Telus International Cda Inc

TSX:TIXT

Earnings Call Transcript 2024-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the TELUS International First Quarter 2024 Investor Call. My name is Jonathan and I will be your conference facilitator today. [Operator Instructions] As a reminder, today's program is being recorded.I would now like to introduce Jason Mayr, Head of Investor Relations and Treasurer at TELUS International. Mr. Mayr, you may begin the call.

[Jason Mayr, executive]

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q1, 2024 investor call. Hosting our call today are, Jeff Puritt, President and Chief Executive Officer, and Gopi Chande, 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 Gopi, 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 2 of the supplementary presentation available for download on this webcast and also available on our website at telusinternational.com/investors. The statements made during this call may be forward-looking in nature, including all comments reflecting expectations, assumptions, or beliefs about future events or performance that do not relate solely to historical periods.These forward-looking statements are subject to risks and uncertainties, which may cause actual results to differ materially from our current projections. We assume no obligation to update any forward-looking statements. Jeff and Gopi 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 SEDAR+ 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 Puritt.

[Jeffrey Puritt, executive]

Thank you, Jason. Good morning, everyone. In the first quarter of 2024, TELUS International delivered results that were on track in terms of our expectations, and what we see as a continued path to recovery. While the operating and macroeconomic environment remains pressured for the first half of the year, with inflation and higher-for-longer rate narratives dominating the market sentiment, we anticipate demand starting to recover in the latter part of the year.We continue to center our efforts on what we can control, and with our meaningful global cost efficiency programs executed over the past 9 months, we're maintaining our focus on profitability. Our outlook for 2024 is unchanged and it remains prudent based on our current view of client demand, and our assumptions around the macroeconomic conditions in the near term. Gopi will share more details on this topic later in the call.With our third largest client, a leading social media network, we're encouraged by recent volume stabilization. Our team is working to surface incremental opportunities, for further rejuvenation in the account, through a potential expansion in our service line offerings and geographic diversification, although these efforts will likely play out over the medium and longer term.Carrying over from last year's results, our momentum continues in AI data solutions driven, by the strength of our relationship with Google in particular, while we're also working diligently on pilots and opportunities, with many major foundational AI model developers. In this regard, the progression of our Fuel iX gen AI client engagement, led by our WillowTree team is accelerating, and I'll share more details shortly regarding our most recent beta launch last month.This launch positions us favorably as we endeavor to become the AI-fueled customer experience partner of choice, for our clients and across the industry. To start the year, our global sales team won several new clients, including a multinational hospitality company, a Canadian-based global e-commerce powerhouse, a leading provider of win-loss analysis services and technology, and a financial technology company in the U.S., among others.To highlight a few wins by our team at WillowTree, they secured mandates with a multinational consumer credit reporting agency, an American biotechnology company, a movie theater chain that operates the second largest theater circuit in the United States, and a global fashion house coach. For the latter well-recognized name, in particular, our team at WillowTree will lead a transformative project involving strategy development, research, design, and advice on technical architecture to envision a seamless, single pane of glass employee retail experience.Importantly, we also continue to deepen our relationships across our existing client base. In the first quarter, we expanded work for many of our long-tenured clients, including one of the largest global logistics providers focused on transportation, e-commerce, and business services, a leading ride-hailing services company, an American telecommunications and media conglomerate, and a leading information services provider of financial property and consumer information and analytics.We also continue to be a beneficiary of steady growth serving TELUS Corporation, our parent company and anchor client, including further ramp up within their TELUS Health division that we expect to continue throughout 2024. Similarly, WillowTree secured an AI innovation win with an American consumer financial services company, and saw incremental expansion with clients across diverse industries, including retail, fast food restaurants, energy, and insurance.Specifically, as it pertains to Fuel iX, our WillowTree team also continues to drive new client engagements, including 2 well-established American financial services companies. I'll share details of one of these engagements, namely Inspira Financial, in a case study in just a moment. Last month, we announced a beta release of Fuel iX, as part of the ongoing growth and refinement of our enterprise-grade AI engine, structured now as 2 main solution layers, Core and Apps. Fuel iX Core offers the orchestration, integration, and administration as a backbone for enterprise AI, while Fuel iX Apps includes templated gen applications across customer and employee experiences.Think of these as add-on solutions and tools, including third-party applications, along with our own consulting and design services, for example, our 8-week GenAI jumpstart accelerator program. Key divisions of our parent company, TELUS, are part of both the Jumpstart and the Fuel iX client rosters.Across multiple business areas and corporate support functions at TELUS, we've designed, built, and delivered AI solutions supporting an IT service desk, field service, and internal team member knowledge solutions, an in-store retail associate co-pilot, a customer service agent assistant, and a public-facing consumer website. These solutions have delivered tangible outcomes for TELUS already, helping them achieve a lower cost to serve, and support their focus on driving a higher average margin per user.Our AI capabilities, are expanding opportunities with TELUS, charting a path to an additional differentiated service revenue stream. In fact, we currently have several more pilots underway, as well as over 30 requests for new applications. Our TI sales team is also taking this successful real-world implementation at TELUS, on the road to demonstrate the value of Fuel iX, to enterprise clients across multiple industries.We also continue to foster strategic technology partnerships, to complement our capabilities and broaden the scope of our offerings. In March, TI announced the partnership with Local Measure, which is an out-of-the-box GenAI-enabled contact center solution, powered by AWS Amazon Connect. This addition to our Fuel iX platform provides our clients with even more choice, and greater flexibility in implementing GenAI.In April, we announced an expansion of our strategic partnership with Appian, a company