ramp training time for the client's growing CX operation. We continue to work together on innovation projects for continuous improvement and to drive profitability enhancements. All of the case studies I just shared today, as varied as they are, at their core, showcase the same foundational elements, our end-to-end capabilities brought to life by our team members leveraging cutting edge technology. And speaking of our team members, at the end of the first quarter, TI was an engaged global team of 76,752 full-time employees, up 13% year over year, including our new WillowTree team members. Moreover, Our team features prominently in TI's 2022 sustainability report, which we released last month. This was our first standalone sustainability report available now on our website and shares our environmental, social and governance priorities and forward looking commitments. In the report, we discuss our dedication to our giving program, diversity, equity, inclusion and cybersecurity, as well as our commitment to net carbon neutral operations by 2030. On this point, We're working in collaboration with our parent company, Telus Corporation, to meet science-based targets by 2030, including to reduce absolute Scope 1 and 2 greenhouse gas emissions by 46% from a 2019 base year. We also share our environmental stewardship results, including year-over-year comparisons of Scope 1 and 2 greenhouse gas emissions and water and energy consumption going back to 2018. Greenhouse gas emissions per team member will reduce 41% when compared to 2019. In 2022, our team members volunteered more than 75,000 hours to important community projects, like planting more than 34,000 trees, installing 250 ecological stoves and an equal number of water filtration systems, as well as supporting 1.4 million bees whose role as pollinators are essential for our crops. And on March 18th, our 11th tele-stage of giving was held in Quetzaltenango, Guatemala, where more than 400 TELUS International volunteers refurbished the Escuela Oficial Rural Mixa Manuel C. Figueroa school facilities and built two classrooms. This past quarter, we also hosted a series of corporate social responsibility events throughout our site, including onsite blood drives in India, the Philippines, and Romania. team members also volunteered to help those impacted by earthquakes in Turkey and Syria, tutor children, taught English, and hosted spring cleanups. In El Salvador, our team members worked with young people from Superate and Oportunidades programs to improve their English skills so they have better opportunities either working with us if they qualify, starting their university courses, or working elsewhere. We're also making good progress on our commitment to impact sourcing with our efforts dedicated to hiring people who may need special accommodations or assistance. For example, through our unique impact sourcing programs in India, we launched a new program for our Telus International AI data solutions team in the first quarter of this year. In a pilot project that began in late March, we're working with young women from rural and economically depressed areas to give them the requisite onsite training and psychological support to be able to work independently and support their families. I'm also very pleased to report that for the fifth consecutive year, TI was named one of the Achiever's 50 Most Engaged Workplaces, an award that recognizes top employers who display leadership and innovation in employee engagement. And for the seventh consecutive year, TI was recognized by IAOP's Global Outsourcing 100, a ranking of the best outsourcing providers across categories of size and growth, customer references, awards and certifications, programs for innovation and corporate social responsibility. And with that, I'll now invite our CFO, Vanessa Cano, to share a review of our financial results, and I'll return to answer your questions as usual. Vanessa, over to you.

