Telus International Cda Inc

TSX:TIXT

Earnings Call Analysis

TELUS Digital shows stabilization with revenue growth and strategic AI investments.

In Q3 2024, TELUS Digital generated $658 million in revenue, a sequential increase driven by strong AI data solutions growth. Notably, revenue from its largest client, TELUS, rose 21% year-over-year, and revenue from BFSI clients increased 21%. They anticipate total revenues for 2024 to be between $2.61 billion and $2.665 billion, with adjusted EBITDA projected between $465 million and $485 million, reflecting margins of 17.8% to 18.1%. The company is also focused on cost efficiencies, aiming for $30 million in savings, while targeting stable margins amid industry pressures. Their shift towards AI-related services, now 15% of revenue, is a key growth driver.

Return to Stable Growth

In the third quarter of 2024, TELUS Digital reported significant progress with revenue reaching $658 million, marking a sequential improvement fueled by momentum in AI data solutions and digital services. Their largest client, TELUS, experienced a remarkable 21% year-over-year revenue growth, underscoring the strength of their ongoing projects, particularly in AI-related services. This stabilization in performance is a positive indicator for investors, suggesting a return to consistent growth following previous volatility.

Diversified Client Success

Diversification of offerings has been a key strategy for TELUS Digital. Notable growth was observed across several client sectors: revenue from financial services increased by 21%, and retail and consumer packaged goods (CPG) clients saw growth of approximately 20%. Moreover, international markets, especially in Central and South America, demonstrated a robust 20% revenue increase year-over-year. This broad-based client success illustrates the company's resilience and capability to capitalize on emerging market opportunities.

Margin Stability and Future Guidance

The adjusted EBITDA margin stabilized at 14.4%, reflecting enhanced operational efficiencies despite previous investments leading to increased costs in sales and marketing. Looking ahead, TELUS Digital anticipates adjusted EBITDA for the year to fall within $465 million to $485 million, with margins between 17.8% to 18.1%. This guidance presents a clear financial outlook for 2024, indicating a commitment to both cost control and revenue enhancements.

Strategic Investments for Long-Term Growth

Going forward, TELUS Digital plans to continue investing in its sales organization and further developing its AI services, which currently represent 15% of total revenue and are growing at 13% annually. The company has set a target to realize $30 million in cost efficiencies this year, which will help counteract competitive pricing pressures in the digital solutions market. By focusing on higher-value services, they aim to protect margins against inflationary cost increases.

Challenges and Expectations

Despite positive indicators, challenges remain. The company noted continued competition in pricing, primarily impacting traditional customer experience outsourcing. However, as economic conditions improve and interest rates stabilize, there is optimism for enhanced demand and potential pricing adjustments over time. Management has indicated a cautious approach, projecting low single-digit growth in Q4 2024 and maintaining stability into 2025.

Final Reflections and Confidence

In conclusion, TELUS Digital finds itself at a pivotal moment, balancing growth recovery with necessary strategic investments. The management emphasized the importance of leveraging emerging digital solutions alongside traditional strengths to foster returning business growth and improved client relationships. Investors should view the gradual shift towards growth and innovative service delivery as a compelling long-term opportunity, especially as the market and economic conditions evolve in 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good day. Welcome to TELUS Digital's Q3 2024 Investor Call. I would like to introduce your speaker, Olena Lobach. Please go ahead.

[Olena Lobach, executive]

Thank you, Carl. Good afternoon, everyone. Thank you for joining us today for the TELUS Digital's Third Quarter 2024 Investor Call. Joining our call are Jason Macdonnell, Acting CEO, COO, and President of Customer Experience; Tobias Dengel, President of Digital Solutions; and Gopi Chande, CFO. We'll begin with prepared remarks from Jason, Tobias, and Gopi and then open the line for your questions before we turn the call back to Jason for some closing remarks.

For our cautionary statements and further context on certain non-GAAP measures used during today's call, please refer to the appendices of the earnings release issued this morning and regulatory filings available on SEDAR+ and EDGAR.

With that, I will pass the call over to Jason.

[Jason Macdonnell, executive]

Thank you, Olena. Good afternoon, everyone. Thank you for joining our investor call. Having now spent about 60 days in my new role, I'll begin by sharing my observations with you and try to proactively address your questions on the near-term expectations as well as our longer-term vision for TELUS Digital. On behalf of our management team, you have my commitment to communicate our goals and progress in a clear and transparent manner as we move forward.