name spelled A-P-P-I-A-N, and not to be confused with another similar-sounding company name out of Australia. The key focus of this partnership, is to offer clients an intelligent automation-as-a-service platform, with low-code automation solutions accessible on-demand, and based in the cloud, with all elements and tools coming together to create a unified AI-powered IT ecosystem.We successfully tested this value proposition, by deploying it for our anchor client, TELUS Corporation, within their core telecom business. Employees at TELUS were able to develop network build tools with a wide variety of functionalities, such as network design, configuration, deployment, and optimization. All of this at a pace 5x faster than conventional methods and already resulting in savings of over $5 million.Turning to case studies. One of the WillowTree client wins in the quarter I mentioned a moment ago is Inspira Financial, a financial services company based in the U.S., providing custody solutions for alternative assets, and retirement services, including self-directed individual retirement accounts and 401(k) rollovers. Having acquired another player focused on providing health savings and spending account solutions, our client needed to undergo extensive rebranding, as they brought the offerings of the 2 companies together under 1 portfolio to transform the combined company into a comprehensive health, wealth, retirement, and benefit solution provider for institutional business partners, employers, and individuals.To achieve this strategic goal, the client partnered with our team at WillowTree to expand the new brand through digital channels, including web and product platforms, creating impactful illustrations, animations, and content that resonated with users. We then applied these new digital brand guidelines to the product portals to support the enterprise-wide brand rollout.We also strategized and implemented marketing operations workflows to support the brand rollout and maintenance using tools like Adobe Workfront and Brand Portal. In addition to developing a web strategy for the new brand, with key focus on designing and building an intuitive public web experience for the updated portfolio, our team has migrated the client's systems and operations to Adobe Experience Cloud.Excitingly, we've also implemented an AI-powered navigational assistant, to guide users through the new portfolio of offerings and reduce support costs, by offering self-service solutions. The AI assistant we've built for the client, is a hybrid LLM and rule-based chatbot, with a secure intent classifier augmented by LLM function calls to deliver optimal solutions for user queries.It adeptly handles various needs such as FAQs, login inquiries, and guiding users to the next step in the journey with Inspira. The chatbot's engagement surpasses search usage by 5x, with a notable 53% conversion and engagement rate achieved to-date. Moreover, insights collected from the chatbot logs and site analytics fuel continuous optimization aimed at reducing the client's call center volume.Another Willowtree client from a completely different industry, Mercury Marine, is a global leader in marine manufacturing, offering a comprehensive range of engines. The client sought our expertise in digital transformation, when they recognized the need to harness technology, to improve their multi-channel offerings, and deepen their direct engagement with customers.In less than 10 months of engagement, our team at Willowtree introduced a brand salient engaging design and modernized website for this client. The enterprise-grade website and e-commerce experience was developed on Adobe's cloud platforms, decentralizing the authoring model, and allowing for regionally relevant and timely campaigns across 36 websites in 14 language combinations.Mercury Marine has seen growth in leads in the quarter following the launch of our solutions, compared to the same time in the previous year. Meanwhile, better user experience enabled by our solutions has improved discoverability, driving increased customer interest and dealer profitability.For 2024, our team at Willowtree continues to work with Mercury Marine on improving their online presence, through more targeted search engine optimization and feature enhancements, to create even better customer experiences. We believe this will enable further opportunities to drive additional revenue for the business, both that of our clients and our engagement with them.Next, I'll share a case study update, from our computer vision group within our AI data solutions team. We continue to work with a long tenured client, an American robotics company based in California, who develops autonomous delivery vehicles. If you're from the San Francisco Bay Area or Houston, Texas, you may have seen their delivery vehicles in your neighborhood.Loyal listeners of our investor calls may also recall I spoke about this client and our work for them back in 2021, during one of our earlier earnings calls. In addition to creating training data sets for this client's computer vision perception models, we've expanded our scope to include fine tuning of the client's LLMs, built for real time explainability of the autopilot's decisions.Our team's goal is to teach LLMs based on the expertise of a human driver, with actions or preferences across various driving scenes, including complex and rare scenarios, as well as generate and explain resulting motion plans, depending on a wide range of very specific traffic conditions. The workload starts with several English speaking and qualified drivers writing detailed and clear descriptions of various traffic scenarios they see in a given image or video.Then annotating the edge cases in the image or video, followed by selecting their motion decisions for the given scenario. As you can imagine, the universe of potential scenes and traffic scenarios, is very close to infinite. Yet the client and our team need to generate, categorize, structure, annotate, and ensure the quality of all these data points and permutations.Thanks to TI's proprietary multimodal annotation and fine tuning platform, we're able to automate many of the steps involved using AI-assisted description generation and video labeling. Drivers then edit descriptions and annotations, applying their driving expertise, knowledge of traffic rules, and using their best judgment. This is a great example to illustrate how TI is able to combine deep human insights and nuances, with high accuracy of input data for LLMs with speed at scale to build adaptable and safer GenAI models for our clients.In the spirit of continuously refining our own capabilities, and particularly in relation to AI, just 2 weeks ago we launched TI's Fine Tune Studio, part of our broader AI data solutions proprietary platform. It's a task execution module designed to create high quality fine tuning data sets for LLMs and GenAI models.While our experts engine can algorithmically match tasks with best fit experts from our global cloud sourced AI community of more than 1 million contributors, the Fine Tune Studio goes further in enabling contributors to create high quality data sets for LLM fine tuning in more than 100 languages deployed across domains where specialized responses are required, including STEM disciplines, healthcare, finance, and more.Our Fine Tune Studios allows for native AI integrations, including real-time assessments of possible plagiarism, tone analysis, spelling and grammar checks, features that improve output accuracy and facilitate users task completion, with increased