Thank you, Jeff. 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 GAAP to non-GAAP measures, please see our earnings release and regulatory filing from earlier this morning. In the first quarter, we delivered revenues of $686 million, up 15% year-over-year on a reported basis, and 16% in constant currency. Our organic revenue growth was 5% or 7% in constant currency, excluding the contributions from WillowTree. I will echo Jeff in saying these are solid results given the challenging macroeconomic environment. Looking at our revenues by vertical, as we said on our February call and during our investor day when we discussed our 2023 guidance, we expected softness in revenues from our second largest client, a leading social media network, as well as general softness in the tech and games and e-commerce and fintech verticals. However, we did also note at that time that this would be offset by strong growth in other clients, including Telus Corporation, and across other verticals. This was evident this quarter, as revenue from that leading social media client was down 18% year-over-year, or 14% in constant currencies, tied to a reduction in service volumes primarily delivered out of our European operations. This contributed to the tech and games vertical overall growing by 3% year over year in Q1, as the decline in that particular social media client was offset by growth in other technology clients. In e-commerce and FinTech, where we also noted that we would see softness, revenue in Q1 was steady year over year. Our e-commerce revenues were strong up year over year, while FinTech revenues declined largely as expected, given what is happening at a broader macro level in that space. Offsetting the softness in these two verticals, we saw strength in all other verticals as expected. Communications and media was solid, with revenues increasing 10% year over year, with higher revenue from Telus Corporation, our parent company, and anchor clients, and growth with other telecommunication clients, including those arising from our acquisition of WillowTree. Banking, financial services, and insurance, or BFSI, continues to show strength, growing 33% year-over-year, driven by increases with major North American financial institutions and the addition of the Willow Tree roster of clients in this vertical. Revenue in our healthcare vertical grew 233%, bringing this vertical into our top five, as Jeff mentioned earlier. Healthcare now accounts for 6% of our total revenue in Q1. Again, this growth was enabled in large part by additional services provided to the healthcare business unit of Telus Corporation. And then finally, revenue from all other verticals, which includes travel and hospitality, retail, and consumer packaged goods, amongst others, saw an increase of 48% year over year. Across all of our verticals, the reported revenue growth rates were negatively impacted by unfavorable Euro to US dollar currency movements year over year. Looking further at revenue by geography, the geographic performance was impacted by the same forces as the vertical performance just described. Our European region delivers a meaningful volume of services to our second largest client and other FinTech clients. The aforementioned softness in those vertical groups resulted in our European revenues being down 8% year-over-year or 6% in constant currency. Revenues in North America, however, grew by 50% year-over-year, driven by contributions from WillowTree and growth in the healthcare vertical attributed to our support of TELUS Health. We also achieved strong growth in Central America, with revenues increasing 26% year-over-year, with broad-based growth across industry verticals, including tech and games and communications and media. While in Asia Pacific, revenue grew a solid 10% year-over-year, also with gains across all verticals. Moving on to operating expenses, salaries and benefits expense in the first quarter was $428 million, up 25% year-over-year. The increase was due to higher team member counts to support our business growth, including those arising from our acquisition of Willow Street, combined with investments in our team members through increased salaries and wages compared to the prior year. At the same time, we saw higher cost of service delivery in Europe, due in part to the lead time to implement ramp downs and other cost realization activities resulting from the aforementioned volume reductions in Europe. Salaries and benefits as a percentage of revenue increased to 62% in Q1 2023 compared to 57% in the prior year. Our goods and services purchased were 103 million in the quarter, a decrease of 10% year over year. with lower dependency on external contractors in favor of continued development and investment in internal capabilities, the reduction of certain sales taxes based on reset successful collection experience, amongst other factors, which were partially offset by additional costs from the addition of willow trees. Share-based compensation expense in the first quarter was 14 million, an increase of 7 million year-over-year, primarily attributed to equity-accounted