TELUS International (Cda) Inc. Subordinate Voting Shares

Good morning, ladies and gentlemen.

Welcome to the TELUS International Third Quarter 2023 Professor Call. My name is Jonathan, and I will be the conference facilitator today.

At this time, all lines have been placed on me to avoid 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'd like to remove yourself from the queue, simply press star 11 again. I would now like to introduce Jason Meyer, Head of Investor Relations and Treasurer at TELUS International. Mr. Meyer, you may begin.

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q3 2023 investor call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer, and Vanessa Canu, our Chief Financial Officer. As usual, we'll begin with some prepared remarks, where Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa, who will provide some key financial highlights. We'll then open the line to questions from pre-qualified analysts before turning the call back to Jeff for his closing remarks. Before we begin, I'd like to direct your attention to slide two of the supplementary presentation available for download on this webcast. and also available on our website at telusinternational.com 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 Plus 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.

Thank you, Jason. Good morning, everyone. Despite an operating environment that continues to be challenging, TELUS International delivered steady third quarter revenue growth of 8% on a consolidated basis. We've made good progress improving our profitability profile relative to the second quarter with our adjusted EBITDA margin increasing 370 basis points, thanks to our team's focus and diligence in executing upon multiple cost optimization programs across the business. Since last quarter, we've worked to better balance demand and supply, especially in our European operations, which in turn has contributed to the sequential quarter margin improvement we delivered, as Vanessa will share in more detail shortly. Encouragingly, our sales funnel still sits north of $2 billion, and while sales cycles remain elongated, our global sales team continues to acquire new logos. For example, during the third quarter, we launched a new business with the largest food ordering and delivery company in the U.S., a luxury fashion retailer, and a well-known property in Canada, the insurance company in the U.S.

Within our existing client base, we have expanded engagements with the world's largest technology company by revenue, a leading ride sharing and food delivery provider, and the world's