productivity and efficiency. Our team presented the Fine Tune Studio during the 2024 World Summit AI, which took place in Montreal a couple of weeks ago, with a great reception from industry participants.One last case study I'll share today, illustrates our deep capabilities to serve telecom clients. As you might expect, TELUS is a meaningful source of opportunities within our media and telecommunications industry vertical, and over the years it's opened doors as a reference for other telecom businesses, notably in the U.S. On our investor call a couple of quarters ago, I shared with you an example of one such client, a large service provider of pay television and retail wireless services.One acquired a mobile network operator and turned to TI, who then, to help them re-imagine and assemble a comprehensive cloud infrastructure. As an update on that engagement, after we successfully helped the client to set up their infrastructure, TI was then tasked to manage a complicated network migration, of the client's entire customer base.A process that also necessitated an introduction of additional functionalities for customers, a customization of user interface and experience, integration with numerous application programming interfaces, a robust logging and exception handling framework, and a complex porting process for account management. Our team collaborated across several squad groups within TI's enterprise platform services, working in the AWS cloud environment to deliver exactly what the client needed.While ensuring network compatibility, managing customer data, and overcoming technical integration obstacles, all while maintaining a positive customer experience. Among the outcomes delivered for the client, our team put together self-service tools that enabled customers to migrate seamlessly and independently. Our solution enhanced account management capabilities, providing customers with increased control, and better insights.We streamlined support operations, reducing the time spent troubleshooting and tracking telephone numbers, across different networks and data models. And we added new sales and service reporting capabilities, providing valuable insights for performance analysis and decision making. This example not only illustrates the continuity we enjoy with some of our clients, having done good work and shown value on the first engagement, we're often rewarded with more and more complex work in the future.It also shows how TI solutions address critical business needs for our clients, addressing both ends of successful customer experience management, cost efficiency, and growth enablement. We've also started the year on a positive note with several industry awards and rankings, which reflect our global team's continuing commitment to excellence in everything we do.Following on from our leader ranking in IDC's Marketscape for Worldwide Data Labeling Software last December, this year TI was recognized as a leader in Everest Group's Peak Matrix for Data Annotation and Labeling Solutions for AI and machine learning. What's truly notable here, is that TI was the only provider ranked in the top 2 for both these assessments, highlighting the unmatched leadership of our AI Data Solution Division's vision, strategy execution, innovation, and client satisfaction.Additionally, for the eighth consecutive year, TI was named on the Global Outsourcing 100 list, once again placing us amongst the best outsourcing providers for size and growth, customer references, awards and certifications, programs for innovation, and corporate social responsibility. Also for the eighth year in a row, our global team's efforts were recognized by Business Intelligence Group in a 2024 Excellence in Customer Service Award within the Organization of the Year category.This award duly recognizes those who are transforming the customer experience in today's online-driven economy. Further, at this year's Webby Awards, known as the Internet's Highest Honor, our team at WillowTree and several of our clients were recognized among nearly 13,000 entries from 70 countries. You may recall among the case studies I shared with you on our investor call in November last year were Brightline Trains and McGraw Hill.Both of these clients won the awards. Brightline Trains secured recognition as an honoree in 2 categories with their mobile app and enterprise website developed by WillowTree, excelling in the travel and travel and lifestyle sectors. McGraw Hill's Access app, also developed by WillowTree, was honored in the education, science, and reference category.Additionally, WillowTree's vocable app won the Trailblazing Techquity, which stands for tech and equity, Innovation Award, a much-deserved recognition for the team's ground-breaking initiative that redefines healthcare through digital innovation. Vocable was applauded as a healthcare initiative helping to close the digital divide in underserved or marginalized communities. If you haven't already done so, I encourage you to read my colleague Tobias Dengel's best-selling book, The Sound of the Future, which reveals how voice technology powered by the latest AI advancements is poised to drastically alter the way we live and how companies do business.Speaking of interesting reading material, TELUS International's second standalone sustainability and ESG report was published on April 5 this year, providing an update on our progress against our 4 pillars and 23 commitments. I'd like to highlight some of the encouraging results achieved in 2023. We volunteered over 90,000 hours, the equivalent of 12,000 days, in the communities where we operate around the world. This included building schools, refugee centers and homes, planting trees and community gardens, and building beehives, as well as providing mentorship and employment opportunities to historically marginalized communities across the Philippines, India, Guatemala, and El Salvador. We provided over $1.6 million in cash and in-kind donations, to communities around the world.Additionally, our 5 international community boards allocated $2.5 million to fund 67 projects spanning our priority areas of health, employment and education, and the environment. We know that diversity, equity, and inclusion are integral to our ongoing success. As such, we set targets to ensure that there would be appropriate representation of women at all levels of the organization.In 2023, we surpassed those targets, with women representing 36% of Board members and 44% of the executive team. Since 2012, we've also been developing programs to hire and provide career development opportunities, to people in economically disadvantaged and/or marginalized communities around the world. These powerful, life-changing, impact-sourcing programs have a dual benefit.They provide training, meaningful work, coaching, and development, while providing TELUS International with a deeply engaged, highly skilled workforce. For example, we run a training and employment initiative in India called Project Sakima, providing opportunities for women from economically challenged communities.And last, but certainly not least, as climate change remains one of the most challenging issues of our time, we're committed to continue to work in tandem with our parent company to achieve net-zero operations through a combination of emission reduction, and emission removal by our 2030 target.With that, I'll now invite our CFO, Gopi Chande, who's had a great, fast-paced start to her role here at TI, to share details of our financial results. And I'll return to answer your questions. Gopi, over to you.