awards, which, unlike liability-accounted awards, are not subject to mark-to-market adjustment based on changes in the share price. During the same quarter of the prior year, share-based compensation benefited from a lower average share price, which resulted in a downward mark-to-market adjustment on liability accounts at awards. Acquisition, integration, and other charges in the first quarter were 16 million, an increase of 12 million, primarily due to a reorganization program initiated in the current quarter related to our European operations, as well as transaction and integration costs associated with our acquisition of WillowTree. Depreciation and amortization expense was $79 million, an increase of $14 million, primarily due to capital and intangible assets acquired as part of WillowTree, as well as our own organic investments over the prior 12 months, which were partially 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. Interest expense in the first quarter was $33 million, an increase of $24 million, which was primarily due to the upsizing and related borrowings on our credit facility to fund our acquisition of WillowTree, higher lease liability balances as we grew our team member base year over year and expanded our delivery footprint, and higher average interest rates compared to the prior year. In the first quarter, we also recorded an income tax expense, an income tax recovery of $2 million compared with an income tax expense of $23 million in the same quarter last year, and our effective tax rate decreased from 40.4% in the prior year to a negative 16.7%, primarily due to a change in the foreign tax differential, including a favorable income tax settlement resulting from the conclusion of a tax authority audit. These items were partially offset by an increase in withholding and other taxes in the quarter. Our adjusted EBITDA was $155 million in the quarter, a year-over-year increase of 9%. Adjusted dividend margin in the quarter was 22.6% compared with 23.7% in the same quarter last year due largely to changes in our revenue mix across industry verticals and geographic locations and clients, higher salaries and benefit costs compared with the prior year, and higher service delivery costs in Europe. Adjusted net income for the quarter was 76 million, up 10% year-over-year. On a per-year basis, this translated into adjusted diluted earnings per share for the quarter of 28 cents up 8% year over year. Now turning to the balance sheet and cash flow. Our balance sheet remains strong with cash of 142 million and available capacity under a credit agreement, a credit facility rather, of 325 million. We generated free cash flow of 65 million compared to 104 million in the prior year, The differential due primarily to higher net outflows from working capital arising from our acquisition of WillowTree, including payments for transaction costs incurred to acquire the company. Excluding these transaction costs, free cash flow would have been 101 million, a decrease of 3% compared to the same quarter last year. Our capital expenditures in the quarter were 15 million or 2% as a percentage of revenue, a lower than usual level and largely due to project timing. However, we expect to increase capital expenditures in future quarters with the overall full year capital intensity similar to historical levels. Following the close of regulatory acquisition this January, our leverage as defined as per our credit agreements stood at 2.9X. During the first quarter, we decreased it to 2.8X as of March 31st with debt repayments coming from cash generated from operations. We continue to expect that our strong cash flow profile will enable us to repay debt throughout the year as we progress towards the lower end of our Q to 3X leverage ratio target. Now turning to our outlook. We are reiterating our outlook for continued robust double-digit profitable growth in 2023. Our revenue outlook remains 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 contribution from WillowTree in the range of 255 to 260 million. Excluding willow tree, we expect organic growth of 10% to 12% for the year. For adjusted EBITDA, we continue to expect a range of $705 to $725 million, or 16% to 19% growth year over year, with adjusted EBITDA margins of 23.7% to 23.9%. This includes willow trees adjusted EBITDA margins of approximately 20% of revenue. We expect adjusted diluted earnings per share in the range of $1.20 to $1.25, which assumes a weighted average diluted share count of approximately $277 million in each of the quarters. And finally, for the full year, we expressed our effective tax rate to remain in the range of 24% to 28%, reflecting the recovery in Q1, but also our expectations of the jurisdictional mix of our earnings. Overall, we remain cautiously optimistic as we exit the first quarter, and we feel confident that TI remains well-positioned to continue executing with resilience, and growing the business profitably in 2023. With that, let's move on to questions. I kindly ask you to please keep it to one question at a time so that everyone can participate. Lateef, over to you.

