Telus International Cda Inc

TSX:TIXT

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the TELUS International Second Quarter 2022 Investor Call. My name is Jonathan, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]

I would now like to introduce, Jason Mayr, Senior Director, Investor Relations and Treasurer at TELUS International. Mr. Mayr, you may begin the call.

[Jason Mayr]

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q2 2022 Investor Call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer; and Vanessa Kanu, our Chief Financial Officer.

As usual, we'll begin with some prepared remarks where Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa, who will provide some key financial highlights. We'll then open the line to questions from pre-qualified analysts before turning the call back to Jeff for his closing remarks.

Before we begin, I would like to direct your attention to Slide two of the supplementary presentation available for download on this webcast and also available on our website at telusinternational.com/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 considers 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]

Thank you, Jason, and good morning everyone and thank you for joining us today. In the second quarter of 2022, TELUS International delivered a 17% year-over-year increase in revenue or 21% on a constant currency basis, which is especially meaningful given the sustained macroeconomic challenges we continue to navigate. Indeed, despite non-trivial foreign exchange pressures, wage inflation, rising interest rates and hiking the competition for talent, challenges which continue to adversely impact so many businesses around the world, TI once again delivered industry leading profitability with a Q2 adjusted EBITDA margin of 24%, whilst simultaneously generating meaningful free cash flow.

Our success in Q2 can be attributed to our global team's ongoing dedication to execute upon all elements of our growth strategy. TELUS International now has almost 70,000 talented individuals located in over 28 countries around the world and collaboratively they are delivering innovative and industry-leading digital services and solutions to our more than 600 global clients.

Our sales team remains extremely active generating a significant funnel of opportunities now north of $2.4 billion, identifying new business and cultivating further opportunities with existing clients across our end-to-end portfolio of capabilities, a significant portion of which is our differentiated set of new economy services such as our AI Data Solutions and Premium Content Moderation services.

Our AI Data Services in particular delivered both double-digit revenue growth and double-digit EBITDA growth year-on-year, both in the second quarter and year-to-date. We have not seen a slowdown in demand for our AI services and unlike some of our single threaded peers in this space, we believe our end-to-end digital capabilities favorably position TI to deliver better value for money and enable better outcomes for our clients.

Our ability to meet the ever more complex criteria of demand helped us deliver key client wins during the quarter. For example, among our new logo wins in Q2 is a leading digital marketplace for sports, entertainment and event tickets. Notably this client had been supported by a competitor of ours, but decided to partner with TI in order to improve its operational rigor and raise the bar on service quality. We also won a new client in the financial technology space, a digital platform that enables global money transfers and offers advanced digital wallet solutions, as well as one of North America's largest public broadcasters that sought out our expertise to support its expansion into new digital channels.

TI's ability to win incremental business with existing clients in Q2 was equally impressive with numerous deals focused on expanded mandates for our AI Data Solutions and Digital Solutions teams. For example, we continue to grow our share of wallet with the world's largest e-commerce company, one of the global leaders in digital media and digital marketing solutions, a global staffing and recruiting company and one of Western Canada's largest bulk transportation carriers. As important is winning new and incremental businesses, successfully retaining clients has become increasingly important against the backdrop of broader macroeconomic challenges.

Nowadays, many companies are looking to consolidate vendor relationships to maximize the quality of customer experience and engagement, while achieving greater cost effectiveness. TI is often rewarded as a net winner in these scenarios, given the scope and quality of our capabilities across the design-build delivery continuum, our ability to effortlessly scale across numerous geographies and languages and ultimately due to our caring culture that ensures our clients are being served by a tenured and knowledgeable team who are personally committed to their success.

Let me share with you just a few examples of some of the more exciting projects we've been working on. The first, relates to our work with one of our long-standing technology partners, Verint, a software company focused on customer engagement. Working alongside another of our long-tenured clients and partners Google, TELUS International designed and built a cloud infrastructure to enable the Verint workforce engagement application suite to run on the Google, excuse me, Google Cloud Platform or GCP, providing our clients with a powerful combination of CX tools.

Our clients are looking for efficiency, agility, scalability and performance when it comes to managing a workforce engagement platform to keep pace with expanding customer expectations along with a less resource-intensive self management of the hardware infrastructure. To extend the benefits of the Verint workforce engagement platform to our clients, TELUS International work to re-imagine our overall CX deployment model to optimize this particular application on GCP.

After developing and building the needing, excuse me, the needed infrastructure in-house, we tested the solution and got it certified on GCP in a matter of weeks. We then migrated 30,000 users over just one weekend. The enhanced platform is 4 times to 5 times faster to deploy for clients and it's able to take vast amounts of customer experience information and store it in the cloud. It's also been integrated with TELUS International's Cloud Contact 360 Solution or CC360 for short, a pure cloud omnichannel contact center platform that empowers team members with all the tools needed to improve the customer journey providing real-time easily accessible data to make informed decisions about workforce optimization, forecasting needs for specific skill sets, scheduling and more.

Users continue to report dramatic improvements in performance and quality and the platform enabled both the capital cost, the working benefit for client using CC360 along with monthly operating cost savings. Notably, TELUS International was the first to enable the Verint workforce engagement application suite on GCP and as a result, other brands and potential tech partners now have a roadmap to do the same with ease.

As a testament to the success of this project in the second quarter of 2022, TELUS International won in the infrastructure category of Verint Engage 2022 Integration Challenge for integrating Verint's GCP-based solution with TELUS International CC360 solution. This is just one example of how our cloud and platform services as part of our broader TELUS International digital solutions offerings accelerate our clients’ digital transformation with fully managed multi-cloud platforms. Cloud computing is fast becoming the de facto engine to build next-gen technology ecosystems for CX innovation. We work with clients to solve their cloud adoption challenges by overcoming their concerns around security, consumption cost, multi cloud management and integration with non-cloud systems.