[Gopi Chande, executive]

Thank you, Jeff, and good morning, everyone. Thank you for joining us today. As per usual practice, 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 our non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning.Up front, I'd like to highlight -- that in the first quarter of 2024, our top-line results reflected a tough year-over-year compare, due to the macroeconomic environment and the impact on our clients, since the summer of 2023. However, we anticipated this and set our targets and our outlook accordingly. Our first quarter results are very much in line with our expectations and the views we shared back in February.In the first quarter, TELUS International delivered revenues of $657 million, down 4% year-over-year, which was expected, knowing the impact on the revenue trajectory, from our third-largest client, a social media network. We mitigated this headwind in part by growing and diversifying our revenues, with other existing large clients, namely TELUS Corporation and Google, as well as adding new clients over the past year.In fact, we've seen an accelerating trend of new customer acquisitions, across several verticals, and while not yet materially contributing to near-term revenue, it does provide better visibility for the balance of the year as these new clients ramp up. With Google in particular, over the past 12 months, we've successfully broadened our relationship across several lines of service, and deepened our engagement in the fast-growing area of AI, which drove Google to become our second-largest client by total revenue.As a result, our revenues with Google in the first quarter of 2024 grew 30% year-over-year, and momentum remains strong with this key client. With our parent company, TELUS Corporation, we grew revenues by 22% year-over-year in the first quarter. TI remains a key enabler of digital transformation at TELUS, with 100s of programs underway across all business divisions, with particular acceleration year-over-year with TELUS Health, as well as supported by the strength of capabilities at WillowTree, not least in our ability to design, build, and deliver GenAI solutions for TELUS.From a sequential quarter perspective, revenue from the social media client is showing signs of stabilization. I echo what Jeff shared at the start of today's call. We are encouraged by this volume of stabilization, and our team is hard at work to surface incremental opportunities for further rejuvenation of this account. I also wanted to highlight that the leading social media company still remains our third-largest client, but has now dropped to just below 10% of revenues in the quarter.Moving on to revenue by vertical. While we faced a similar challenge of a strong comparison base, in the tech and games vertical, our momentum with Google was a positive offset. In fact, excluding the impact from the social media client, our revenue in the tech and games vertical grew by approximately 7% year-over-year. Our games clients, in particular, performed very well.Looking at the rest of our key verticals, we're seeing sequential quarter improvement, a positive reading this early in the year. For example, with clients in the banking, financial services, and insurance, or BFSI vertical, revenues decreased by approximately 3% from the fourth quarter, driven by a ramp-up with a couple of clients, one of Canada's largest banks, and one of the financial clients at WillowTree.Meanwhile, the communications and media vertical continued to deliver growth, increasing 5% year-over-year by expanded digital engagements with TELUS. And finally, our revenues in the healthcare vertical decreased 23% -- pardon me, increased 23% year-over-year, also primarily driven by an expansion of services provided to TELUS Health.Turning to our revenue performance by geography, as we expected, Europe remains our most challenged delivery region, partly due to the aforementioned year-over-year dynamics, with the leading social media clients that we primarily serve from that region. That said, on a sequential quarter basis, revenues generated in Europe were flat. For further context, the year-over-year changes for certain other geographic regions also reflect our efforts to optimize both our clients' cost to serve, and our own cost to delivery.For example, revenues in North America reflected increased offshoring, with the beneficiary, VA, our Central America delivery region, along with the growth in South America and Africa, with revenues generated from these offshore locations increasing 13% year-over-year. Meanwhile, in Asia-Pacific, revenues were relatively flat year-over-year, with reductions in service volumes with certain technology, BFSI, and e-commerce clients, offset by higher volumes delivered for our clients in communications and media, as well as healthcare.Moving on to our operating expenses, salaries and benefits expense in the first quarter were $416 million, a year-over-year decline of 3%, reflecting a lower average team member count, which also declined by 3% year-over-year, as a result of our cost efficiency efforts taken in 2023, to align our supply levels with changes in service demand from certain clients. This was partially offset by higher training costs, commensurate with the typical ramp up earlier in the year, and expectedly higher average salaries and wages in the first quarter of 2024.As a percentage of revenue, we kept salary and benefits relatively flat at 63% in the first quarter, compared to 62% in the same quarter last year. Our goods and services purchased were $116 million, an increase of 13% due to higher external contractor costs from growth in our AI data solutions service line, as well as a reduction of certain sales tax reserves we realized in the first quarter of the prior year that, did not recur in the first quarter of this year.For additional context, as part of our ongoing efforts to improve efficiencies, we continue to consolidate and optimize our physical footprint as appropriate, with a net impact of slowing our facilities growth and related costs in the quarter.Share-based compensation in the first quarter was $1 million, a decrease of $13 million year-over-year, reflecting an expense recovery, due to a downward revision of the estimated achievement of certain performance-based restricted share award units, and a further expense recovery on award forfeitures, as well as lower expense associated with share-based compensation awards granted in relation to our acquisitions in the past.Our acquisition integration and other charges in the first quarter were $7 million, a decrease of $9 million year-over-year, primarily due to lower personnel-related efficiency program costs.Depreciation and amortization expense held steady at $79 million for the quarter, due to higher depreciation and amortization associated with our investments in capital assets over the past 12 months, which were partially offset by timing of fully