My initial observations reflect a balanced pragmatic view of both the near-term challenges posed by our operating environment and the longer-term opportunities ahead. The conditions this business has faced over the past 18 months largely persist, and the reality is we'll need time to see the full extent of the turnaround taking shape, but some solid fundamentals are being put in place, and we have some early indications of some great momentum.

We need to adapt to the conditions in the industry, and we are encouraged by the long-term prospects with TELUS Digital's adaptability, scale, global reach, high quality of assets, and talented team that is creating and capturing meaningful opportunities from the ongoing digital transformation of our company and the global economy.

TELUS Digital remains among a handful of increasingly AI-led service providers with the end-to-end capabilities that are necessary for our clients to implement, leverage, and advance their AI and AI customer experience processes. We're confident in our growing capability set and our marketing position to emerge as a winner within a rapidly evolving tech-enabled ecosystem. And we'll talk a little bit more about how we're infusing AI to the benefit of our customers and our operations later in the call.

Very transparently, our road ahead is guided by 4 key pillars to prioritize our near-term efforts and investments and improve our performance while fostering the longer-term success of our business. Our rejuvenation of revenue growth, relentless pursuit of differentiated service quality, investing in our talent for the future, and driving the evolution of our business for the AI-enabled economy are all key pillars of our future success.

The first pillar is rejuvenation of revenue growth. We are investing in new service offerings, positioning new service bundles, cross-selling to our existing clients and continuing to see focus on customer diversification by adding new logos. Immediately at hand, the key goal for our business is to achieve stability in our operating performance, which is largely reflected in our results reported here today. And we must continue this course of reliable financial results and solid strategy execution as we move forward.

We're expanding our existing and new services to our current clients in renewals and cross-selling. With more than 650 clients globally across 5 key industry verticals, the opportunity to go broader and deeper across this expansive client base remains a meaningful opportunity on its own.

In the third quarter, we won and added new services for dozens of our existing customers while also growing existing services with more than 80 clients, including Google as well as our third largest client, a leading social media network, a popular ridesharing provider, an online food delivery company, several financial services companies, and a multinational fast-food chain. That's just to highlight a few.

These wins are above and beyond the numerous new methods we are testing and scaling with our partner, TELUS, as we rapidly evolve our AI and CX suite of capabilities. Leveraging our partnership with TELUS, we have the distinct advantage of being able to quickly test, trial, and scale innovations, giving us a pragmatic edge in the refinement of new technology and use cases before going to the broader market.

To help us do better and more for existing clients, we're acting on further improvements to bring our operating and commercial teams closer together. We're breaking down silos, streamlining account management and continuing to make important account planning investments to help earn more share of wallet with each client.

The second aspect of our growth recovery is advancing new client acquisition strategies. Our end-to-end expertise in CX position us very well, especially as we drive the momentum on digital solutions and show clients value and proactive adoption of GenAI by example of our own evolution and co-innovation with our parent company, TELUS, as I mentioned previously.

Just examples of this work in action. In the third quarter, our AI data solutions team won mandates with 2 clients based in Japan that are developing AI driver assistance features for their future car models. We also have an ongoing engagement with a Santa Clara-based chip maker. We recently secured a project involving the development of a multimodal generative AI model, and we look forward to earning our share of opportunities with this client.

Our AI data solutions capabilities will be a clear focal point in our future strategy as we move forward, including crowdsourcing and expert rating investments. We further expanded our business in the third quarter by winning more opportunities across new logos in technology, financial services, e-commerce, and fintech, and wellness sectors, helping us improve our revenue diversification.

The second pillar of our plan is our relentless pursuit of service quality differentiation and client retention. Fundamentally, our success spans from our commitment to deliver exceptional customer service through a strong culture that has the courage to constantly adapt and innovate. TELUS Digital has gone through decades of transformation, carrying and carving a leadership position in trust and safety, data annotation, AI and digital solutions and CX and is always guided by the commitment to delivering the best customer service in the industry.

For the sixth consecutive year, Everest Group selected TELUS Digital as a leader in its peak matrix for CXM services, recognizing our scope of service and specifically highlighting our innovation in GenAI offerings. TELUS Digital was 1 of only 6 companies in the leader category from a cohort of 43 assessed service providers in 2024.

Among other notable accolades, TELUS Digital was recognized as a leader by Nelson Hall's CX services analysis for high-tech and automotive markets for our ability to tailor digital CX transformative strategies and solutions to our clients' needs. At the same time, they recognize our global delivery model and strong partner ecosystem that enable rapid scaling and end-to-end data management. It's this combination of customization for clients and our global scale that support differentiated market positioning. These are just 2 of the many recognitions our team receives each year, validating our industry standing.