With cloud native technologies become more pervasive, bringing all of the technology processes and services together remains critical. We guide our client transformation journeys by moving and managing applications for the right cloud platform with the right deployment model. Our flexible cloud platforms and comprehensive managed cloud services are designed to support a single cloud or multi-cloud deployment to deliver better customer experience and ensure meaningful return on investment.

In another example, I want to share with you, how our TELUS International AI Data Solutions team is working with not-for-profit organization Light of Dawn International or as it's known locally in Indonesia, Yayasan Internasional Cahaya Fajar or YICF for short to create job opportunities for displaced people and refugees in Southeast Asia. According to the United Nations in 2021, there were more than 84 million refugees worldwide.

This figure is nearly doubled in the past decade and unfortunately keeps growing. And in most cases, these populations have typically been marginalized when it comes to recruitment opportunities. TELUS International sort out as an organization to help us provide access to our global AI Community to add data annotators from across Southeast Asia to incorporate their voices and perspectives to help us deliver more diverse datasets to ultimately create more inclusive AI models to help mitigate bias. TELUS International selected the Light of Dawn as a partner because of their commitment to creating opportunities for Indonesians and refugees and transit to the country.

It's a locally rooted and globally connected organization focused on transforming lives in Greater Jakarta through education, vocation and community. Our team worked with the Light of Dawn to expand our global workforce by engaging with refugees throughout Southeast Asia. As part of the partnership, we participated in the organizations recently launched program called Bersama meaning together with a mission of providing life changing vocational learning experiences for unemployed Indonesian youth and refugees who are without legal rights to employment while they await resettlement to a new country. Through this program individuals gain work experience, improve their language and digital literacy skills through continuous learning opportunities and are able to become part of a support of co-working community.

To-date, Bersama has created opportunities for individuals across seven unique nationalities with a variety of ages, backgrounds and languages represented including English, Persian, Indonesian and Arabic. These individuals have quickly expanded and progress the scope of their work in the AI community for more simple collection and categorization tasks to include more complex image annotation, audio and images transcription and categorization and quality assurance work.

I'd also like to provide an example from our trust and safety practice, highlighting how our team helped optimize a debt collection strategy for a leading utilities provider in the United States. We've been a trusted CX partner to this client since 2005. And our team's impressive track record providing exceptional customer care and sales solutions influence this client's decision over a decade ago to broaden its relationship with TELUS International to include debt collection management.

Members of the TELUS International team in Central America have been providing first party collection support on behalf of our clients since 2009, seamlessly resolving billing issues and improving the client's overall customer experience. All services are delivered in English and team members are responsible for addressing fraud scenarios, resolving credit report disputes, communicating with customers on overdue accounts, performing audit, processing refunds, handling issues resolution and working with credit bureaus as needed.

Through our engagement leveraging our best practices, TELUS International was able to deploy a cost efficient and highly effective technology-driven solution for the client. The team was able to streamline the collections process by identifying and eliminating rework which is already generating meaningful savings all the while delivering an enhanced customer experience which is essential to this client's industry leading brand reputation and lower customer churn. I particularly like this example, as it clearly illustrates the long tenure diversity of mandates and stickiness of our client relationships. Our clients see us do good work in one area and reward us with more varied work in other aspects of their operation with our engagement often spanning over many, many years, as our clients increasingly rely upon our expertise and advice for some of the most important areas of their business fueling longer-term growth.

My final example today highlight, our TELUS International Digital Solutions team's efforts on behalf of a large telecommunications and information technology company. TELUS International developed a specialized response card enabling this client mobile customers’ to efficiently find information for an effortless customer experience. Conversational bots are commonly used to facilitate a smooth user experience on mobile devices. In order to implement a successful chatbot, organizations must first identify the most common inquiries and the chatbot can then serve up this information as pre-populated options for the customer to select when the support application is launched.

Ensuring the selection is as clear as direct as possible improves customer satisfaction while also reducing our clients contact center volumes through self service. After assessing our clients' specific requirements and their user journey goals, our team utilized our proprietary conversational bot platform, Intelligence TELUS International Assistant or ITIA to establish deep linking along with the customized response card for a better mobile experience.

Deep linking is the process of creating URL shorteners to land user on specific flows within a chatbot, depending on their intended use case. By offering deep linking experiences, the Intelligence TELUS International Assistant not only enable the client's customers to easily access the top searched inquiries from a menu but it also smooths over any issues our customer might experience with mobile interface rendering. The TELUS International Development team also created a customized response card that sorts through its trained content when a user asks a question and responds accordingly. If a customer requires further assistance, they can decide to be transferred to a live agent or continue with the chatbot. As a result of our work, the client has already seen meaningful improvements in the overall mobile user experience. We created a branded solution, customized the clients team, which further supported the client's brand equity.

Early in the solutions deployment, the client has already experienced over 70% of its customer calls being rolled into the chatbot by deep linking to create seamless interactions that deliver measurable enhancements to customer experience while simultaneously reducing their contact center volumes and costs by leveraging our technology-driven solution.

The same ITI Bot platform, I just described, was recently recognized with a 2022 AI Breakthrough Award but for an informational bot in the Virtual Agents & Bots category. This is the second consecutive year ITIA has won this industry award that's based on a variety of considerations including innovation, design and user experience, as well as overall technological advancement.