leading short-form video platforms. We also continue to successfully expand volumes with now our second largest client, Google. Moreover, despite the challenging environment, our team at Willowtree continues to win new business as well, with new client ads in the quarter that included a U.S.-based payment processing and information management services provider, an American multinational consumer credit reporting agency, an American multinational financial services corporation that owns and operates stock exchanges and one of North America's top banks, an impressive roster of new clients that we're very encouraged by. Similarly, Willowtree also deepened its engagement with several existing clients in the financial sector and across other verticals, including an American multinational pizza restaurant chain, and importantly, with our parent company, TELUS. Among our joint wins with WillowTree are one of the world's most trusted providers of mission-critical software for legal, financial, and business professionals, as well as a leading innovator in connected enterprise safety technology. Let me now turn our attention to a topic that's top of mind across our industry, the opportunities and impacts of general AI on our business, on our operations team and our clients is a key strategic focus of our executive leadership team. At a broader economic and multi-industry level, we believe that the disruptive impact of generative AI will affect most business functions. To quote the findings of a recent McKinsey study, the total percentage of work hours that could theoretically be automated by integrating technologies that exist today is estimated to be 60 to 70%. with the acceleration of GenAI adoption pulling forward the potential for technical automation and making it a key strategic consideration with long-term implications for virtually all businesses. While digital transformation has been a priority for many businesses for several years now, the advent of GenAI has placed even more emphasis on our clients' need to embrace these latest technology advancements in order to unleash efficiencies and design, build, and deliver enhanced customer experiences or risk being left behind. Specifically, when it comes to CX center operations, according to Deloitte, nearly two-thirds of contact centers are delivering disjointed customer experiences across communication channels. And 34% of customers, according to the Call Center Management Association, are most frustrated when passed to another representative during a contact or call. To address these issues, we believe that the time is now for GenAI to help transform the CX journey. offering meaningful value creation for customers as well as the businesses that serve them. And at TI, we positioned our business as a partner of choice to our clients as we bring them the latest tools and strategic thinking to best transform their operations. With our assets across CX, AI, and full digital stack, including Willowtree in particular, we're uniquely positioned to be a leader in this next big phase of the transition to digital-first CX. To that end, I trust you've all seen our announcement earlier this week, marking the official launch of Fuel IX, TELUS International's enhanced solution to integrate GenAI into our clients' customer experience operations. It would have been easy to race out earlier this year, issuing press releases with one-off GenAI tools and single task bots. But at TELUS International, we instead focused on enhancing our existing solutions, advancing the development of incremental capabilities, and bring together under one umbrella an end-to-end offering for clients to address their evolving needs around integrating Gen AI into customer experience operations from ideation to implementation. Dual IX brings together a full spectrum of intelligent experiences across customer, digital, voice, user, employee, and human interactions. It's a robust and comprehensive suite of capabilities that includes digital consulting, a GenAI jumpstart eight-week accelerator program for clients new to AI, along with data services and analytics, as well as web and mobile application development. We believe it's only through this holistic view encompassing all of the internal and external aspects of a customer engagement that GenAI technology can create tangible value for our clients. With FueliX, our clients have end-to-end support around how they should think about AI, integrate it into their CX operations, or enhance already existing capabilities. Importantly, our integrated solution addresses a bottleneck many companies face in getting accurate, high-quality data sets to enable the success of Gen AI capabilities and accelerates the pace of a proof-of-concept design to getting a Gen AI-enabled solution into production. Critically, all of this work is done within a secure environment where client data is protected and private. And at each step of our engagement is guided by Pellis International's humanity in the loop approach with reinforcement learning through human feedback to suppress data inaccuracies and bias. In terms of monetization, we're using a solution as a service model with Fuel IX being available via an agile hybrid pricing structure with licensing tiers tied to accurately reflect how our clients are leveraging the various capabilities enabled by the platform. Several of our clients are already benefiting from the Fuel IX offering, including our parent company, as well as iRobot, to name but two who were both quoted in our press release from earlier this week. Additionally, as part of our Gen AI Jumpstart program, our team at Willowtree is working with a leading global financial services firm to create a GenAI customer service chatbot to empower customers with a robust conversational literacy tool. I look forward to sharing more details about FuelIX and the proliferation of compelling use cases in the quarters ahead. As we typically have done on these calls, I'd like to now share some of our other examples of our work over the past quarter. For many years, TI has engaged with some of the world's largest game publishers, developers, and platforms, supporting millions of gamers. One such client, a popular gaming platform that enables players to create their own games, as well as play other user-created games, was experiencing a surge in its player community that quickly overwhelmed their existing systems, revealing insufficient staffing and technology infrastructure, which led to a rise in complaints, scams, offensive content, and toxicity. They turned to Telus International to protect their current global player community and to ensure their safety program was designed to rapidly scale in order to be able to keep pace with the community's future growth. Right away, our trust and safety experts identified the need to moderate an array of user-generated content, both in-game and on Discord servers, as well as within the immersive experiences created by players on the platform. Additionally, given the prevalence of young players on the platform, ensuring adherence to community and government guidelines was paramount for player safety. We deployed a team of content moderators or first responders to promptly remove bad actors, eliminate violating user-generated content, and block spam. What's more, we set up a critical incident investigation process with law enforcement notifications for situations deemed to be high risk. In our role as a trusted advisor, we helped our clients align their player safety program with strategic initiatives including the addition of new lines of business like voice moderation and moderation-related appeals. As a result, in close partnership with our clients, we've created a dedicated content moderation team for them, as well as a comprehensive wellness program and mentorship program to ease the learning curve for new team members serving this client. We've now grown this team to well over 1,000 moderators with the capacity to process more than 11,000 tickets per day and up to 20,000 moderated items per team member per month. Moreover, we've achieved impressive results in improving and sustaining operational excellence metrics for this client, including content moderator attendance, customer satisfaction, and quality assurance, whilst guiding the creation of the policy documents and frameworks and information security, which has since been applied across the client's entire vendor network. Another example I'd like to share with you today comes courtesy of our digital solutions line of business, where TI reimagined and subsequently constructed a sophisticated cloud infrastructure for a successful telecommunications company in the U.S. This large service provider of pay television and retail wireless services needed to transform their offering after acquiring a mobile virtual network operator, or MVNO, in order to offer affordable mobile services to current and potential customers. They needed to build the technical infrastructure that would resolve the incompatibilities between the acquired operator's infrastructure and what our client envisioned for the combined entity in the future. In particular, to reimagine their operations and building support systems. Our client turned to Telus International to lead the configuration of numerous but highly complementary web services technologies to create a future-ready operations and building support infrastructure. The solution was implemented on the AWS cloud platform, providing scalable and flexible hosting for the application components, leveraging the AWS tool set to create the infrastructure specifically tailored for our client's needs, our TI team enabled efficient order management and provisioning for the client's operations, ensuring proper sequencing of tasks and facilitating communication with external systems. Other features of our solution included task progress monitoring and management of tickets to maintain operational efficiency and reliability, as well as enhanced data collection and proactive alert setup, enabling our clients to gain real-time insight into the performance and health of the deployed technology stack. Our team's expertise in identifying and implementing the right technology for a client-specific need helped realize significant end-customer improvements, including greater self-service functionalities for new plans and multi-line accounts, the introduction of new compatibility and enhanced account management with a 70% reduction in bill cycle process time and a 35% acceleration in to market for a new plan, new devices and activations, as well as optimal system uptime and successful completion of goals for key operational processes. The next example I'd like to share today is from our team at Willowtree and their work to enable a better travel experience for customers of Brightline Trains Florida, a new high-speed railroad in the United States. As operations were resumed emerging from pandemic lockdowns, Brightline Transport realized its original digital properties needed to scale with rising passenger demand and planned market expansions. They chose Willowtree as a digital partner to help get its flagship mobile and web app experiences on the right track. Willowtree began with a comprehensive omni-channel audit of the existing customer journey, from passenger interviews to deep dive with experts in rail travel, They moved rapidly from problem exploration to envisioning a new travel experience that sold for pain points along the journey. WillowTree's North Star, the guiding objective for this engagement, was identifying scalable in-app revenue opportunities for this client. That is creating frictionless paths to purchases and upgrades. Once the future state customer journey was clearly defined, the WillowTree development squad built the next generation of the client's front-end web and mobile experiences, powered by Adobe Experience Manager. With the WillowTree solution, our clients' customers are able to efficiently find and book tickets, customize their trip, and easily access tickets through a digital wallet. In addition, this consolidated platform unifies customer data to deliver more personalized marketing campaigns that engage customers and drive revenue opportunities for Bright Line Trains Florida. In another example, our team at WillowTree spearheaded the digital transformation of a medical learning library through the release of native iOS and Android apps for a major global education company, McGraw-Hill. With the rapid digitization of education materials, McGraw-Hill's global professional team is partnering with Willowtree to fundamentally reimagine how they educate the next generation of medical professionals. Today, our team at Willowtree is supporting McGraw-Hill Professional as they develop the portfolio strategy for their flagship medical education franchise with a modern, intuitive, and flexible digital platform. This includes exploring innovative new ways of surfacing a massive library of content across the medical student to resident and attending journey, all supported by a common design system and a shared technical foundation. The app's developed by Willowtree to gain critical insights into user behaviors and personas throughout their medical education journey while leveraging an enhanced learning experience, driving engagement with a full portfolio. Through collaboration and partnership, we've helped make remarkable progress, putting content such as audio, video, textbooks, images, and more at students' fingertips wherever they go. Finally, while the broader near-term operating environment remains challenging, it's been a truly encouraging year for our AI data solutions business. always been a dynamic space, but we're seeing good momentum and demand this year in particular, led by the work we do to support market-leading generative AI foundational model builders, and we're now on pace to complete one billion tasks in a single year for the first time ever. In 2023 thus far, we've seen a roughly 1,060% increase in generative AI and large language model services, with leading use cases including supervised fine-tuning and reinforcement learning from human feedback, data sourcing, and data engineering. Our workforce solutions are supported by new technology offerings, including Experts API, our proprietary platform which streamlines and optimizes the framework of matching key specialist talents with reinforcement feedback tasks. We continue to evolve this suite of offerings across execution models with multiple new in-facility engagements also now in implementation. Other high-growth areas within our TI AI portfolio include UX research data sourcing, where we partner with innovative technology customers to evaluate and capture human-machine interactions to enhance production development life cycles, and we continue to see remarkable diversification and opportunity in the autonomous vehicle space to support safety use cases, including 2D, 3D, and LIDAR sensor fusion, plus driving data set sourcing across a multitude of scenarios. We've grown our TI AI customer base by 30% in 2023 and have continued to expand a number of key partnerships across multiple Fortune 50 tech companies, including our longtime collaborations with Google and Microsoft, where we continue to support their needs for high-quality human-annotated data sets across numerous locales and product use cases. Before I hand the call over to Vanessa, I'd like to conclude by acknowledging our global team's continuing achievement as evidenced by several notable awards we received in the third quarter. Starting with TELUS International being named the leader in the Americas for a fifth consecutive year by global research and advisory firm Everest Group in its peak matrix for customer experience management, Additionally, TI was included on Everest's global peak matrix assessment following our delivery site expansion that now encompasses five continents. TELUS International was also ranked a leader in Nelson Hall's NEAT assessment for content transformation services, specifically within subcategories for cost optimization and revenue generation. Similarly, TELUS International maintained our strong positioning on Constellation Research's shortlist for CX operation services, again, within the global category. In recognition of our team's efforts to bring our caring culture to life, SAS Company selected TELUS International as a finalist in its 2023 Best Workplaces for Innovators within the international category. And to wrap up this list, TELUS International was the recipient of three 2023 Gold Stevie Awards for great employers, which highlighted our leadership development program, our technical training program, and specifically the use of digital coworkers, as well as our efficient skills training solution. These awards continue to reflect and illuminate the TI team's global efforts, and I thank our team members for consistently delivering value for our clients and for the communities where we live, work, and serve. With that, I'll now invite our CFO, Vanessa Canute, to share details of our financial results, and I'll return to answer your questions as usual. Vanessa, over to you.