Thank you, Ms. Kanu. As a reminder, to ask a question, you will need to press star one one on your telephone. Once again, we kindly ask you to limit your questions to one at a time and get back in the queue if you would like to ask another question. We will pause for a moment to compile the queue. Our first question comes from the line of Keith Spockman of BMO. Your question, please, Keith.

Yes, many thanks. I was hoping you could talk a little bit more about Europe if you could. I know you talked about the volumes were under duress. how do you see this unfolding in terms of why does it get better and when do you think the cadence of it is getting better? And if I could just wrap a broader AI question into that is, you know, you talked about the ITIA solution, but I'm just wondering a little bit, I hear the description of how it's enabling bots. Is it just, you know, how do you think generative AI would lend itself either to help or hurting, because on the surface, it just sounds like that same functionality could be driven by a generative AI solution. But maybe just if I could couple those two together, but thank you very much.

So I think they're different, but indeed might be overlapping implications of the two questions, Keith. Thank you. Frankly, we could spend hours talking about generative AI, and indeed I'm happy to. It is an exciting field of opportunity and no doubt there are challenges associated with it as well. On the first part of your question, Europe continues to be a challenge for us, as Vanessa articulated in particular, and we are cautiously optimistic that with some stabilization in terms of wage inflation, with continued optimization of our customer engagement there, we're looking forward to returning to profitable growth in the region. And I think we're not alone continuing to aspire to some stabilization, particularly given the cascading effects from the ongoing invasion of the Ukraine. I guess the jury's still out, frankly, on how soon that happens, but as I said, we're looking forward to the back half of the year with a better performance out of that part of our business. In terms of the generative AI, there is obvious puts and takes here, and there has already been non-trivial disintermediation or displacement of, let's call them left complex, lower value human-assisted interactions through traditional automation and bot displacement, where generative AI is a game changer already is really just the accelerated pace of displacement potentially. But this is, as I said at our Investor Day, for example, and frankly, even on previous earnings call, this is not net new for us, although obviously the chat GPT announcements in November and March were game changers in terms of, I think, the broader public awareness and understanding of just how progressed that capability has become. For us, we think it's a net positive. We were already leveraging automation, RPA, and bots. to support simple, predictable, repeatable interactions with our clients and inside TI as we look to drive more efficient process activity and combat, mitigate inexorable wage and expense inflation. There are nonetheless, though, I have a dozen, almost 11 concerns, and some are macro, some are micro. Some get more attention already around generative AI Surely you've heard the expression hallucination, and I think that's emblematic of the industry when generative AI is producing candidly straight up false results. And across the landscape, but exacerbated more so in domains like healthcare and financial services, none of us can afford to have hallucinations being the output of these generative AI models in terms of providing the requisite reliability, certainty, predictability, and connection with those transactions. I think it's going to be a while still before everyone in this industry gets displaced by generative AI. Candidly, I believe that that is not the future. I just don't see that dystopian outcome. I think for sure there's going to be a move to more complex activities that require humans in the loop, and not just in supporting the proliferation, the production, the creation of ever more sophisticated, complex generative AI models, But there's going to be a whole bunch of stuff in terms of supporting human beings and users that generative AI cannot, will not get to. And that's where we have been focused historically. And I'm grateful that we got out in front of this and we will continue to progress that evolution so that we still have a meaningful role to play in the ecosystem and supporting our clients, delivering exceptional client experiences to their end user community. Thank you, Jeff. My pleasure. Thanks for the question. And if you're up for it, I'm curious. Offline, let's talk some more about generative AI. It's a fascinating field for all of us.

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

Hi, thanks for taking the question. So first I just wanted to ask, I guess you guys still have your unchanged 10% to 12% organic revenue growth for the full year. It does imply a bit of an acceleration from the 1Q levels of about 7%. I guess what do you think is going to be driving that? Is there anything more specific you give around assumptions around macro that may have changed or any updates in terms of like growth from your top clients or anything that you feel confident that will drive that? Thank you.

Yeah, as you'll recall from my prepared comments, Cassie, the funnel here at TI continues to be very robust. filled with both large and medium sized opportunities. The decision making process has continued to be elongated, sort of a dynamic that we've been commenting on as have our peers over the last six, nine months. And we are cautiously optimistic based on those conversations with our clients existing in perspective that they will finally get to finalizing, formalizing those decisions and moving forward in giving us the green light to get going on many of those opportunities that are in the funnel right now at fairly progressed levels. I think that's a byproduct, a consequence of all of us, we on both the supply and our customers on the demand side of the ledger, looking more broadly and sort of feeling, not just hoping, that we're going to see some stabilization with respect to ongoing inflation, interest rates, and sort of a better macro environment with some improved levels of certainty in terms of how the future will continue to unfold. And so I don't think any of our customers can wait indefinitely in order to get going on some of these now long delayed pause transformation initiatives. And so it's a direct consequence of those conversations and sort of a broader look at the macro environment that is the underpinning of our optimism regarding the improved growth rates in the back half of the year.