Also in the quarter, leading industry analyst relations firm Everest Group, named TELUS International as a Star Performer on its 2022 Everest Group Trust and Safety Content Moderation PEAK Matrix, highlighting our market adoption and market share growth and ability to scale along with our enhanced language capabilities and provision of localized services.

Another notable accolade came from the Business Intelligence Group naming TELUS International as a 2022 Excellence in Customer Service Award winner in the Organization of the Year category, recognizing our team members' superior performance and helping companies better communicate with their customers and provide a differentiated level of customer service.

Our team also won a Stevie Award for sales and customer service based on our work with Green Tech scale up refurbed. Our team won in the front line customer service team of the year category having supported refurbed in its growth and expansion through the delivery of an exceptional customer experience since 2020. Additionally, I'm immensely proud of our company for being named one of Mogul's Top 100 Companies for diverse representation in 2022 recognizing our leadership in implementing practices, investing in resources and tools to hire diverse talent and placing diverse leaders across our organization.

And saving perhaps the best one for last, TELUS International was included on the Forbes' list of Best Employers for Diversity in 2022. This was a survey of over 60,000 respondents with the evaluation based on four different criteria, direct recommendations, indirect recommendations, diversity among top executives and Board members and diversity engagement indicators. This recognition of our global team’s remarkable performance and commitment to our caring culture is extremely well deserved, and I'd like to take this opportunity to once again sincerely thank them for ensuring we continue to bring our values to life in everything we do for our clients and for the communities where we live, work and raise our families.

As I've often shared before in many ways what I'm most proud of the TELUS International is our caring culture. How we take care of our customers, one another, our communities and the planet is core to how we operate as a company and is consistent with our stated ESG priorities.

In light of this, I'd like to share some highlights of just a few of our TELUS Days of Giving activities, our signature high impact volunteer events. Among the many held this quarter, we hosted fitness challenges in China, India and the Philippines where 4,000 team members raised funds for the China Association of SOS Children's Villages, Save Free's Environmental Trust in India and Rural Vision Development Foundation in the Philippines. The donations will benefit 13,000 children and youth in need and will ensure more than 2,000 trees are planted creating urban forests.

On June 4th, we celebrated our 10th year anniversary of TELUS Days of Giving in Huehuetenango, Guatemala by building the second Phase of La Colina Health Center that included two clinics and a warehouse and we painted the entire center. Since we started the project in 2018, we've had over 250 team members volunteer on the site in addition to our own direct investment. Today, the health center benefits more than 25,000 people annually who could not otherwise access care.

And finally, before I turn the call over to Vanessa, let me also share our latest return to office update. Globally, more than 50% of our team members have now successfully transitioned back to working on site. Additionally, around 6% are working in a combined office or remote setup. Not surprisingly, there is a high degree of variability in our return to office profile, with some locations, like the Philippines now at almost 90% back in the office and others like Ireland at less than 10%.

These different in-office profiles are correlated to local legislation, customer demand, employee preferences, and team member safety, all of which we seek to balance and optimize. As we continue ramping our plans to return more of our team members safely back to our sites around the world, we're doing so while of course being very mindful of evolving developments around new virus variants as we monitor the situation in each region very closely.

With that, I'll now invite our Chief Financial Officer, Vanessa Kanu, to take you through a detailed review of our financial results, after which I'll return to answer your questions. Vanessa, over to you.

[Vanessa Kanu, Chief Financial Officer]

Thank you, Jeff and good morning everyone. Thank you all for joining us today. I'll begin with a look at our financial results for the second quarter and then discuss our business outlook for full-year 2022.

As mentioned at the start of this call in my review of financial results, I will refer to some items that are non-GAAP measures. For descriptions and reconciliation of our GAAP to non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning.

We had solid second quarter results with 21% revenue growth on a constant currency basis and an adjusted EBITDA margin of 24.0%. We generated robust cash flow with $60 million of free cash flow generated in the quarter. These results once again illustrates our focus on maintaining a healthy balance of strong top line growth and leading profitability matched with strong free cash flows, which we believe is notable particularly against the backdrop of the current macroeconomic environment.

Let me now expand upon the components of our financial performance. We achieved total revenues of $624 million, up 17% year-over-year on a reported basis or as I mentioned earlier, 21% in constant currency, as our reported revenue included an unfavorable foreign currency impact of approximately 4%, compared to the year-ago period, predominantly driven by the strengthening U.S. dollar against the euro exchange rate. As Jeff highlighted earlier, we saw very strong growth from AI Data Services in particular with along with content moderation are amongst our fastest growing service lines.

Looking closer at our revenues by geography, our highest quarterly revenue growth was in Asia-Pacific at 42% year-over-year followed by 28% growth in North America. Central America grew by 21%. In Europe, we saw a slight decline of 2% due to the weaker euro, relative to the U.S. dollar that I just mentioned. On a constant currency basis, we continue to see double-digit growth in this region.

From an industry vertical perspective, we continue to again see growth across our key verticals. Our largest vertical, Tech and Games grew 18% in Q2, with TELUS International AI Data Solutions remaining a key driver. Our revenue growth in AI is not only indicative of market growth but also increasing market share. In our e-commerce and Fintech vertical, our revenues were up 26% year-over-year, driven by our digital CX Services.

Banking, financial services and insurance or BFSI grew by 117% year-over-year driven by continued growth with leading financial institutions in North America and globally. Our Communications and Media vertical grew 8% year-over-year, principally driven by higher revenue from TELUS Corporation, our parent company. And then finally, clients in our travel and hospitality verticals continue on their post-pandemic reopening trajectory driving growth up 46% year-over-year. I should also note that across all of our verticals the reported revenue growth rates were adversely impacted by unfavorable euro to U.S. dollar currency movement.