depreciated, or amortized capital assets.Changes in business combination-related provisions increased by $29 million in the first quarter of 2024, compared with the same quarter in the prior year. This was due to a downward revision to our estimates of certain performance-based criteria associated with the willow tree business, resulting in a reduction of our provisions for written options. The thoughtful design of our transaction at first instance provided good alignment of incentives that ensured that there was an appropriate linkage between expected performance and future payouts.Interest expense in the first quarter of 2024 was $35 million, an increase of $2 million, primarily driven by higher interest accretion on lease liabilities due to higher average interest rates and balances. In the first quarter of this year, our income tax expense was $9 million, with an effective tax rate of 24.3%, compared with an income tax recovery of $2 million and a negative DPR of 16.7%, recorded in the same quarter of the prior year.These year-over-year changes were primarily, due to a change in income mix, whereby proportionately more income was earned in higher tax jurisdictions in the current year's quarter, and an increase in the foreign tax differential, partially offset by a decrease in withholding taxes.Moving on to profitability. In the first quarter, our adjusted EBITDA was $153 million, an increase of 9% year-over-year, primarily due to other income arising from business combination-related provisions and lower share-based compensation expense, which were partially offset by lower revenue.Adjusted EBITDA margin was 23.3% in the quarter, an improvement of 270 basis points year-over-year, due to the factors I've just described, as well as changes in our revenue mix across industry verticals and geographic regions. If not for the favorable impact from the business combination-related provisions, and share-based compensation expense, our adjusted EBITDA declined and the margin compressed year-over-year, reflecting lower revenue flow-through, as well as higher service delivery costs from increase in complexity of work, variability in utilization levels based on customer demand volumes, along with an overall increase in average salaries and wages.As discussed on our investor call in February, this year we're making further investments in our sales and marketing organization and internal transformation, the strategic initiatives to position our business for success in the near and long term, and that we've started to implement during the first quarter.Adjusted net income was $65 million in the current year's quarter, an increase of 3% year-over-year, whereas our adjusted diluted EPS of $0.22 declined slightly, compared with $0.23 in the same quarter of the prior year, due to an increase in weighted average number of diluted equity shares outstanding, during the first quarter of the current year, arising from the dilutive effects on the provision for written put option.Turning to the balance sheet and cash flow, the balance sheet remains strong with cash of $154 million and available capacity under our credit facility of $504 million. We generated robust free cash flow of $107 million in the quarter, a year-over-year increase of 65%, driven by higher net inflows from working capital, which included higher cash receipts and lower income taxes paid partially offset by lower operating profits and higher capital expenditures. As a percentage of revenue, free cash flow was 16% in the quarter.Our capital expenditures were $19 million in the quarter, an increase of $4 million year-over-year, primarily due to facility build-outs in our newest delivery centers in Africa, as well as additional investments in our digital solutions and AI businesses. As a percentage of revenue, capital expenditures in the quarter were approximately 3%.Our leverage ratio as of March 31 was 2.9x, a slight increase when compared with the prior quarter, driven mainly by headwinds when comparing the 12-month rolling EBITDA in the calculation of the ratio, which overshadowed debt repayments in the quarter. That said, the ratio remains within our communicated steady-state range, and we believe our strong cash flow generation will enable further meaningful debt repayment and leverage ratio improvements throughout the remainder of 2024.Turning to our outlook, we are reaffirming our full-year outlook today. For 2024, we continue to expect revenue in the range of $2.79 billion to $2.85 billion, which represents revenue growth of 3% to 5% on a reported basis. We do not currently expect year-over-year foreign currency impacts on revenue to be material. Within this outlook range, we assume near-term stabilization in revenues from our third-largest client, with any softness offset by continued expansion of revenue with TELUS and further momentum with other large clients, including Google.As I mentioned earlier, we are seeing an acceleration in new client additions that we expect will have more meaningful revenue contributions in the quarters ahead, and something that is already reflected in our outlook range. Our funnel remains robust at $2 billion.For adjusted EBITDA, we expect a range of $623 million to $643 million, representing 7% to 10% year-over-year growth, with adjusted EBITDA margins of 22.3% to 22.6%. We expect adjusted EBITDA growth to outpace revenue growth in 2024, in part due to the significant cost efficiency programs we executed upon in the past nine months, as well as our current year in-flight initiatives that address our service delivery capabilities, to enhance service quality and optimize our global cost of service.Our outlook continues to call for an adjusted diluted EPS range of $0.93 to $0.98, representing growth of 7% to 13%. We assume a weighted average diluted share count of approximately $292 million for the year.And finally, for the full year 2024, we expect our effective tax rate to be in the range of 22% to 26%, reflecting the expected jurisdictional mix of our needs. While we do not provide formal quarterly guidance, I would like to reiterate certain seasonality factors to help you model our quarterly cadence. We continue to expect revenue seasonality of approximately 48% in the first half and 52% in the second half of 2024, and adjusted EBITDA seasonality of approximately 45% in the first half and 55% in the second half.Finally, our effective tax rate is also subject to seasonality, being higher in the first half of the year, and lower in the second half. We believe this outlook remains prudent, even though we're mindful of continued uncertainty in the market, with evolving forecasts around interest rates and resulting caution in IT spend. At the same time, we still expect to see demand starting to recover in the latter part of the year.With that, let's move on to questions. I kindly ask that you keep it to one question at a time so that everyone can participate. Jonathan, over to you.