That's helpful. And then just wanted to touch a little bit about headcount as well, because I think you mentioned it a bit in your prepared remarks. You guys saw some pretty strong growth in headcount. I know some of that was from military. Was that relatively in line with your expectations? And I know you talked about a little bit of tightness that's going to continue through 2Q easing in the second half. You know, just kind of help us translate what that means in terms of what you're expecting in terms of headcount growth for the full year that's based into your guidance. Thanks.

Yeah, the team member growth that we saw was really both WillowTree and the healthcare projects that we're taking on. not exclusively, but principally, and indeed consistent with both Maya and Vanessa's prepared remarks. We do see continued challenges, both in terms of we haven't seen a meaningful moderation in wage inflation yet, nor in access and or retention of talent. Obviously, the headlines in terms of the onshore environment, in terms of tech sector layoffs in particular, are non-trivial, but that's not really the fishing pool, if you will. That's not where we're ramping up most of our team members. Most of our incremental team member growth is outside of North America, and you're not hearing and seeing much or nearly as much about the downsizing, if you will, going on there. I think you'll see a continued moderation of team member growth inside TI through the back half of the year, consistent with supporting the growth rates that we forecasted, as well as I think a reflection of the continued mix in services from which we derive our revenues that will continue to be ever more technology centric and somewhat less labor centric. This is going to be a business that will always be employing a significant number of talented human beings, but I think you should expect the mix shift to continue to progress and evolve over time.

Thanks, guys.

Thank you, Catherine. Thank you.

Our next question comes from the line of Ramzi El-Assal of Barclays. Your question, please, Ramzi.

Hi, thanks for taking my question this morning. I hope you're both well. I wanted to ask about the sort of divergent performance in Europe versus the U.S., of course, ex-willow tree. I'm curious if that was more just due to mix, meaning Europe just over-indexes in the more pressured tech verticals, or is there a difference in sort of the macro pressure, more broad-based macro pressure that you're seeing in Europe versus the U.S.?

Hey, Ramzi, nice to hear your voice. Hope all is well. Thanks. It's both, but if I had to weight the impact of the two, I would say it's probably more endogenous and less exogenous. I think the mix of both services and customers that we've supported historically out of Europe has been more susceptible to some of these challenges that we're hearing and seeing in the macro. And so it's having a a disproportionately adverse impact on our business there. Although the macro, as I discussed in my response to an earlier question, it continues to be challenging as well. But candidly, if I had to sort of eyeball it, I'd call it sort of 60-40, endogenous, exogenous.

Interesting. All right. Thank you. Thank you.

Our next question. comes from the line of Aravinda Gallipatige of Canaccord Genuity. Your question, please, Aravinda.

Thanks for taking my question. I wanted to talk a little bit about, you know, Jeff, in your prepared remarks, you talked about, you know, increased business from your existing clientele. Can you talk to the trends you're seeing in terms of vendor consolidation in this current sort of macro backdrop Is that a tailwind that you foresee going forward? Thanks.

It has historically been so, Aravinda, and we have indeed experienced and enjoyed the benefit of some of that. Admittedly, I had expected to see more of it more quickly, and I've not seen as much of it as yet, but I continue to be optimistic, and I am expecting again, based in part on conversations with existing clients, that that dynamic will continue a pace and perhaps even accelerate, you know, over the next three to six months, as sort of that uncertainty hopefully begins to wane and customers move forward with some of these now somewhat delayed decision making projects, etc, that the partners with whom they choose to move forward that will likely be an ever smaller community, and they'll be looking for sort of single points of contact, if you will, those of us who can provide a wider spectrum of support rather than just niche onesie-twosie capabilities. I think we should be the beneficiaries of a disproportionate share of the return to transformation projects at scale in the back half of this year and longer term. Thanks, Jeff.

I'll leave it there.

Thank you.

Thanks. Thank you. Our next question comes from the line of Jensen Huang of JP Morgan. Your line is open, Jensen.