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. And for descriptions and a reconciliation of our GAAP to non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning. In the third quarter, Telus International delivered revenues of $663 million, up 8% year-over-year on a reported basis, and 6% on a constant currency basis. Revenue contribution from WillowTree in the quarter was $42 million. Excluding WillowTree, our revenue increased $6 million, or 1%, which included a favorable foreign currency impact of approximately 2%, compared with the same quarter of the prior year, associated with a weakening U.S. dollar against the euro. Revenues in the quarter continue to be impacted by reduced spending by certain clients. Most meaningfully, our revenues were impacted by a reduction in volume from our third largest client, a leading social media company, whose revenue declined in Q3 by 23% year-over-year. Excluding the impact of this particular client, our total revenues grew by 13% year-over-year. Revenues from our first and second largest clients, Telus and Google, grew year-over-year by 23% and 25% respectively. Looking at our revenues by vertical, in the Tech and Games vertical, revenues grew 4% year-over-year, impacted by the volume reduction from the aforementioned social media companies. Excluding the impact of this client, revenues in the Tech and Games vertical increased 17% year-over-year in Q3, reflecting continued growth in AI-related revenues from Google and notable growth with other clients, including a highly popular gaming platform that Jeff referenced earlier. Revenues from the e-commerce and FinTech vertical increased 6% year-over-year, with software performance in certain FinTech clients offset by growth delivered by WillowTree in this vertical. Revenues from the banking, financial services, and insurance, or BSSI, vertical, declined 19% year-over-year, primarily due to lower service volumes from a global financial institution client, which we mentioned on last quarter's call, partially offset by the addition of new clients from our acquisition of WillowTree. Communications and media grew 3% year-over-year, supported by the ongoing digital transformation revenues from Telus Corporation, along with another leading U.S. telco, and new clients added with WillowTree, partially offsetting softness in certain other accounts. Speaking of our work for Telus Corporation, revenues in our healthcare vertical increased by more than 200% year-over-year on strong growth with Telus Health. We expect continued growth in this vertical over time, reflecting yet another example of our mutually beneficial relationship with Telus. Revenues from all other verticals, which includes travel and hospitality, energy and utilities, retail and consumer packaged goods, amongst others, grew 14% year-over-year. Turning now to our revenue performance by geography, revenues in Europe declined 4% year-over-year, resulting from service volume reductions in the region, including most notably the reduction from the aforementioned social media compliance. Revenues in North America grew by 16% year-over-year as contributions from Willowtree, Healthcare, and other tech and games clients were partially offset by lower volumes in BFSI. In Asia Pacific, revenues increased by 9% year-over-year through contributions from TELUS and other customers within e-commerce and fintech and tech and games verticals. Finally, Central America and other revenues grew 19% year-over-year from growth in tech and games and communications and media clients. including TELUS. Moving on to operating expenses, salaries and benefits expense in the third quarter were $403 million, an increase of 16% year-over-year due to higher team member counts, investments in our team members through increased average employee salaries and wages, and temporarily disproportionate higher costs of service delivery in certain regions. As you may recall from our last discussion last quarter, these had a much more significant effect beginning in the second quarter of 2023 and principally in Europe. These increases were partially offset by the positive impact of our cost efficiency efforts executed to date, including decreases in team member counts as we rebalanced supply with demand, and adjustments made to variable compensation based on operating performance metrics, which resulted in a sequential quarter-over-quarter decline in salaries and benefits expense. Our goods and services purchased were $116 million, an increase of 5% year-over-year, primarily attributable to the addition of willow tree, as well as other higher costs tied with higher revenue, partially offset by lower dependency on external contractors in favor of continued development and investment in our own internal capabilities. Share-based compensation in the third quarter was $5 million, a decrease of 17%, primarily due to forfeitures of unvested awards in relation to employee departures. Largely as a result of our cost reduction efforts, acquisition, integration, and other charges in the third quarter were $11 million, an increase of $4 million, primarily due to expenses associated with cost efficiency efforts, principally in Europe, including staff reductions to address lower service volumes from certain clients. Depreciation and amortization expense was $80 million, an increase of $19 million primarily due to capital and intangible assets arising from willow tree, as well as other investments made over the prior 12 months. Interest expense in the third quarter was $38 million, an increase of $28 million, which was primarily due to higher average debt levels arising from WillowTree, higher average interest rates and interest accretion recognized on the provision for written put options associated with the WillowTree acquisition. Our income tax expense decreased by $23 million to $3 million during the quarter. The effective tax rate decreased from 30.6% to 25%, primarily due to a change in income mix, whereby proportionately less income was earned in higher tax jurisdictions and a reduction in certain adjustments in the current period for income tax of prior period. Moving on to profitability measures, adjusted EBITDA was $144 million in the third quarter, a year-over-year decrease of 9%. An adjusted EBITDA margin was 21.7% compared with 25.7% in the same quarter of the prior year. Adjusted net income was $58 million, and adjusted deleted earnings per share was $0.21, reflecting decreases of 33% and 34% year-over-year, respectively. While our profitability was impacted by cost imbalances arising from reductions in service demand, these pressures were partially offset by cost efficiency efforts we realized during the quarter, which helped to drive an adjusted dividend margin improvement of 370 basis points from last quarter. As previously announced, we rationalized our team member count, particularly in areas where we had excess capacity, resulting from volume ramp down. These efforts were accelerated since our last call, and the actions completed today will now generate over $45 million of in-year savings, or $96 million on an annualized basis. Reflecting in large part these downsizing efforts, our team member count decreased to 73,045 as of September 30th, 2023, or 5% lower from last quarter. Turning now to the balance sheet and cash flow, at the end of the third quarter, cash and cash equivalents were $132 million, and available capacity under a credit facility was $435 million. We generated free cash flow of $159 million in the quarter, primarily due to higher net inflows from working capital, which included higher cash receipts for services provided to TELUS during the quarter, lower share-based compensation payments, and lower income taxes paid, which were partially offset by lower operating profits. Our capital expenditures in the quarter were 26 million, consistent with the same quarter last year. Our leverage ratio as of September which improved from last quarter and remains within our communicated steady state range. This improvement reflects our focus on ongoing reduction in our data outstanding. Now turning to our outlook. We are reaffirming our full year guidance today. We continue to expect revenue for full year 2023 in the range of 2.7 to 2.73 billion, now including 190 to 200 million from WillowTree, representing year-over-year revenue growth of 9 to 11% on a reported basis and growth of 1 to 2% excluding WillowTree. This assumes an average exchange rate of 1 euro to $1.08 U.S. dollars. In terms of profitability, we continue to expect adjusted EBITDA in the range of $575 to $600 million, which will continue to benefit from the cost efficiency efforts we've discussed. In addition, we are continuing to reduce discretionary costs, continuing to optimize our third-party vendor relationships, rationalizing our facilities' footprints where feasible, and maintaining prudence in hiring to manage our staffing in line with the near-term demand environment. And finally, we continue to expect adjusted deleted earnings per share in the range of 90 to 97 cents for full year 2023. We believe this outlook remains prudent given the continued macroeconomic uncertainty as we remain relentlessly focused on managing what is in our control. With that, let's move on to questions. Jonathan, over to you.