[Operator]

Our first question for today comes from the line of Ramsey El-Assal from Barclays.

[Ramsey El-Assal, analyst]

I wonder if you could comment a little bit further about the signs of stabilization that you're seeing at the leading social media partner. I think you mentioned that some of the recovery dynamics could take place over the medium to long-term. I guess I'm just wondering sort of what's giving you confidence that you're seeing stabilization, and also if you could comment on the shape of an eventual recovery. Is this a long, gradual, multi-cycle recovery or do you see something a little bit more of a snap back at some point?

[Jeffrey Puritt, executive]

We suffered some pretty significant deterioration in spend with that client, really starting in the back half of 2022 throughout 2023, as you'll recall. And so the performance in 2024 is still on a year-over-year compare basis, rather disappointing. The good news that we're alluding to is we have now seen a stabilization and some meaningful green shoots in terms of incremental business.And so our outlook for 2024 already reflects that, as I said, as you heard from Gopi as well, the stabilization. So no further shrinkage, reduction, deterioration in spend and already sort of turning that around. We don't want to get too over our skis here, and assume that all of a sudden we start to recover in terms of growing back to the 2023, or 2022 levels of total spend.But we do anticipate and what's reflected already in 2024 is sort of that flattening of the historical curve in the previous decline, and going into hopefully 2025 with meaningful positive improvement.

[Operator]

And our next question comes from the line of Tien-Tsin Huang from JPMorgan.

[Tien-Tsin Huang, analyst]

Just curious on conviction on the second half recovery versus 90 days ago. It feels like you mentioned green shoots, like Google is tracking quite well. I just answered on Ramsey's side with the social media. I'm just curious on conviction versus 90 days ago for the second half?

[Jeffrey Puritt, executive]

I'll invite Gopi to top up, but I can tell you my conviction is as confident, if not more so, based on the new clients we've already signed, many of which I referenced in my opening comments. The challenge of course, is just how quickly we can get deals signed, and ramped and start to realize the profitable revenue associated with them.But we spent a lot of time, as you can imagine, Tien-Tsin, discussing amongst ourselves and with our Board the prudence of our guidance reaffirmation, given what's going on amongst our peers in the market more broadly and admittedly, given what happened last year at TI. And I think where we've landed, is reflective of our belief as to the prudence of this outlook reaffirmation.

[Gopi Chande, executive]

I'll top up there, Tien-Tsin. Reiterating our funnel is looking strong. Again, it's circa $2 billion. We're seeing that new global acceleration sequentially from Q4 as well as Q1 last year. We've mentioned the investment we've made in our sales and marketing organization and that's bearing fruit, will continue to bear fruit throughout the year.And the recovery we're expecting is in the latter half of the year. That reflects the seasonality we've reflected in our guidance of 48% and 52%. So continue to feel that that's a prudent outlook for -- just as we did 90 days ago.

[Operator]

Our next question comes from the line of Stephanie Price from CIBC.

[Stephanie Price, analyst]

Gopi, maybe this is one for you. You noted on the call that excluding the $29 million addback around WillowTree that margins were down year-over-year and they were below the full year guidance. Just trying to understand what margin should look like on a go-forward basis factoring in the cost savings, and the puts and takes you found in the quarter?