Great. Thank you so much. Good morning, guys. I just want to ask on visibility versus 90 days ago, especially on the large client side, Telus Corp sounds like it's doing quite well. And same with BFSI strong this quarter. Have you seen any notable impact from all the bank turmoil and stresses in the banking system?

Hey, Jinjin, nice to hear your voice as well. Good question, as ever. We don't have any exposure to the smaller regional banks, thankfully, so we haven't seen any adverse effects there, although obviously the market has more broadly. And I suspect I'm not alone in anticipating that we've not seen the end of that dynamic unfolding. But thus far, we've been reasonably inoculated from it and prospectively we anticipate that continuing. The larger BFI community that make up our customer base just seem to have figured this out a little bit better. I guess they're just better capitalized and they continue to be a source of meaningful growth for us. I guess it speaks to the, let's call it prescience of our strategy at first instance in terms of the diversification of the domains we selected, where we've developed expertise and customer relationships. it really has been off the back of having successfully served some of those larger entities that were winning more business and growing along with them as they've been able to better prepare themselves for these challenging times prospectively. And as you correctly point out, TELUS continues to be just a wonderful symbiotic partner for TELUS International in terms of we continuing to be a source of accelerated transformation for them, and they are a meaningful source of continued growth for us, not just in the core telecom platform, but now in their healthcare business as well.

Great. Thanks for the update.

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

Hi, thank you and good morning. This is Jesse on for Maggie. Appreciate the color on two of your largest accounts. Could you round out the bases with what you're seeing at Google and maybe the 4 to 10 bucket as well?

On the Google front, We're actually seeing continued growth across the entire platform and given both the tenure and multiplicity of services that we provide to them, it's been encouraging to see continued progression across multiple areas and given what's happened more broadly with the hyperscalers and they not being immune from some of the challenges that I just alluded to earlier, that they continue to be a source of growth for us is heartening and encouraging. And we're pretty excited about the areas of continued opportunity, particularly around generative AI. In terms of 4 to 10, perhaps I'll impose upon my colleague, Vanessa, to provide just a little bit of incremental color there for you, Jessie.

Sure. Hey, Jessie, you know we don't guide by clients, so I'm not going to get into a lot of detail there, but as Jeff mentioned, as you kind of look at the top 10 accounts, we've talked a lot about the number one client, Telus, the number two client, the social media company, and our cautious optimism with the number three client, Google. As we look beyond from, say, client number four to client number 10, we're actually optimistic there as well. When we look at our Q1 results, as I mentioned in my remarks, particularly as you look at tech and games, that vertical overall actually grew year over year when you look at the magnitude of the decline in the number two clients actually says a lot. It actually tells you, if you do the math, that the other clients in that vertical in Q1 actually grew rather healthily. And so once you isolate the impacts of that number two clients, we're seeing some pretty good growth across, you know, the other clients, not only in the second games vertical, but across the overall top 10 group. And we're feeling, again, reasonably comfortable that we'll see that dynamic play out through the rest of the year.

Understood. Thank you. Thanks, Jesse.

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

Good morning. I'm hoping you can talk a little bit about the current competitive intensity and how you see the environment changing post the recent consolidation in this space, and maybe related how you think about the M&A market here and whether TI was involved in bidding on any of the recent deals.