Certainly. Thank you. One moment for our first question. And as a reminder, if you have a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. Our first question comes from the line of Ramsey Aliso from Barclays. Your question, please.

Sure. Thanks so much for taking my question. Good morning to you both. Vanessa and or Jeff, you mentioned a lengthening of the sales cycle in the press release, and I wanted to ask you a couple things about that. I guess one is, is that a comment about signing deals or converting deals? bookings to revenue or both? And I guess if maybe you could also overlay that onto this sort of, you know, it seems like there's a particularly large headwind coming from the large social media client versus the rest of the business, which is doing better. Is that comment sort of equally applicable if you removed the impact of the one large social media client, if that makes sense?

So let me start, Ramzi, and then Vanessa can top up as ever with additional detail as needed. I think it's both. And it's not an exacerbation of what we discussed last quarter. It's a continuation of those elongated sales cycles. And so it's taking longer for deals to be consummated and taking longer for deals to come to fruition. So both once we kind of get the notional verbal green light, but getting to end of job and kicking off the engagement as well as just generally the pursuits continue to be elongated. And indeed, I think your observation is fair and accurate. We are having, I would suggest, disproportionately more challenge with respect to one of our customers in particular. And we're hopeful that in the not-too-distant future, things finally start to turn around. But given the size of that client, And this speaks to what we've all been mindful of, frankly, from our inception as a public company on in-concentration risk. It has an outsized impact on our business. If I normalized out the performance of that account, I think you'd see considerably healthier growth in totality across the business right now. So we have our work to do and, as I say, improving and turning around that situation. And we continue to be hopeful that that will indeed occur.

Got it. Thank you very much. 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.

Thank you. I wanted to ask about visibility into potential cuts, additional cuts with that third largest customer. And then what are some of the potential catalysts to reinvigorate not only business with that customer, but the service line in general?