Moving onto our operating expenses. Salaries and benefit expense in the second quarter were $356 million, up 19% due to higher team member counts to support business growth and higher average employee salaries and wages. Our goods and services purchased were $118 million in the quarter, an increase of 15% year-over-year. This increase was primarily attributed to the business growth, including the impact of higher cloud contractor costs from the volume expansion we continue to see in our AI Data Solutions business.

Share base compensation expense in the second quarter was $7 million, a decrease of $12 million or 53% year-over-year, primarily due to a decrease in our share price types of recent market conditions, which resulted in lower expense on our liability accounts and awards. Acquisition integration and other charges in the second quarter were $6 million, a decrease of $1 million primarily due to lower integration cost compared to the same quarter last year. Our interest expense in the second quarter was $10 million, a decline of 17% year-over-year, primarily due to lower average debt balances on our credit facility, as we have made meaningfully -- meaningful rather principal repayments against our debt facility over the past year, including in the past quarter.

With rising interest rates, we also saw a benefit from our hedging activity from our cross-currency interest rate swaps that have locked in favorable fixed interest rates on a meaningful portion of our debt. Income tax expense in the second quarter was $21 million, compared with $30 million in the same quarter last year. Our effective tax rate decreased from 44.8% to 27.3% primarily due to a decrease in withholding and other taxes, a decrease in non-deductible items and a decrease in foreign stocks differential. As a reminder, during the first half of 2021, the majority of the non-deductible items were as a result of our IPO and were non-recurring.

Our adjusted EBITDA was $150 million in the second quarter, a year-over-year increase of 15% driven by an increase in revenue from both existing and new customers alike partially offset by higher costs to support business growth as just mentioned. Adjusted EBITDA margin in the quarter was 24.0%, a solid achievement in the current environment with the margin expanding by 30 basis points, compared to the prior quarter.

Looking at the year-over-year differential, it was primarily due to higher costs associated with our frontline team members as expected as well as changes in revenue mix. Adjusted net income for the quarter was $81 million, up 29%. And on a per share basis, this translated into adjusted diluted earnings per share for the quarter of $0.30, up 25% year-over-year.

Moving over to the balance sheet. Our balance sheet remains very strong with further improvement during the quarter in our leverage ratio and liquidity position. Cash and cash equivalents were $123 million as of June 30th.

Our total available liquidity which comprises cash on hand and available capacity under our revolving credit facility of $788 million grew to $911 million. With our available liquidity, we continue to have ample capacity to pursue strategic growth opportunities as we have done historically. We also continue to reduce our leverage, lowering our net debt to adjusted EBITDA leverage ratio as defined for our credit agreement to 1.5 times as of June 30th, our further improvement from 1.8 times as of March 31, 2022.

Just a reminder, we continue to see the 2 times to 3 times zone as a good steady state amount of leverage and continue to have the ability to go beyond this range for the right type of strategic opportunities. In the second quarter, free cash flow was $60 million compared to $71 million in the same quarter last year with the decrease primarily due to higher outflow from working capital and cash taxes paid, partially offset by higher operating profit. Our capital expenditures in the quarter were $29 million, an increase of $4 million year-over-year primarily attributed to additional investments in AI Data Solutions, including for the development of our community manage platform and related to our state-of-the-art site in Baleno, Ireland as we announced a couple of weeks ago.

We also continue to invest in our digital services for additional capacity and cloud storage along with other normal course facility related to a couple of weeks. Looking at the first half of 2022, we generated $159 million of free cash flow, an increase of 79% from the same period last year with the increase primarily driven by higher operating profit and a decrease in interest and income taxes paid, partially offset by higher net working capital outflows. In the first half of the year, our capital expenditures as a percentage of revenue remain modest at around 4%.

Looking at our team members, we ended the quarter was 69,218 global team members, an increase of 23% year-over-year, reflecting our ability to continue to hire and retain key talents to support our revenue growth.

Now turning to our outlook, starting with revenue. As a reminder, approximately a third of our full year estimated revenues are denominated in euros. As you will recall, our initial guidance at the start of the year assumed a euro to U.S. dollar exchange rate of $1.13. And in May, our outlook assumed a $1.8 based on the exchange rate at that time. As we are today, given the continued strengthening of the U.S. dollar, we are now assuming $1.2 for the second half of 2022. Given the relative size of our European business, this FX headwind is material, not only in relation to our initial guidance at the beginning of the year but also even when compared to our guidance at the end of just last quarter.

Despite this further deceleration in euro however, given our strong performance year-to-date and the current outlook that we have for the second half, we are today again reiterating our guidance, anticipating revenues in the range of $2.55 billion to $2.60 billion, reflecting a year-over-year increase of 16.2% to 18.5% on a reported basis and 20% to 22% on a constant currency basis. Compared to a constant currency growth range of 19% to 21%, showed in our last guidance update and also compared to constant currency growth range of 18% to 20% in our initial beginning of the year guidance.

As a reminder, our outlook does not include the potential impact of material M&A. We continue to expect adjusted EBITDA margin to be approximately 24% for the year. We also continue to expect to deliver adjusted diluted earnings per share in the range of $1.18 to $1.23, which reflects growth of 18% to 23% from last year. This assumes a weighted average diluted share count of approximately $270 million in each of the quarters.

In terms of quarterly seasonality within the second half of 2022 similar to the prior year, we expect an approximate split of 48% in Q3 and 52% in Q4 for revenue and earnings.

With that, let's move on to questions. Jonathan, over to you.

[Operator]

Cerainly. [Operator Instructions] And our first question comes from the line of Ramsey El-Assal from Barclays, your question please.