This brings me to the third pillar, investing in our talent. We continue to make the right investment to expand our premier sales organization, expanding both capacity, efficacy, and coverage, creating a growing integrated team of experts across critical client touch points and verticals to help us reach and better capture sales opportunities in our addressable markets globally.

We continue to actively recruit new talent and expertise across multiple AI and digital industry skill sets and are aggressively expanding new recruitment, training, and coaching methods throughout the organization. And we also have the advantage of partnering with TELUS talent in our pursuits, as I mentioned previously. These talent investments include training, performance management, and other data insights that are coupled with great coaching and education to ensure that our team is prepared for the future.

The fourth and final pillar is driving the evolution of our business for the AI-enabled economy. Tobias will speak in a moment about our recent release of Fuel EX, which stands for Employee Experience, and how we've ushered a new phase of GenAI adoption. To help our global teams succeed and make the most in their impact of the roles, we're thoroughly and responsibly embedding GenAI in our own operations. Our initial focus is on training our teams and setting up centers of excellence to lead a shift in mindset and formation of new habits across all levels of the organization.

We remain mindful of heightened price competition in our industry, and our clients are vigilantly managing their own costs while they look for value-added opportunities from their partners. Being as efficient as we can through the ongoing adoption of new technology and AI capabilities within our own operations ultimately helps us be more cost effective and competitive for our clients.

This is illustrated by way of example in our parent company, TELUS. In the third quarter, our digital CX solutions helped TELUS lower their Technology Solutions segment's indirect cost to serve by 4.9% year-over-year. Overall, digitization will play an ever-increasing role across all of our lines of service with digital solutions fusing with CXM and trust and safety and expanding our digital IT and AI data solutions.

We continue to have a meaningful front seat to waves of transformation by virtue of working with clients like TELUS, Google, and other major players who lead the way in incorporating the latest tech into their new business models.

And on this important topic, I'm very happy to now turn it to Tobias. Tobias, over to you.

[Tobias Dengel, executive]

Thank you, Jason. Good afternoon, everyone, and thank you for joining us today. I'll start by echoing Jason and give you an update on our progress on the digitization of CX and then give you a broader overview of the digital solutions and WillowTree business.

A key principle of the strategy to bring WillowTree capabilities into TELUS Digital was to drive the digitization of both our internal and our clients' operations. I'm pleased to report that our digital solutions practice, which now includes fully integrated teams from WillowTree and TELUS' digital legacy IT business is making significant progress in this regard.

We're launching new tools and software, both for ourselves and for our clients, often pioneered through innovations for and with TELUS. Every single one of our existing and prospective clients is either going through or must go through digitization of their CX delivery. The opportunity is clear. We estimate the global CX market to be north of $350 billion a year, and we are laser-focused on increasing our share with a far-reaching cross-enterprise program we've termed digitization of CX.

Digitization of CX includes strategy consulting, turnkey and customizable assistance powered by Fuel iX, our proprietary enterprise-grade GenAI management platform and foundational technology, data, and infrastructure services. The goal is a seamless customer service experience supported by both direct-to-consumer AI solutions and human agents augmented by deep AI tool sets that reduce time to answer, average handle time, and increase end customer satisfaction.

At an industry level, the current CX technology stack in most contact centers requires both software developers and business analysts to create and customize tools for use by customer service agents. That means a guaranteed delay between the decision to implement a solution and that solution's availability for use by CX agents. It also means that the frontline teams that have the most direct experience and daily feedback mechanisms cannot easily experiment or continuously improve their tools without outside assistance.

We're fundamentally changing that equation with FUEL EX and its ability to enable distributed innovation or democratized innovation with customizable no-code copilots. We radically reduced the time from the identified opportunity to production capability. Software-driven productivity today requires developers to set aside time to create a solution or an upgrade for existing CX processes before agents and customers can benefit.

Fuel CX Copilots remove that barrier to productivity realization. Frontline team members can make improvements and even build their own solutions directly. This is a first step to ushering in a new era of contact center agility, and TELUS Digital is at the forefront of this change, and we have made the Fuel platform available to over 17,000 of our team members.

As an example, after the release of FUEL in one of our frontline CX teams in Europe, they created a quality assurance copilot to support an important part of their daily workflow for a specific client. The automation achieved by the copilot creates efficiencies and allows more time for the team to address more complex matters for its customers.