[Gopi Chande, executive]

So maybe I'll start, Stephanie, with I do think it's fair to continue to use our revised definition of EBITDA and the inclusion of the business combination provision. I'll just spend a minute discussing why. So first of all, our outlook and guidance is based on our estimates of those numbers. So keeping them in is an apples-to-apples comparison.Secondly, if you think about both of the items that we've added in, or kept in adjusted EBITDA in terms of the, earn-out or stock-based compensation, they're both essentially a pay-for-performance arrangement, where we're incentivizing management or through acquisition, or internal management to deliver on expectations. And so, to the extent that doesn't happen, we do not want to overpay for underperformance.And effectively, you're seeing the trough-up of those amounts. So I do think they are reflective ultimately of our business operations. Now having said that, Stephanie, we are seeing pressure on our margins and essentially still feel confident in the guidance that we've provided, and the range we've provided of 22.3% to 22.6%. I'll give you a bit of color of the pressure we're seeing, and what we're doing to mitigate that.So a bit of the pressure relates to the mix of business we're doing. So we don't provide margin by service line, but we have said in the past that trust and safety is one of our higher margin businesses. And AI data solutions, depending on the work, can be a bit below average. So we're working through the adjustment of the mix of our work. As I mentioned in my remarks, we are seeing some higher cost of delivery.And then just as demand stabilizes, we're seeing the utilization of our team members vary. What we're doing to offset that and we think that will help us keep in the range that we've guided on is, first of all, with our clients optimizing the geography in which we're providing them service; and then second of all, doing that internally, really creating our centers of excellence and providing our internal delivery at optimal geos within TI.And then the last comment I'll make is we've made some investments that I've referred to both in sales and marketing as well as in some of our cost transformation. That both has an effect on Q1 that is where we're making the investment, but we also believe that that will help stimulate the gross margins throughout the year.

[Operator]

And our next question comes from the line of Aravinda Galappatthige from Canaccord Genuity.

[Aravinda Galappatthige, analyst]

I just wanted to go back to the EBITDA guide. I know that the provision related to the business combination obviously boosted your EBITDA number. Was that foreseen when you kind of gave the guide or should we sort of consider that to be incremental to sort of the number that you originally guided and you obviously maintained?

[Gopi Chande, executive]

So Aravinda, I will confirm that we did anticipate this in our guide. And effectively it's aligned with what we're expecting with WillowTree's performance and the recovery in the back half of the year. So this is anticipated within the guidance that we provided.

[Operator]

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

[Divya Goyal, analyst]

So Gopi, I wanted to actually get some color on the client concentration here. You did talk about TELUS and Google being obviously 2 of the key clients that you have. I wanted to make sure the amount of revenue that the company generated from TELUS at 24.3% includes TELUS Health's revenue, number 1. And I am just concerned with respect to the ongoing recurring revenue that you can continue to generate out of these 2 accounts if the concentration were to stay where it is today?

[Gopi Chande, executive]

So Jeff, maybe I'll start with Divya on that and then I'll pass to you. Divya, yes, the TELUS numbers we referenced do include TELUS Health. And of course, client concentration is something that we're focused on. What we're very pleased to see with both TELUS and Google is the diversification of the work that we're doing with both of them.So with TELUS, it's TELUS Health, as you mentioned, as well as some of our digital services with WillowTree. And with that one in particular, given the number of opportunities, projects, various business units, there really is no limit to the work we could continue to do with TELUS. There's over 30 projects waiting with a favorable ROI that we're waiting to work on at this moment in just the WillowTree digital business with TELUS.Similar with Google, again, that is a diversification of the work on the AI front. And so, we're encouraged by, while it is our larger clients, the different works that we're doing with them. And Jeff, maybe I'll pass to you to top up.

[Jeffrey Puritt, executive]

Yes, I share your concern, Divya, with respect to concentration risk, given we've already experienced the downside of what that could potentially entail for us. Part of our expansion of our sales and marketing investments, is reflective of our recognition of and our intention in the near term to do something meaningful, to mitigate it by getting out there and winning more clients more quickly.And growing them as quickly as we can, so that we can reverse that trend of concentration. The history of TI way back from our origin was, starting out, dominated by the work we did for TELUS. And I was quite pleased with the progress we made going into 2016, 2017, 2018, where TELUS's contribution to our revenues in totality was starting to diminish, I think, at our Zenith down to about 14% of revenue.And unfortunately, as a result of our failure to be more successful in growing new other accounts, and then scaling them more quickly. But at the same time, it's not entirely all bad news. It's a bit of a mixed outcome. The opportunity to continue to enable TELUS, enable Google across incremental service lines, different geographies, different capabilities. That's a good news story.And obviously not wanting to refuse the work, for fear of exacerbating the concentration profile. But we well recognize the critical importance, of turning that trend around and cautiously optimistic that, before the year is out, we will have made a meaningful improvement in that regard.

[Operator]

And our next question comes from the line of Daniel Chan from TD Cowen.

[Daniel Chan, analyst]

Just another question about diversification, but more on the opportunity side of things. Your data annotation business has been very focused on North American tech players, particularly with the cloud service providers. So 2 parts to this. Is the opportunity pipeline filling up with a more diverse group of customers? And secondly, do you need to modify anything in the business if enterprises start requiring your services for their AI efforts?

[Jeffrey Puritt, executive]

It's not an if, it's already a when. Although hyperscalers have indeed historically dominated the landscape in terms of data annotation demand, we're already seeing that move into the enterprise space more broadly. That is absolutely part of our strategy on our sales and marketing activity to try and capture the opportunity and to leverage our credentials in being a meaningful part of helping the hyperscalers to build out their machine learning algorithms and now their large language models. And again, you're quite right in terms of the North America centricity of the customer base. But we've got teams in both Japan and Korea that are already starting to win new opportunities. And we hope that that will continue to grow more quickly in the near term, given what we see is a pretty fertile target rich environment for both data annotation, computer vision work, as well as GenAI work there.