[Ramsey El-Assal, Barclays]

Hi, good morning and thanks for taking my question. It sounds like things are going quite well. I wanted to ask, if you could provide just in general thoughts on the demand environment. There's a lot of headlines about potential recessions on the horizon, et cetera. Maybe just some color on customer spending patterns and decisioning in particular whether you're seeing any changes or any signals in your day-to-day?

[Jeffrey Puritt]

Thanks for the question, Ramsey. Nice to hear your voice, hope you're well. We are built for the recession, I would suggest. The origins of this business work to help parent company TELUS at first instance. And since then, all of our clients to find ways to do more with less, to leverage our scale and scope advantage and expertise to help them accomplish what they'd like to on their own but frankly, they don't have the expertise or the scale or scope. And in a recession, I think that's ever more so. Over the second quarter have you just read and heard, I think we did exceptionally well in continuing to progress our growth strategy focused on both growth and profitability.

Our outlook as Vanessa just reaffirmed, continues to be quite robust. And whilst we're certainly mindful of and sensitive to the discourse with respect to recession, some layoffs and volume diminution in connection with some of our customer business environments. Thus far we've not been adversely affected at all. To the contrary, we continue to see pretty exciting growth opportunities and serving existing and prospective clients and not entirely surprisingly, we were around in the slowdown down a number of years ago and then too, we were a net gainer if you will off the back of exactly what our value proposition anticipates, helping clients to navigate those challenging times, relying upon our investments in infrastructure, in talent and technology.

[Ramsey El-Assal, Barclays]

Great. Very helpful, thank you very much.

[Jeffrey Puritt]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Tien-tsin Huang from JPMorgan. Your question please.

[Tien-tsin Huang, JPMorgan]

Thank you. Good morning, real encouraging that you were able to fight through the FX and then some. I just wanted to ask, I guess, looking ahead to the second half of the year in terms of the range on the revenue side that you're laying out the usual question, what gets you to the low end versus the high end, how much cushion do you have left to the extent that maybe there are some surprises and Jeffrey, seeing maybe a change in your client priorities are the types of clients that you're engaging with that provides a hedge against what Ramsey was asking this, I know you mentioned the BFSI win for example. So just trying to better understand the potential range of outcomes in the second half of the year here. Thank you.

[Jeffrey Puritt]

Hey Tien-tsin, thanks for the question. I see here you as well perhaps, I'll invite Vanessa to respond in detail there.

[Vanessa Kanu, Chief Financial Officer]

Thanks, Jeff. Good questions, Tien-tsin. We've guided a range of outcomes that we deem to be feasible for the balance of the year. I smiled when you mentioned the word cushion. I mean how much cushion there is in the second half guide. Clearly we're not going to implicitly raising our guide moments after issuing it by starting to talk about how much cushion we've already built into the guidance. All I will say there, Tien-tsin, is that we do remain fairly optimistic. As Jeff mentioned, obviously, we are in a time where there's a lot of uncertainty from a macroeconomic perspective, lots of headlines around some companies slowing down, et cetera.

But thus far we can see to be a net beneficiary. We have a really strong funnel as you heard in my prepared remarks. We've got pretty good visibility as well into the second half. So not only visibility in terms of what's the opportunities in our funnel but also just based on the work that we do, we're in discussions with clients in terms of planning their projects and priorities for the second half. So we do have some fairly strong visibility at this particular point. Of course things are -- we are in uncertain times. I don't think anybody wants to project or pick up a perfect visibility at this particular point in time.

But based on what we know, what we see today, we're fairly confident in the second half guidance that we put forward. And in terms of, whether we're seeing any changes in the types of clients, I mean I'll bisect at the top-up, but I don't think we're seeing changes in the type of clients. Certainly, we have a pretty nice new logo wins that you heard Jeff highlight in his prepared remarks earlier to fit nicely into our existing verticals. We go after very high quality clients that have the ability to actually wrap it up pretty significantly.

And so from that perspective, I wouldn't say the types of clients are changing in any meaningful way so far. The type of work we're doing with clients continues to evolve in terms of, again you heard some of the examples that Jeff shared, in terms of progressing their digital journey even further. Some are in fact looking for cost optimization for looking at rebalancing, some of the geographic distribution of work et cetera, but some -- I'm about, I think I would say bit on what we're seeing that the type of clients and the type of what we do falls right within our wheelhouse.

[Tien-tsin Huang, JPMorgan]

Great, thank you, Vanessa.

[Operator]

Thank you. And our next question comes from the line of Ryan Potter from Citi. Your question please.

[Ryan Potter, Citi]

Hey, thanks for taking my question. I wanted to touch on M&A. So are there reported acquisition offer that you guys made in the quarter to acquire public competitor in the AI space? And not sure if you want to comment on that specifically, but more broadly, can you discuss how you're thinking about M&A now that you're below your target leverage ratio. Is there a desire to continue to make large-scale acquisitions like you've done in the past or are you more comfortable with the tuck-in acquisitions? And I guess what exactly would you be looking forward any potential targets?

[Jeffrey Puritt]

Hey, Ryan, thanks for the question. On the first part of your question, suffice to say, we decided that it wasn't prudent for we to proceed with the proposed transaction. As a consequence, decided to walk away, I don't know that there is much to be gained by dwelling on the details behind that. On the latter part of your question, obviously as our leverage ratio continues to improve that creates more and more headroom for the possibility of M&A activity. And it's always been an enabler or an amplifier of our strategy, not the strategy itself.