Moreover, this copilot can easily be replicated across other accounts with similar use cases. And our operations team is now able to reference this specific use case in discussions with the client on broader opportunities for incorporating GenAI solutions into their CX. We are encouraged by the early results of this democratized innovation model. Our team members created over 1,200 copilots in the first month of the rollout to select CX teams.

For more customized digitization of CX applications, we've begun providing strategic consulting services for our top clients across the technology vertical, including Google as well as in financial services and transportation sectors. For 2 of our clients, both online commercial platforms, we're working on a series of AI-powered custom copilots to drive operational efficiencies and improve customer experience delivery.

At the core of our work is a simulation of a customer journey to ensure we're embedding GenAI at the right touch points. Drawing on TELUS Digital's deep immersion in our clients' data and workflows, our Fuel team is uniquely positioned to design and build solutions that have a practical, measurable, and often immediate outcome for our clients' customer experience management.

TELUS as a client and TELUS as a partner continues to play a significant role in our ability to innovate. It's a real-world lab for TELUS Digital, for example, allowing us to test and refine Fuel with 35,000 TELUS users before taking it to market. Our unique relationship allows us to test, refine, and scale our solutions in a live environment, giving a significant advantage over our competition.

For example, working with TELUS, we are testing innovative contact center deployments such as Fuel iX for translation, next best action, knowledge search and response generation. In addition, we partnered with TELUS to launch the first ISO-certified GenAI privacy by design bot, which is available to users on the TELUS website.

I'd now like to address what we're seeing in our digital solutions business more broadly. We are uniquely positioned to assist our clients in managing their complete end-to-end customer journeys. These journeys start with a marketing message, for example, an e-mail or text from an airline with a special offer. Then we help our clients optimize the purchasing funnel on their app or their website, followed by managing their customer relationship.

Again, in the app, in the airline example, such as with check-in or baggage tracking. When there's a problem, we supply the AI-powered bots that serve as a first point of contact. And in more complex cases, the AI-supported and highly trained human beings to resolve the problem. When that is successful, the cycle starts again with a well-timed marketing message. To orchestrate this journey, thoughtfully designed digital experiences, deep data architecture and optimized AI deployments are required, all of which we excel at.

As part of expanding our AI capabilities, we also continue to evolve our AI data solutions sourcing and crowd management platform. We're focused on both quality of expertise and increasing our reach globally. Here, too, GenAI will play an important role as we work to further automate and gain efficiencies in how we attract and manage our crowd-sourced AI community.

TELUS Digital's recent rebrand also supports our robust go-to-market approach and strengthens our positioning. We continue to gain recognition through market leadership, for example, with our recent consumer survey on voice technology. Our findings show that 81% of Americans use voice tech daily or weekly with a 68% increase in their usage over the past year. Driven by AI, voice tech has reached the tipping point. Our capabilities at TELUS Digital directly address each aspect of creating an AI-powered voice and multimodal interface for clients to take full advantage of the advancements in voice technology.

To bring our digital solution strategy to life, I'd like to share some examples. We've partnered with one of the largest consumer credit reporting agencies in North America to design, develop, and launch their first ever customer-facing mobile app. The key innovation here is that we used our CX knowledge and data to design the app, so it not only simplifies and improves the user experience, but drives revenue with customer retention and higher chances of conversion to paid products. The result has also been a meaningful reduction in our clients' contact center load through digital user experiences that deliver further personalization and AI-powered products.

Another client of ours, one of the largest providers of co-branded credit cards in the U.S., was quick to market with their first Apple Vision Pro app, launching it in less than 3 months after Apple made their Vision Pro available for purchase in February of this year. We designed and developed an immersive technology experience that supports consumers in visualizing their savings goals in a very compelling way and provides a platform for our client to drive online engagement and transaction flow with their retail partners.

This example is not trivial. At a higher level, the current Apple upgrade cycle is introducing massive ecosystem changes, including most notably Apple Intelligence. Every app will have to be rebuilt with an AI-powered voice and multimodal interface to remain at the forefront of modern customer experience expectations. The primary interface for most apps will evolve from swiping and tapping to using our voices. TELUS Digital will have a leading role in helping our clients leverage this technology, SeaChange, to fully integrate their customers' apps, websites, and CX experiences.

Looking ahead, I'm fully aligned with what Jason said earlier. Our vision for TELUS Digital's long-term success is to be the leader in supporting our clients' end-to-end customer experiences. A critical component is providing the most tech-enabled CX offering in the industry. We're well on our way to achieving this goal, leveraging our combined strengths in digital solutions and customer experience management, and we're committed to continuing to drive these innovations forward through our culture of relentless innovation.