So we continue to work closely with them, and as before, we're reasonably confident that we have the requisite visibility regarding the volume, demand, and profile for the work, and I think we're taking prudent steps in terms of matching supply and labor to support the existing demand profile. I think one of the sources of turning things around is really leveraging our capability set, particularly as I referred to earlier in the AI space. I think obviously content moderation in particular has seen an interesting evolution as many of our clients, particularly in the social media space, look to rely more and more on AI enabled capabilities as a first line of identification and defense and less and less so on human digital engagement where possible. And so we hope, we believe that once again, we have what the doctor is ordering in terms of addressing this opportunity in evolution. But as I said in response to Ramsey just a moment ago, we still have some work to do to demonstrate to this client in particular that we can indeed be the right partner for them in that regard. And hopefully we'll see progress there in the quarter ahead.

Thank you, Jeff.

Thanks, Maggie.

Thank you. One moment for our next question.

And our next question comes from the line of Aravinda Galapatige from Canaccord Genuity. Your question, please.

Good morning. Thanks for taking my question. First of all, Jeff, I was wondering if you could just delineate between perhaps some of your larger clients and maybe sort of the small to mid. Are you seeing sort of the same trends you talked about in terms of sort of a length and sales cycle and maybe taking time to, in terms of converting the pipeline, is there any kind of delineation between the sectors, between size, that I think is worth calling out? And I also wanted to just, for Vanessa, given the substantial free cash flow, how should we think about Q4? Would some of that working capital kind of flow out again, just to get a sense of how the year would kind of close from a free cash flow conversion of EBITDA perspective? Thanks.

Thanks, Arvinder. I think it's fair to say that elongated sales cycles are somewhat pervasive and not exclusive to this one client, but I think it's equally accurate to reference the fact that things are decidedly, palpably more challenging with that one client in particular. Whether it's in sort of the TI core business, if you will, and even in Willowtree, know we've seen continued elongation despite the fact that the opportunities continue to be plentiful as reflected in the size of our funnel overall and that's equally true for our willow tree division just getting to go continues to be a bit of a challenge for all of us but as i say palpably more so with this one client in particular and We are encouraged by some of what we're seeing late around our TIA portfolio in particular, as I referenced in my prepared remarks. So we'll hopefully have something better to report in that regard in the next quarter. And with that, I'll invite Vanessa to respond to the second half of your question.

Thanks, Jeff. And Aravinda, absolutely. I think we had a very, very strong pre-cash flow quarter, and some of that is timing. having a 24% free cash flow as a percentage of revenue is not a typical quarter for us. I would look more at the year-to-date because Q1 and Q2 were just slightly light, and I expect that to normalize as we look at Q4. So on a year-to-date basis, we're really around sort of the, you know, close to mid-teens in free cash flow as a percentage of revenue, and that's what I would expect us to be at in Q4.

Thank you. Offline. Thank you for one moment for our next question.

And our next question comes from the line of from JP Morgan. Your question, please.

Hey, thanks. Good morning. Glad to see the study results. And Jeff, you sound good. I think the question I had was just on visibility for the top two accounts. Any change there or notable call-outs? And similarly with WillowTree and some of the wins you mentioned, any surprise in the type of work you're seeing or your views on synergy potential now that you've owned it for another quarter? Thanks.

Hey, Finjin. Thanks for the question. Indeed, we're very pleased with the double digits starting with a true growth for clients one and two, Telus and Google, and we anticipate continued performance in that regard for the foreseeable future. No surprises in particular with respect to WillowTree client wins. Most of the client wins of late have been sort of within their domain expertise and targeted industry verticals. Disappointingly, obviously, the growth trajectory there not quite where we had expected, hoped to be, but again, still confident in the longer-term thesis and the willow tree capability as the front door, if you will, to our QIX offering is where I think we're going to prove out the thesis and the value of that investment in the next year and beyond. So, hindsight is always 20-20, and I think we will yet prove that that capability was a critical strategic addition to our overall service offerings. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Stephanie Price from CIBC. Your question, please.

Good morning. In terms of AI, you noted expanded service volumes with Google and Telus, and thank you for the color on the call around the offering as well. Just curious around what you're seeing in terms of demand outside of your largest customers and what portion of your customer base is is looking at AI work at this point. Any further call, that would be great. Thank you.

So almost everybody is talking to us about AI. There is a, I think, not entirely surprising level of curiosity, interest, excitement, and frankly, trepidation and worry about how Gen AI in particular, AI more broadly, will likely impact their business models and they're looking for help insights suggestions guidance and i'm cautiously optimistic that we're going to start to really see some meaningful engagement adoption of this offering obviously i drank my own kool-aid some time ago here and stephanie but i think we really do have something quite unique differentiated because of a our experience and expertise and because of the comprehensive nature of the offering where And we can engage in a conversation in terms of a consulting advisory basis to really explore together with our customers the art of the possible and how their environment might lend itself favorably to Gen AI implementation and adoption to help both their own internal team members exploit that capability as well as to better serve their customers. We can then move to the next phase of that engagement with them in helping to structure their data, such that when you're deploying these generative AI capabilities, you're producing more relevant insights and actionable takeaways rather than just garbage in, garbage out. We can then, again, engage in the next phase of that evolution with them and build the web interface and or mobile application capability so that both team members and customers alike have access on a real-time basis to all of that more valuable information that generative AI is now producing. And then, last but not least, having this proprietary platform that gives customers customers access right now on day one to a myriad of capabilities in terms of agent assist bot capabilities and language translation capabilities on a real-time basis. And it is essentially Switzerland, if you will, in terms of technology agnostic, such that if they have a predilection to work with one language translation capability rather than our proprietary offering and or a different cloud environment, AWS, GCP, Azure, et cetera, we really... are capable of supporting them in any of those environments with any of the plug-in API capabilities, that kind of agnosticism, I think, again, lends itself favorably to adoption. I'm very excited about the opportunity going forward.