And so whilst we're certainly confident in our current capabilities to meet existing and prospective customer demand, we continue to be actively on the look out for areas of opportunity for adjacencies, for extension, [wind] (ph), scale, for additional capabilities that we think we can immediately put to good use in serving existing or prospective clients and as you've seen over our history, we've not been restricted to either tuck-in or more transformational acquisition activity and I think the success in our past in this regard emboldens our thinking around what we might do in the future, but as ever, you should expect us to continue to be disciplined and thoughtful about what we want to buy, why, when and how.

The market continues to be, what I would call a target-rich environment for potential M&A activity, but first and foremost, I think not entirely dissimilar from what you see and how we run the business organically, i.e. a focus on discipline and profitable growth. So you should expect that same discipline in how we approach potential M&A activity.

[Ryan Potter, Citi]

Great, thank you.

[Operator]

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

[Stephanie Price, CIBC]

Good morning. Data annotation solutions has been an area of strength and a competitor and data annotation recently pre-announced some weaker results this week. I'm curious if you could talk a bit about what you're seeing in the competitive environment on the Data Solutions side and whether TI is winning share there.

[Jeffrey Puritt]

Yes. Well, obviously we too read with interest our competitors updates. Their experience candidly is decidedly dissimilar from our own, as I shared in my comments earlier and as Vanessa further illuminated. Our data annotation business continues to perform exceptionally well with double-digit growth in revenue and EBITDA for the quarter and year-to-date and our outlook for balance of the year continues to be to be equally robust. I'm not sure I can comment on what's behind what they're seeing and why they were commenting the way they were. Obviously, I don't have perfect visibility to their own particular circumstances, but it would seem to me that when we're growing at 40% year-over-year one of two potential things is occurring and it could be both. Either, we are growing with continued market growth and or we're taking meaningful share from them. In either case, I think it's good news for us.

[Stephanie Price, CIBC]

Thanks for the color.

[Operator]

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

[Jesse Fink, William Blair]

Good morning. This is Jesse on for Maggie. I had a follow-up question to the M&A topic. So, you guys mentioned higher contractor costs in the quarter. So how are you sourcing these contractors in the AI business. And could you potentially leverage M&A to gain access to more crowdsourced annotators?

[Jeffrey Puritt]

Thanks, Jesse. I knew right away when I heard your voice you weren't Maggie. So, you have so much deeper sound to you than she does. We obviously use a multitude of direct channels, web-based and otherwise social media in order to surface crowd source worker opportunities, and as you can imagine, just given the size of that community, it is a prolific channel that we leverage on a constant basis. Acquisition activity theoretically could amplify and extend our reach in that regard. We thought a little bit about it and candidly, I'm not sure that that's the way to address the desire, the need to continue to amplify the size of that community, given you know there is [Technical Difficulty] media in order to surface crowd source work opportunities. And as you can imagine just given the size of that community, it is a prolific channel that we leverage on a constant basis.

Acquisition activity theoretically could amplify and extend our reach in that regard. We thought a little bit about it and candidly who them for example working with someone else and vice versa. So as long as our current acquisition recruiting team continues to be active and engaged I think theoretically we could reach everybody and the very people that might be part of the community that is being sourced by an acquisition candidate, they are already theoretically available to us. Yes, we might be able to get them a little bit more quickly more easily through the acquisition, but I'm not sure that would be the primary consideration at all with respect to the value we might see in a potential acquisition. It would have to be something significantly more substantive than that, before what -- you know, that would be the kind of acquisition we would be looking at.

[Jesse Fink, William Blair]

Understood, thank you for taking my question.

[Jeffrey Puritt]

My pleasure. Nice to hear your voice, Jesse.

[Operator]

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

[Daniel Chan, TD Securities]

Good morning, guys, and congrats on the strong quarter. So TELUS is acquiring LifeWorks. Just wondering how involved you will be in supporting it? And maybe as a follow on to that, how much of a sales effort is it to get that business or is it pretty much free growth without much sales expenses associated with it? Thank you.

[Jeffrey Puritt]

Thanks very much, Daniel. Well I certainly I'm hopeful that we are going to be very actively engaged in supporting LifeWorks assuming TELUS is successful in completing that transaction. As I think you know it's signed, but probably yet closed. And so upon closing, assuming that does indeed occur, we will absolutely be looking for areas of opportunity for collaboration, not dissimilar from the support we've been providing to TELUS core communications business, as well as TELUS Health, TELUS [Ag Tech] (ph). I think there is a multitude of areas of opportunity for enablement, leveraging our core competencies around digital transformation and exceptional client or in their acute patient experiences.

The latter part of your question then made me smile only because over the last 17-years, I can tell you that, I think there is perhaps a surprising misunderstanding regarding the dynamic between TELUS and TI. In many ways I've often lamented that TELUS is the most difficult client for TELUS International to win and or support. They are discerning, they are demanding. It is no day at the beach. It is more like D day, I'd normally beat sometimes I joke. We have to work hard to win that business. We compete every day with all of the usual suspects and TELUS is by no means giving TELUS International a whole pass or free run of winning business. We have to compete in RFPs often. We have to demonstrate value for money. We have to demonstrate that we have the requisite experience and expertise. And we don't get to automatically assume once we've won it then we just to keep it.

There too, they hold us at the very same standards of performance in quality and value that they do all of their other supplier vendor partners. And TELUS procurement, these guys and gals are experts at what they do. And we have renegotiations on our statements of work each and every time to ensure that TELUS continues to derive the value would expect from the relationship with TI. And so I would anticipate assuming LifeWorks gets acquired and there is opportunities for we to enable them, that that dynamic will be no different than that which I just talked.

[Daniel Chan, TD Securities]

That's very helpful color. Thank you very much.

[Jeffrey Puritt]

My pleasure, thanks for the question.