Hey, Stephanie. As ever, thanks for the interesting, challenging question. Competitive intensity, I think, as you know, given the size and fragmented nature of our industry, continues to be quite high. And I think it's fair to say that in this environment, as customers continue to be ever more focused on efficiency and cost savings, it is making for an even more challenging environment Our value proposition, as you well know, is, I would suggest, decidedly differentiated from our peers and avoiding the your mess for less concept. And when the competition are willing to take on low, no margin opportunities, it becomes that much more challenging to persuade an existing or prospective customer who is facing their own financial challenges and concerns regarding future uncertainties. to continue to recognize the overall value proposition and total cost of ownership construct that we rely upon rather than just cheap and cheerful. So I would suggest that intensity has continued and perhaps even intensified, and we have to continue to be better. We have to continue to be refined in our approach and our thinking and demonstrate the disproportionate value that customers derive from working with TI and that we have a differentiated set of services that many, most of our competitors do not, again, gives us an opportunity to mitigate or inoculate against that dynamic in part. In terms of the M&A landscape, as I know you know, we tend to avoid talking about deals that we haven't done, even deals that we might have done. That there's consolidation going on in our industry and you know, two sort of much larger ones recently in the headlines doesn't come as a surprise to me at all. I think this is an industry that has been in need of consolidation, if you will, reflective of growing customer appetite for, as I alluded to earlier, a single point of contact. And so continuing to grow and scale one platform, whether it's extending the service line and or the geographic reach, I anticipate we will see even more of that in the months and years ahead. I guess in our case, though, we're looking to continue to focus on our differentiated approach to our service offering rather than just continuing to scale up in legacy services that have, in my view, inferior margin attributes and not an awful lot of upside in my view in that regard. Our focus has always been on profitable revenue, not just revenue. And I think you should expect that we will continue to demonstrate that discipline in terms of M&A activity prospectively as well.

Thank you so much.

Thanks, Dustin.

Thank you. Our next question comes from the line of Ryan Potter of Citi. Your line is open, Ryan.

Hey, thanks for taking my question. I wanted to follow up on the expansion into Africa. Could you discuss the opportunity that you think Africa represents from a delivery standpoint? I guess, what types of initial clients, vertical services do you kind of envision work being delivered from there initially? And then just, I guess, more broadly, how important do you guys view geographic expansion amongst your priority lists?

Hey Ryan, thanks for the question. So, I mean, it's a bit ironic for me personally, given, as you may or may not know, I grew up in Africa and that we haven't been there yet. It's been a bit of a gap personally in terms of recognizing the opportunity that that continent represents in terms of growth prospectively. And we're obviously not first, new or alone in recognizing the potential that that market represents. both from a supply and demand perspective. Many of our existing clients, as well as perspective, have been inviting us to consider expanding our delivery capabilities there to continue to serve them as they, our customers, look to be closer to their end user community in those markets and express a desire to have our quality of service helping them to continue to delight their end user community there. And frankly, I've been slow off the mark, frankly, and cautious in supporting our expansion there. And now is when we decided it made sense with a meaningful backlog of demand from existing and prospective customers so that it's not a build it and they will come dynamic, but rather as a result of our investments in both South Africa and Morocco, we will have existing and prospective customers being served out of those locations immediately. And so we can start to build from a base of consequence. We also recognize that there's an ever-growing talent pool there. It's not just unique language skills, but also technology skills as those regions continue to invest in education and training to facilitate their citizenry participating in the digital economy prospectively. And so having a, presence there and giving us access to that deeper, broader growing talent pool was important for us. So longer term, we would anticipate as we've done everywhere else, we've extended our reach. We'll start to scale meaningfully across our entire service line in supporting both existing and prospective customers. More broadly in terms of geographic expansion, I think what I just described is what you should expect prospectively We have never leveraged the build it, they will come model for expansion. We have always only expanded into new geographies, either through acquisition and there came with existing customers that were being supported and accessing existing talent pools that were already engaged and employed by the businesses we acquired. and or when we had existing prospective customer demand that we could count on to immediately support the capital investments required to extend our geographic reach. And you should expect that that will continue to guide additional expansion as we look to continue to meet that opportunity.

Great to hear. Thanks.

Thanks, Ryan.

Thank you. Our next question. comes from the line of Divya Goyal of Scotiabank. Your line is open, Divya.

Thank you so much. Hello, everyone. I just wanted to ask a question on the willow tree. Vanessa, if you could provide us the exact willow tree revenue for this quarter, and how was the growth for the company, willow tree revenue growth specifically, on an year-over-year basis, and how do you expect Would it translate in the guidance that you've provided for the year? I appreciate it. Thank you.