Thank you. One moment for our next question. And our next question.

comes from the line of Richard from National Bank Financial Markets. Your question, please.

Yes, thank you. Jeff, can you talk about sort of any service areas that have been sort of more resilient relative to some of the other ones that are a bit softer? And then secondly, I think last quarter you talked about price competition in the market or pricing. And I wonder if we can maybe get an update on that too, please. Thank you.

Thanks, Jeff.

I think, unfortunately, the challenges are results by industry service line are a bit skewed because of that concentration profile that we've talked about already. As I said before, we normalize after that. I think we're seeing reasonable opportunities for continued growth everywhere, but obviously not surprising the TIAI service line in particular enjoying the biggest bump. And I expect that continues for the reasons we just discussed. In terms of pricing dynamics, it feels to me like it's simply a continuation of the same, i.e., there is a pervasive persistent pressure around more for less. And so finding a way to mitigate those challenges even customers that historically were over-indexing on quality and were willing to pay for that quality, where that's becoming less available, if you will, it creates the necessity for service providers like we to find a way to create the headroom in our service offering so that we can capture the demand opportunity at those pressurized price points, but still generate our targeted margin yield. And so, as you heard Vanessa detail, in her prepared remarks earlier, we've undertaken a fairly comprehensive optimization effort that's not just right-sizing labor to demand, but also looking to, as you've heard me say often in these calls, drink our own champagne, eat our own gourmet cooking, where we're deploying AI-enabled and automation capability inside TI to drive down our own costs to serve, to create that headroom we need so we can continue to enjoy our targeted margins I think we've made some progress in terms of enterprise architecture and data access, so we can be making better decisions more quickly in terms of how we're allocating resources and serving our customers. In our HR team, we're deploying AI in terms of reducing the time and effort that we need to deploy and building recruiting profiles for hiring and then leveraging AI to try and expedite bringing the right match skills to the required we're looking to onboard more quickly, more expediently, and the list goes on and on. We still have a lot more work to do to essentially reduce the proportion of labor that goes into generating every dollar of revenue by exploiting these exciting new technologies and capabilities. But pretty optimistic about the progress we made in a reasonably short time. Would that we'd move faster sooner, admittedly, but we are on the right track indeed. And as I mentioned, I think a lot of those efficiency gains that were reflected in the quarter are absolutely sustainable and will continue to amplify in the quarter and the year ahead.

That's great. Thank you. Thank you. One moment for our next question.

And our next question comes from the line of Divya Goyal from Scotiabank. Your question, please.

Good morning, Jeff and Vanessa. We've spoken about it briefly, but I wanted to get some color on your client diversification efforts, and you did provide some context in the press release this morning, but I'm trying to understand how can we expect over time to see concentration slightly move on from TELUS, and is there a certain timeline that you have internally to reduce that concentration given it's been picking up with willow trees work that you're doing with Dallas. And just to add on in general, I also wanted to understand how are some of the budget discussions going with some of the customers for 2024 and what sort of traction are you seeing there?

Thanks very much, Divya. of trying to ameliorate the client concentration profile, continuing to expand our direct sales capability, both hunters in particular, but farmers as well. We've deployed a TELUS framework around their sales organization methodology to try and ensure that we're more disciplined and better data-driven around how we approach our account planning activity so that we can make more meaningful accelerated progress around reducing our dependency on just a few large clients. As I've said in the past, it's a bit difficult obviously when you're enjoying the patronage of these large clients who want and need so much of the great services we have to offer. We don't want to artificially slow down their continued spend just because we want to try and improve the overall proportion distribution of revenue derived from our customers. But again, increasing the number of feet on the street, if you will, in our commercial organization to try and win new clients more quickly. We've not set arbitrary targets in terms of how quickly we get from 54 to 52 to 50 to 48% revenue concentration from our top 10 clients. But we recognize that we were the beneficiaries when the hyperscalers were growing quickly, and we were over indexed on them and suffered the consequence of late when things turned around the other way. And I've been reminded that we needed to make more progress more quickly on that front.

And just on those 2020... Sorry, thank you.

In terms of 2024 budget, early days still, engaging with a number of our clients around those discussions, and we're not ready to guide for 2024 yet, but as I think you heard from Vanessa in particular in her prepared remarks, we're still moving with caution and prudence. We're not yet seeing and hearing that people feel like we're at the bottom of the trough, I think folks are still feeling a bit trepidatious. There's still some uncertainty regarding when or if interest rates finally stop being raised, and we see some better predictability and stabilization across the planet in terms of geopolitical issues in particular. So cautious optimism regarding what 2024 is going to look like for now.

It's very helpful.

Yeah, I think we're going to have Q4 is going to be a critical quarter just in terms of, you know, how our clients are thinking about their budgets because this is the time, in fact, that clients are working on their budgets. And so, you know, to Jeff's very point, I think when we come back in the next quarter and we start talking about guiding for 2024, we'll have a lot more color there because we would have had more meaningful conversations because every single company right now, that's a calendar year end company, is right now going through their internal budget discussions.

That's very helpful. Thanks, Jeff. Thanks, Vanessa.

Thank you. One moment for our next question. And our next question comes from the line of Casey Chan from Bank of America.

Your question, please.

Hey, guys. Thanks for taking my question. I just wanted to make sure that I understood your full year outlook correctly. For Willowtree, the full-year revenue outlook was taken down by about $15 million, and FX is a little bit better than expected, hence the unchanged reported outlook. On an organic FX neutral basis, the guide is also essentially unchanged, and what are some of the underlying factors that's going to drive the implied 4Q acceleration itself? Thank you.