[Operator]

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

[Keith Bachman, BMO]

Hi, good morning everybody. I wanted to ask a clarification and then a question which is distinctly different from asking two questions. But so, Vanessa on the margin guide that you're giving for the year, you're keeping 24, but I actually think you're raising margins because you're absorbing FX within that. So I just wanted to try -- if you could just clarify how much FX you're absorbing in your operating margin to understand how much you're net-net effectively raising the EBITDA margin?

The question, Jeff, I wanted to pose to you is, if you think about the cost side of the equation, I just wanted to get a perspective on how that's actually transitioning as you look at it through the year and the variables would include attrition and wage, labor rates. Just want to try to understand as you see the economy behind us weakening a little bit, are those wage inflation staying the same, getting better, getting worse. Just a little bit of comments on how you see both attrition and wage inflation unfolding over the balance of the calendar year? Many thanks.

[Jeffrey Puritt]

Thanks very much. Keith, you must be a recovering lawyer in your past life. You missed that distinction, good for you. Vanessa why don't you take the first half and I'll take the second.

[Vanessa Kanu, Chief Financial Officer]

Thanks, Jeff. Keith, thanks for your question. For the first part of your question, look, when we look at currency movements starting the year at $1.13 on the euro and now at $1.02 that's an almost 10% swing within the same year. And frankly, had it not been for these currency movements TELUS International would have been raising guidance normally dollar guidance, right? And so we want to make sure that folks walk away with the real key takeaway here, which is strong operational execution.

From a margin perspective, we do have puts and takes there. While we do have the currency adverse effect on the euro, which are actually pretty significant even against EBITDA. We have the currency movements that help protect us from the cost side. For example, we have a bit of an appreciation of the peso. It doesn't absorb fully the implications of the decline in euros. But again back to strong operational execution, which is really what's allowing us to reiterate both the revenue and the margin percentage guide.

In terms of the actual basis point impact honestly had it not been for FX, I think we'd releasing our margin guide by probably at least 20 basic points to 30 basis points in the year, if not more. So lots on the go here but strong operational execution to help to combat these FX movement. Over to you, Jeff.

[Keith Bachman, BMO]

Okay, perfect.

[Jeffrey Puritt]

Thanks Vanessa, so our assumptions for the back half, Keith, are not entirely dissimilar from what we have set out at the beginning of the year. There is obviously a number of puts and takes as we read about as I referenced earlier in my response. I think it was contingent question about recessionary effects. Attrition continues to obviously be a challenge for we and for all of our peers. And whilst we are by no means immune from the implications of this continued tight labor market in terms of accessing at scale the requisite talented folks to help us on these technology-enabled transformational work and services we provide.

As I've said many times in the past. I really do think we continue to be inoculated in part because of our unique and caring culture, because of how we approach employment more broadly. And so for the back half of the year, we're not anticipating any further difficulties. We think it's going to kind of continue a pace. I think there is some reason for potential optimism ironically in the sense that when you start to read a little bit about potential layoffs and some softening in the marketplace, it maybe that means the labor market might open up a little bit for us. And whilst there is some cause for potential optimism there, the reality is, most of our hiring is not happening in those markets where we're reading about these layoffs.

So to the extent that we're looking to access talent, it's not where you're hearing about the layoffs necessarily. So I'm not anticipating all of a sudden the challenges around recruitment and retention are going to somehow move in an inverse correlation to what we saw in the first half. I think it's going to continue to be challenging, not insurmountable as we've demonstrated given we're in north of 7,000 new hires in the first half.

In terms of overall inflation, there too I think what we saw in the first half, we anticipate will likely continue in the second half. And as I mentioned earlier as did Vanessa, clients I think are going to continue to become perhaps more and more mindful, concentrated around efficiency value for money ensuring that the partnerships they have for support are really delivering the ROI that they expect. But that's always been the case, and that is how we positioned our business and our service offering to our value proposition. We are designed to address exactly those concerns. So as I said before, I think we're going to see not dissimilar back half from the front half subject only to as you've heard from Vanessa before, taking quasi seasonality where the back half tends to be a little bit more robust for us in terms of growth than the front half.

[Keith Bachman, BMO]

Okay, got it. Many thanks, team.

[Jeffrey Puritt]

Thank you, Keith.

[Operator]

Thank you. Our next question comes from the line of Jeff Cantwell from Wells Fargo. Your question please.

[Jeff Cantwell, Wells Fargo]

Hey, thanks so much and congrats on the results. I wanted to ask all three of mine upfront, if you don't mind. The first is, can you tell us a little bit more about e-commerce and Fintech 26% growth this quarter. So please give a little more color on what's working out there in the market with you guys? I would love to hear a little bit more about that.

Second one is just kind of similar, can you talk a little bit about the competitive environment, just give us a sense of what is tightening. Maybe we’re not getting a little easier for you as you progress over last 12-months or so?

And then third, earlier there's question about profitability, I'm just curious if you can give us a sense longer term of how you're thinking about profitability for the company given all the moving parts with inflation and wage inflation and obviously a lot happening on the topline for you as well. So just want to get a sense of where you're thinking, current thinking on that as well? Thank you.

[Jeffrey Puritt]

Thanks, Jeff. I'm not sure if we have other questions in the queue. So I'm a little bit reticent to answer all three, but I will try and go fast, so that we leave enough time if there are more, I think there might be. And I'll take them in inverse order. On the profitability front, as you may have heard many times in the past and again now, it's the continued evolution in the service mix of our business that we believe is a source of margin expansion. It continues to scale, its continued leveraging of our own secret sauce around automation and process excellence and efficiency that we think will continue to contribute, not only mitigating the inflationary effects of wages and overall expenses and operating these businesses that will actually give us expanded margin yield in the fullness of time.