Okay, Divya. So we actually disclosed the willow tree revenues in the 6K that was filed this morning. It was $57 million for the quarter. We didn't disclose the year-over-year growth because that's a pro forma metric. We didn't report them last year. But that actually is in the high 20s. And how that translates from a full year perspective, if you kind of look at our guide, consistent with what we said at the investor day, that would also put them about 30% year-over-year growth at the midpoint of our guide.

And you think the pipeline looks strong enough that they would be in a position to meet that guide then?

So their pipeline is actually quite strong. And remember, we also talked a lot at the investor day about cross-sell and up-sell revenue opportunities. I think you may recall both Jeff and Tobias talked about shovel-ready projects that were on the go. Our priority in Q1 has been very much around integration, but not only from a back office integration perspective, but frankly, our go-to-market integration. So there is a lot of activity going on right now with Willowtree and CI pitching to clients. So we're feeling pretty good about their pipeline. Again, that's as of today, Divya. Nobody has a crystal ball, but their guidance that we previously shared is what we're reiterating today.

That's helpful. Thank you. Thank you.

Our next question comes from the line of Matthew Roswell of RBC. Your question, please, Matthew.

Yes, it's Matt on for Dan Perlin. He says, hello. Hate to kind of beat a dead horse, but talking about your second largest client, Vanessa, could you give the revenue numbers again and then I guess the question would be, what is the volume doing at that client? Because you were shifting from onshore to offshore, which obviously has a revenue impact.

So are you seeing kind of a greater than expected volume drop?

So the revenue in the quarter, again, this can be derived from our filing. It was approximately $86 million, and as I mentioned, it was down 18%. It was actually stable quarter by quarter, but down about 18% from last Q1, 14%. We actually did have a very strong Q1 last year with this particular client based on various projects we had on the go. But like I said, a bit more stable on a sequential basis, but a big reduction year over year. But we did also talk about an expectation of softness with this particular client. The performance in Q1 wasn't terribly surprising to us. Again, we had been in discussions with them around planning for the year, et cetera. So we had already sort of built that into our guidance. And really, I don't think there's really that much more to add to it, frankly. I think, you know, we had expected that we'd have a soft performance with this client. We did also expect that, you know, based on strength in other enterprise customer groups, especially as well with our Telus Corporation, that we would largely offset that. And that's what we saw in Q1.

Okay. If I could sneak in just a quick modeling question. How should we think about interest expense for the rest of the year? Is the $33 million this quarter sort of a good run rate?

Yeah, I think that's a reasonable run rate.

Okay. Thank you very much.

Thanks.

Thank you. Due to the time allocated for questions, I would like to turn the call back to Mr. Puritt for closing remarks. Mr. Puritt, the line is yours.

Thank you, Latif. As you've heard me say before, in times of macroeconomic uncertainty, I believe that it's imperative that we focus on factors within our control. For TI, this means that our priority remains operating all aspects of our business with the utmost efficiency. We continue to leverage automation and AI and We're incorporating generative AI into many of our existing platforms, such as our in-house spot applications, internal communication translation, and drafting job profiles, to name just a few. It also means remaining agile in order to meet client demand at full speed when conditions start to improve. And this includes our ongoing integration of WillowTree into the business, which further enhances our differentiated end-to-end value proposition in the marketplace. And last, but certainly not least, it means continuing to operate our business guided by our values and our culture. This includes strengthening the sustainability of the environment and social structures in the regions where we operate through funding, volunteer activities, impact sourcing, and community employment programs, expanding and enhancing our learning and development offerings for our team members and their families, promoting diversity and inclusivity for the benefit of TI and our clients, and supporting the creation of responsible AI and safe digital spaces. As a reminder, before we wrap up, TELUS International's annual general meeting of shareholders will take place virtually next week on May 12th. Our shareholders have already received instructions on how to cast their vote ahead of time, as well as join the meeting, while everyone else can certainly join as guests. All the details on how to join are available on our investor relations website. Thank you all for your time and engagement today. I hope to meet with you all again soon. Bye bye now.

The conference call has ended. You may now disconnect.