Yeah, so Cassie, we did trim WillowTree down by about $15 million. It's a bigger percentage on their revenue, just given the size of their revenue, but not really a big impact on the total $2.7 billion total company view. So that obviously implies a slight uptick. We show our organic revenues rounded. We don't get it down to the decimal place. So that does indeed imply a slight uptick in organic revenue growth. But where is that coming from, I think? We've spent quite a bit of time on this call sort of talking about where those drivers are coming from. So it's not that meaningfully different from last quarter. It is a very, very slight uptick. We've talked about some stabilization in what we're seeing in revenue. We've talked about the strength we're seeing in AI. We've talked about when you sort of normalize for that large social media client, we're seeing pockets of positivity, growth within tech and certain games clients growing their book of business with us, not only year over year, but also sequentially. Some of the other declines that we've seen, like BFSI, still quite meaningful, but as I look quarter by quarter, it is now starting to stabilize. So all of these factors, Cassie, and of course, last but not least, we've talked about the work we're doing with Telus and others, and of course, Google. So that's what's driving that, and that's why we're fairly comfortable reiterating the overall guide, even though we do see about 50 million of soft nets within the willow tree specific part of the portfolio. Okay, that's all helpful.

And I know last quarter you mentioned the $40 million in the annual cost savings. Is that still the right number to think about? And how much of the optimization in terms of your costs is just headcount versus the other discretionary costs that you also mentioned before? Thank you.

Yeah, so the $40 million is actually now $45 million that I mentioned in my prepared remarks, Cassie, and the annualized value of those savings is $96 million, as I mentioned in my prepared remarks. So that's an acceleration from what we reported last quarter. It is a combination of not only headcount reductions, but also some of the other efforts I mentioned around vendor optimization, facilities, footprints, etc., But if you look at our cost structure, most of our costs are in fact S&B salaries and benefits. So as a result, disproportionately, that is where we're seeing the overall cost savings that I mentioned.

That's helpful.

Thank you.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Keith Bachman from BMO. Your question, please.

Hi. Many thanks. Appreciate taking the call. I wanted to ask a couple, and I'll just do it successively because they're sort of paired. The degradation of willetry is certainly a bit startling. And so what do you think, what needs to happen to really turn that asset around? And then more broadly, number two is how do you think about M&A with your leverage ratio at 2.9, but, you know, asset prices presumably have come down on the sell side. And so how does that make you think about M&A in this environment? And the last one, just to throw in there, Vanessa, I just wanted to see if there's any directional comments, not specific, that you want to make about FY24. You're currently growing about 1% to 2% organically, and the street has 6% to 7% or something like that for FY24 growth. revenue growth, and just anything philosophically you want to say or directionally about FY24. That's it for me. Many thanks.

Thanks, Keith. I'm not sure if it's just nomenclature, but I don't agree with your characterization of the significant deterioration of Littletree's performance. I would agree that there's been a deterioration in the outlook for the growth trajectory, but in terms of year over year, it's pretty much flat. So I don't think that's deterioration, but I would agree that our expectations of in-year growth are certainly not being met right now. And as I said earlier, it's because the customers that they're serving the customers they're aspiring to serve are unfortunately taking a lot longer to get around to making the decision to move forward with the transformation initiative that they've been discussing with Willowtree for quite some time now because like so many businesses out there, their budgets are being constrained or they're being invited to take a bit of a wait-and-see approach as everybody seems to conserve cash and wait to see what's going to happen in terms of the macroeconomic and geopolitical landscape. But as I said also a moment ago, we continue to be very bullish on the WillowTree capabilities and their addition to our portfolio. And in the fullness of time, I'm confident that will be borne out. In terms of M&A, I mean, I think it's not surprising that these unfortunate price points putting our transaction currency, our publicly traded shares to work would be a bit heartbreaking, frankly. And so I think you should expect that we're not likely to be pursuing something at scale in the near term that requires the use of our equity at these price points. Similarly, where we are in terms of our leverage ratio, not again in a big hurry to try and take our leverage outside of our comfortable state of two to three times where we sit comfortably right now. unless there was something quite compelling and irresistible. You're right, prices have moderated somewhat, but attractive assets always seem to come with attractive or perhaps less attractive price points. So we need to be thoughtful about that. And again, we've always talked about M&A as you earn the right to go shopping. And one of the ways that's a prerequisite is you have to have your organic house in order. And I think what we demonstrated in Q3 over Q2 is we've made meaningful progress to getting our house in order, if you will. But we have more work to do still. And I think other than perhaps some tuck-in activity, you shouldn't expect to see significant M&A activity from us until we show that we're back on track in terms of our targeted margin yield and organic growth trajectory. I want my management team focused on that first and foremost. distraction, the complexity and the risk associated with M&A activity is not something we take lightly. And before we embark upon the next one, I want to get a little bit more continuity and stability on the organic business under our belt. And we're making good progress on the integration of Willowtree, obviously, but we're not quite finished that yet either. And I'd like to bring that to fruition before I stress the team with the next one. On the 2024 outlook, I'll invite Vanessa to... respond to the extent that she's able.

Sure. And maybe I'll just add to your earlier comment, Jeff, with respect to Willow Tree performance. Clearly not where you would have expected it to be based on the date of close of the acquisition. But I would agree. I think degradation is probably a bit of a strong word. And we are seeing softness in that discretionary spending, which, of course, is not only impacting Willow Tree, but I would suggest it's a fairly common thing we're seeing across their peer set. So we're not seeing that WillowTree stands out uniquely in that regard. We're actually seeing that they're somewhat maintaining their own relative to what we're seeing across their peer group. For 2024, Keith, it's a good question. And as we're now planning around 2024, if I just start from a revenue perspective, for now we're thinking about 2024 revenue you know, very, very cautiously. You know, perhaps low single digits for now. We want to see a bit of stabilization in the current environment. So Divya's earlier question, you know, Q4 right now is going to be critical in terms of what we hear from clients as they go through their budget cycle. So those conversations are happening in real time. So that's what's going to inform, you know, how we think overall about revenue growth for 2024. But I would say as of where we are right now, we're approaching that with a lot of caution. and not, at this particular point in time, planning for a significant... We expect an improvement, but I wouldn't suggest going back to double-digit growth at this particular point in time. And then from a cost perspective, one of the benefits is we have taken out the $96 million of analyzed costs, as I mentioned earlier. But as we think about the new year, obviously, we're going to see wage pressures. We'll see things like performance-based compensation that came down this year just given performance metrics, but obviously that has to normalize again next year. So we will see some of those puts and takes. I think for right now, as we look at margins, if you look at our guide, we're in that sort of 21%, 22% range for the full year. My expectation is we should be able to make some modest improvements in that in 2024 directionally, but obviously we'll come back with more specifics, particularly as we work with our clients in this critical time as they finalize their budgets.