On the competition front, I wish I could tell you that I think things are getting easier, I’m sure think they are. This is an industry that is not for amateurs. There is a high degree of complexity and so many moving parts. If there was anything that was getting easier, I guess, it would be as we continue to grow and scale and certainly post accessing the public markets, we are no longer a well-kept secret. I certainly would appreciate even more visibility and awareness of our existence, of our expertise, of our capability, so that we got invited to even more opportunities, whether by RFP or RFI or otherwise. We can always do better there, but we certainly get more add thoughts if you will than we used to when we were smaller and before we were public. So in that regard, I think the competitive environment is improving, but still challenging. I think ongoing consolidation and the high level of fragmentation in our competitive landscape also is a dynamic we continue to be quite mindful of and to the extent that those ebbs and flows represent risks, threats and opportunities, we continue to navigate them as effectively as we can.

And the last thing on the e-commerce and Fintech front, I think there too, we just continue to see ongoing opportunity. I think that's a vertical that continues to be just filled with creative, exciting, innovative business models and capabilities. And I think as we continue to build more and more credentials and build a reputation for being a terrific partner to support, enable, amplify the success of those businesses in their platforms, whether it's through subscriber growth protecting the integrity of their environments, ensuring the quality of the transactions that they and their customers enjoy on their platforms, we see continued upside opportunity for the foreseeable future.

[Jeff Cantwell, Wells Fargo]

Okay, that's great color. Thanks so much and congrats on the results.

[Jeffrey Puritt]

Thanks very much, Jeff.

[Operator]

Thank you. And our final question for today comes from the line of Casey Chan from Bank of America.

[Casey Chan, Bank of America]

Hey guys, this is Casey on for Jason Kupferberg. I'll be quick. One is just a follow-up. So I know everyone's been talking about like wage inflation and everything. Is there any update on your end on kind of like the ability to pass on those potential price increases to your customers? Is there any update that you kind of baked in your kind of full-year topline guidance? And then a quick modeling related one. Are there any updates on like below the line items, so like interest expense, so like tax rate for the back half that is kind of baked into your full-year outlook? Thanks, guys.

[Jeffrey Puritt]

Thanks very much, Cathy. I'll invite Vanessa to take the second half of your question, second, but just briefly on the first one. Oh my goodness, I just had a seniors moment and I forgot the first half of the question. Remind me again, Casey?

[Casey Chan, Bank of America]

Yes, no problem. So ability to pass on price increases and you got assumptions for your full-year outlook for top line? Thanks.

[Jeffrey Puritt]

Sorry, sorry. Thank you. I have to be excused here. I had not much sleep last night. I became fixated this morning, I've been up all night for the update from my kids. So in any event, I think if you look at our margin profile for year-to-date and the second quarter, that answers most of the question right there. It has been surprising in some ways candidly disappointing to me to read some of the narrative out there about passing on price increases, wage increases, the customers, whether we have cost of allowance, living allowances or CPI provisions in every single one of our customer contracts.

I think the reality is, we've done a reasonably good job of ensuring that as often as we can, we are able to share some of the burden of these wage inflation dynamics with our customers. And we are so pleased and grateful that we've got customers, partners who are willing to work with us in some cases of course it is predicated on these covenants in the contracts that we have in place that allow us to do that. In many other cases, it's not explicitly because of contract language but it's because as I say, the strength of the relationship that we're able to go back to them off cycle, if you will, not when there is sort of a natural incision point on an exploration or renewal date of an MSA or an SOW again to work with them.

But in totality, we continue to be pleased with the progress given the continued profitability profile of the business and for back half of the year given Vanessa sharing as we expect to not just maintain guidance, but that means we're going to absorb continued FX impact. Again, I think that inherently implies that it's not just we're pricing new work at new rates but we're also able to try and mitigate some of those challenges with existing or older contracted work as well. And Vanessa you want to talk about below the line matters?

[Vanessa Kanu, Chief Financial Officer]

Yes. So to answer the second half of your question Casey, from an interest expense perspective, I would expect us a nominal change up, in terms of second half versus first half. And ETR, we have previously guided a full-year range of 28% to 30%. And I think you can do the math in terms of where we landed in the first half to get where we are going to go in the second half. We do have seasonality there where the ETR steps down in this quarter. And so Q4 will in fact be our lowest if you model to that 28% to 30% and make sure you split your Q3, Q4, to get Q4 to the low end. The only variability there, as I think you already know, is obviously that assumes a certain jurisdictional mix of our earnings. So we might have a small variation there but I think if you go with those assumptions, you should be okay.

[Casey Chan, Bank of America]

Great, thank you.

[Operator]

Thank you. 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.

[Jeffrey Puritt]

Thanks Jonathan, and thank you all for your questions. In closing, I'd like to reiterate our belief that TELUS International is well positioned to not only continue to execute through current macro headwinds but to thrive along the way. Our deep expertise, best in class digital capabilities and global scale directly translate into fundamental sustainable drivers of our profitable growth strategy. We've been through many business cycles throughout our 17-year history, and this experience reinforces our confidence in our own ability to continue to navigate these challenging times and to execute upon our growth objectives.

We are staying focused on what we can control, delivering exceptional service and value for money as we help our clients to continue to maximize their customer experience outcomes, whilst concurrently achieving greater cost effectiveness. Vanessa and I look forward to connecting with many of you face-to-face at upcoming conferences and investor events in August and September. And we hope to see you at our next quarterly call in early November. Thank you again for joining us today and keep you [Technical Difficulty] as we help our clients to continue [Technical Difficulty]

[Operator]

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