[Operator]

And our next question comes from the line of Cassie Chan from BofA.

[Jinli Chan, analyst]

I just wanted to ask, I think you guys talked about some acceleration and some new client additions that is included in your full year guidance. Just wanted to know what kind of offerings there, there's more interesting, which business segments, et cetera. And in general, I guess, how much of your business makes it existing client expansion versus sort of net new client additions?

[Jeffrey Puritt, executive]

The demand we're seeing now, Cassie, is really across all four service lines. And in terms of the mix, excuse me, I'll invite Gopi to reiterate sort of the percentages, if you will. I'm sorry, I got a bit of a frog in my throat this morning here. I think it really is sort of the recognition that there is opportunities across these broad segments. And that's kind of been our overall strategic value proposition is not sort of just being in a single lane, but being a single point end to end service provider across the design, build, deliver continuum for our customers. That is sort of the source of our confidence and optimism about our ability to meet our guide. Gopi?

[Gopi Chande, executive]

Yes, and Jeff, I'll reinforce that. So Cassie, really following our current service line breakout that we give annually. So following in each 4 of those categories, roughly at that equal percentage, just so growing all 4 service lines.

[Operator]

And our next question comes from the line of Bradley Clark from BMO Capital Markets.

[Bradley Clark, analyst]

This is Brad on Keith Bachman. I want to go into the BFSI line a little bit. It's been under pressure for a couple of quarters now. You've been helpful calling out the impacts from Google and your large social media client. Are there any client specific issues within this line segment that we should think about, even if it's below 10% of total revenues that would have an outsized impact on this line item? Or what are industry trends that are sort of occurring in BFSI, and how and why would they get better?

[Jeffrey Puritt, executive]

So, I think Brad mentioned that sequentially quarterly, we're actually seeing positive growth in BFSI. Indeed, year-over-year and over the last little over a year or so, that segment was dominated by one of our BFSI clients in particular. And as a consequence of they having a bit of a hiccup in terms of their customer growth and by extension, their reliance upon we to support them.And that was really the source of the decline in that vertical for us. That situation has now stabilized and indeed turned around. So we're anticipating improvement in the vertical in totality, because of that situation as well as continued growth coming not just from some of the sort of TI direct BFSI sales customer wins. But again, as Gopi noted earlier, the WillowTree team continued to have strength in that segment as well.

[Operator]

And our last question for today due to time constraints comes from the line of Maggie Nolan from William Blair.

[Kathleen Kronstein, analyst]

This is Kate Kronstein on for Maggie. Last quarter, the team was really excited about the growth that you were seeing in the healthcare business. And it looks like that trend is continuing this quarter. So is there anything incremental that you can share about the health of this industry vertical?

[Jeffrey Puritt, executive]

Indeed, I am continuing to be quite encouraged by not just the progression in helping TELUS Health, but lots and lots of green shoots across the health care landscape more broadly outside of the TELUS vertical. Winning, supporting and growing work with TELUS Health has really kind of been a binary issue for TI.Despite our ambitions to leverage our meaningful capabilities that I think have always been quite relevant for the health care sector, our inability to have successfully grown our capability serving TELUS Health was almost a bit of a boat anchor in terms of our ability to successfully persuade non-TELUS related health care businesses to work with us because we didn't have the credentials, we didn't have the experience, we didn't have the capabilities.And indeed, if when asked during the pursuit, how much work are you doing for TELUS Health? When the answer was not a particularly positive one, and not surprisingly, we were met with, well, I think we're going to take a pass. If your own sister organization is uncomfortable and willing to work with you, why would we? Now that that's changed meaningfully. And we are at, I would suggest, materiality thresholds and then some, closing in on $200 million a year of healthcare specific related revenues, and not all the TELUS, but much of that. We are now, I think, have earned the right, so to speak, to be taken more seriously with other healthcare providers. And indeed, the opportunities are starting to come much more fast and furious as a consequence. So excited about what we hopefully will be able to post and talk about in the quarters ahead here on the health care front in particular.

[Operator]

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jeff Puritt for any further remarks.

[Jeffrey Puritt, executive]

Thanks, Jonathan, and thank you all for your questions and engagement today. To echo Gopi's commentary, we are indeed committed to driving growth and remain laser focused on profitability and efficiency in our operations. We believe clients will soon again return to a growth mindset, and will look to leverage the best of technology and TI's expertise to create better outcomes to differentiated customer experiences.TI is very well positioned, going to market as an end-to-end AI-fueled customer experience partner of choice, to capture this opportunity. I'd like to remind you of our upcoming Annual General Meeting of shareholders taking place next week, May 17, conducted in a user-friendly, digitally-enabled format. You can find all the details on how to participate as a shareholder or join as a guest on our Investor Relations website.Gopi and I also look forward to connecting with many of you across our investor and analyst communities over the weeks ahead. And as always, our Investor Relations team is available for any further questions you may have. Our next quarterly investor call will take place in early August. And until then, please take good care and enjoy your summer. Bye all.

[Operator]

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