With that, I'll hand it over to Gopi for an overview of our financial performance.

[Gopi Chande, executive]

Thank you, Tobias, and good afternoon, everyone. In my review today, I'll focus on our quarterly results. For year-to-date commentary and further details, please refer to our disclosure materials issued this morning.

Our results in the third quarter showed stabilization in our performance on a sequential quarterly basis. We generated revenue of $658 million, an incremental improvement from the prior quarter, supported by continued momentum in our AI data solutions line of service, along with the overall top line growth in digital solutions. This sequential quarterly improvement was also seen across the key verticals of tech and games, comms and media, BFSI, health care, and others.

Our largest client, TELUS, revenue grew 21% year-over-year, driven by consistently strong volumes and acceleration of our various projects, including in GenAI as part of the broader digital transformation and co-innovation with our parent. This strong momentum with TELUS is also reflected in year-over-year revenue increases in the comms and media and healthcare verticals, up 6% and 26%, respectively.

With Google, our second largest client, revenue comparison year-over-year reflected a spike in volumes in the third quarter of last year when we started to capture our competitors' volumes. Otherwise, year-to-date revenue with Google is up 12%, delivering consistent growth diversified across our service lines and with the continued strong demand for our AI services in particular.

Revenue with a leading social media client, while lower on a year-over-year basis, grew by approximately 5% on a sequential quarterly basis. This client remains our third largest, just under 10% of the revenue disclosure threshold. Our efforts to diversify services with this client across geographic delivery footprint and cross-sell into adjacent solutions, specifically our AI-related services are starting to yield results.

Among other areas of growth in the quarter, revenue with our BFSI clients increased 21% year-over-year, showing a great trajectory with certain Canadian banks and regional financial services firms in North America. While much smaller in absolute dollar contributions, we've achieved double-digit growth rates year-over-year in the travel and hospitality vertical, driven by demand from some of our long-tenured clients seeing recovery. We also grew by approximately 20% our revenue with clients in the retail and CPG vertical.

Among our geographies, I'd like to call out Central America, South America and Africa. Year-over-year revenues there grew by a solid 20% in the quarter and 15% year-to-date, reflecting a combination of increased demand volumes and our ability to shift client volumes to more cost-effective regions across our delivery footprint, for example, from North America to Central America.

In the third quarter, our adjusted EBITDA margin was 14.4%. We achieved stabilization in our margins in comparison to the previous quarter, taking aside the impact of share-based compensation and it normalized for non-recurring items, namely the business combination-related provisions that benefited our margins in the previous quarter. Going forward, improvements in our margins is highly dependent on our success in returning to growth given the cost structure of our business.

In the meantime, and as we continue to face price competition in our industry, we are finding ways to at least partially offset near-term pressures on our profitability through ongoing cost efficiency efforts. These largely involve strict limitations on non-direct non-essential costs and an overall focus on running agile operations across our global footprint. We're on track for achieving $30 million in cost efficiencies planned for this year.

The year-over-year comparison of our margin largely reflects higher investments in corporate initiatives such as expansions of our commercial sales team and operational effectiveness programs as well as investments related to the Fuel iX product development and marketing. These items flow through the increase in salary and benefits and goods and services purchased in the quarter. It also reflects a higher mix of AI services we provide to clients and specifically increase in digital services we provide to TELUS, partially offsetting the impact of a reduction in revenues from a leading social media client and overall competitive pricing dynamics in the market for our services.

I know leverage is top of mind for some of our shareholders. For year-end 2024, the leverage covenant in our credit facility is 3.75x. Our most recent reported leverage of 2.9x is well within range, and we believe our forecasted leverage for Q4 will also be within range. In the first quarter of 2025, as per the terms of our credit agreement, the leverage covenant falls to 3.25x. We haven't issued our outlook for 2025 on adjusted EBITDA, so I won't be able to comment in detail. However, what I can say is we do not currently have concerns in meeting our 2025 covenants. We have multiple levers to ensure we remain within our desired level of leverage.

Our balance sheet and liquidity profile remains strong, and we continue to reinvest our cash back into our business and towards debt repayment. In the third quarter, we generated free cash flow of $98 million, a year-over-year decline, largely reflective of lower operating profits and timing of income tax payments. We expect our free cash flow yield as a percentage of revenue to be approximately 14% for 2024.