Okay, perfect. Terrific feedback. And Jeff, I thought your comments on M&A made a ton of sense. Thanks, Keith.

Jonathan, maybe one last question, and then we'll wrap it up.

Certainly. One moment for our final question today. And our final question for today comes from the line of James Fawcett from Morgan Stanley. Your question, please.

Great. Thank you so much. I wanted to ask quickly two questions. Clearly, there's been a lengthening of sales cycles. Jeff, I'm wondering how much of that you attribute to macro, which it seems like there's a lot, versus customers potentially evaluating their needs, and especially with the changing capabilities that TELUS is able to deliver, especially on using AI, et cetera, and just trying to assess what the potential there is. And separately on hiring, how should we think about hiring going forward, whether not just on overall headcount, but where you maybe need to shift delivery locations to and from, et cetera? Thanks.

Thanks, James. Good question. The first one, candidly, I'm not sure I can offer you – a high level of scientific insight on what the balance would be from macro versus TI evaluation-specific, although I think there's probably some degree of interconnectedness there. I think the macro is probably the more dominant driver of elongated sales cycles right now. I just think businesses almost across every vertical are nervous, concerned about what the future may hold. And as a consequence, they are taking a more cautious wait and see approach to committing to large multimillion dollar transformation engagements. And the conversations across the board, but particularly highlighted in our Willowtree engagements, I think are emblematic of what we're hearing and seeing, which is everybody seems to recognize that they can't do nothing indefinitely. that they see the necessity of engaging, deploying these exciting technological enablers so that they can drive costs out of their service requirements, they can delight their customers, they can facilitate self-serve to their customers, which is a growing pervasive dynamic out there. And few businesses are fully capable of meeting their customers where, when, and how they want. So they all seem to recognize they've got to get there, but they're just not being given the green light to deploy capital as quickly as they would like. But it's amazing how often we're hearing, just not now, but we definitely know that this has to come. And so we're hopeful that early next year we start to see that situation change. In terms of how much of that is TI, well, again, we need to do more, obviously, on the marketing front, on the awareness front, on helping these existing and prospective customers to recognize that there really is something here at TI that they can exploit and leverage to positive effect and to help them through this complicated but exciting transformation journey. Obviously, we need to double down on our efforts to create more awareness and confidence in the customer ecosystem so that they work more with TI more quickly. On the shift on hiring, We're not seeing anything other than Europe being a particularly challenging environment for us right now. And unfortunately, our Europe experience is disproportionately tainted, admittedly, because of our over-indexation on serving that one client and that one service line. If I normalize out for that, It's not like things are rosy and terrific for us right now, but I think we would be feeling a lot differently than we do on our experience around right-sizing our labor force and working to grow, I think would be different. But in totality, I think what this whole AI revolution is representing is, as I've talked about for quite some time now, simple, predictable, repeatable, human-assisted engagement. are being displaced by technology, by automation, by AI enablement. And that means humans in the loop need to be more sophisticated, more well-trained, more capable of interoperating with technology and AI-enabled technologies in particular. And that's sort of the labor force that we're looking to continue to grow. And excitingly, I don't think that there's a monopoly there. I think there's tremendous opportunities across Asia and Latin America and Europe and North America to access that talent. And despite these challenges, I think Telus International has done a really good job of differentiating itself as an employer of choice, a destination for talent. And as demand from our customers returns and grows, I think we're going to do a disproportionately better job than most in attracting that particular skill set and talent pool to support that growth opportunity.

Great. Thanks for the commentary there, Jeff.

Thank you. Appreciate the questions. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Puritt for any further remarks.

Thanks, Jonathan, and thank you all for your questions today and always. While we look forward to making further progress in the quarters ahead and throughout next year, our intent for this call was to provide you with a balanced view of the near-term conditions we continue to operate through and insights into the longer-term fundamentals of our business. A diverse array of end-to-end capabilities is illustrated today by the specific examples I've shared, from gen AI adoption and CXM to our content moderation expertise within trust and safety to digital transformation projects led by our digital solutions team, and finally, some of the exciting work underway in our AI data solutions line of service. Since our company's inception, we've been committed to driving value for our clients by helping them grow revenue, take costs and risks out of their business, and serve and exceed the expectations of their customers more effectively by evolving, advancing, and enhancing our capabilities to incorporate leading-edge technology. When it comes to the GenAI impact on CXM in particular, in many ways, Fuel IX is a culmination of our significant efforts over the years to carve out a role for TELUS International as a provider of a complete end-to-end CX journey fueled by the latest technology and enabled by our engaged global team. A lot has been said about the impact of Gen AI on our industry and more broadly on society. While the hype is starting to settle, the focus is now on detailed use cases, feasibility of implementation, and specific monetization approaches. And I'm hopeful that you all now leave this call with a better understanding of TI's strengths in this area and thoughtful positioning as an end-to-end CX partner for clients. On that note, Vanessa and I look forward to connecting with many of you in person at upcoming investor conferences, or we'll meet again on our next quarterly investor call that will take place in February. With the holiday season fast approaching, I wish you all a safe and joyous end of the year. Thank you once again for your time and attention today. Bye-bye all.

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