We remain confident in our ability to gradually return to top line growth and maintain a solid margin profile grounded in the context of our industry's pressures and opportunities and is shaped by the increasing adoption of GenAI in our own and our clients' operations. We are reiterating our annual outlook as set in August. That is we expect revenues to come in the range of $2.61 billion to $2.665 billion, implying growth in the second half from the first half of this year.

For adjusted EBITDA, we expect a range of $465 million to $485 million, with margins in the range of 17.8% to 18.1%. On a per share basis, our outlook assumes adjusted diluted EPS in the range of $0.39 to $0.44, and we continue to expect our 2024 cash taxes to be in the range of $45 million to $55 million. We believe this sets a reasonable base to improve upon going forward, and we look forward to provide you with our financial outlook for 2025 in February.

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

[Operator]

The first question is from Ramsey El-Assal from Barclays.

[Ramsey El-Assal, analyst]

I was wondering if you could provide us with a little bit of early sort of guidelines or thoughts on 2025 in terms of where we might see top line margins, that type of thing. If you have any color there, that would be appreciated.

[Jason Macdonnell, executive]

Sure. It's a bit early at this stage, but Gopi, why don't you take that call or that question. Thanks for your question.

[Gopi Chande, executive]

Perfect. Thanks, Ramsey. So again, as Jason mentioned, we'll be able to formalize what next year is looking like in February. But directionally, I can give you some insight really based off what we're seeing in Q3 and Q4. And so from a revenue top line perspective, we are seeing stabilization. We expect to see low single-digit growth in Q4 sequential to Q3, and that's a reasonable basis upon sort of looking at next year on a top line basis.

Ramsey, from an EBITDA margin point of view, again, similar to half 2 in terms of needing to normalize for non-cash items. So as I mentioned in my script, we have adjusted our adjusted EBITDA definition. But if you look at our half 2 adjusted EBITDA margins, those will give you good insight for next year. And that involves investments that we're going to continue to make. So smart investments continuing in our sales organization, marketing efforts, Fuel iX investments and other tech-centric investments that will really help us develop those efficiencies internally and externally. That's embedded in that margin view.

And then lastly, maybe I'll give some insight into free cash flow. As mentioned, we do expect this year to land at about 14% free cash flow yield. That is a little flattered by some of the timing of our payments between ourselves and TELUS. For next year, we're refining those numbers, but we can expect them to continue to be healthy above 10%, and we'll finalize that when we come back to you in February.

[Operator]

The next question is from Stephanie Price from CIBC.

[Stephanie Price, analyst]

Jason, Tobias, just taking on your new roles, just curious how you're thinking about your first priorities in the first few months here as you look out in the current demand environment?

[Jason Macdonnell, executive]

Thank you, Stephanie. Nice to virtually meet you. We are -- when we look at the priority set and the pillars that I've mentioned before, we're heartened by the fact that we've seen some early progress even in the last 60 days. When I look at the opportunity set before us and the assets in our portfolio, we just have a tremendous suite to be able to take to the market.

When we look at priorities in particular, as we expand our sales capacity and efficacy, and we give the sales force the -- what they need in order to sell relative to a full breadth of products and services, we're actually starting to see good traction with customers. So the cross-sell of those services, starting to get more into the digital and AI capabilities on top of our CX capabilities, that's where we're seeing a lot of early traction.

And in terms of other priority sets, we are looking at where do we take the organization next when it's with regard to TELUS digital AI solutions. And the data solutions that we bring to market, whether it's collection, creation, annotation, selection and relevance are super important. We are seeing as far as the generative AI models and their thirst for more data, quality data, it's essential that we bring better capabilities in this front.

And so between our data center engineering, our model validation, tuning software engineering, we are able to advance some of our investments in this area and really ensure that, that's a bigger part of our revenue base as we grow forward. Maybe, Tobias, I'll turn it over to you to talk a little bit more about those priorities.

[Tobias Dengel, executive]

Yes. Thank you, and nice to meet you as well. I would say this unified approach to our clients around the digitization of CX is really bearing some early fruit. And I think if you look at the industry, right, you have a lot of players who are coming to our clients with technology solutions. And then you have a lot of players coming to them with a CX history and experience. There's not that many players who can tie those 2 things together.

And I think the great luxury we have that when we go into a client, is we can look at years often of CX data and make suggestions around what their technology solutions and opportunities are, and that changes the dynamic of the conversation quite quickly, and you get to a C-suite conversation much more quickly than you otherwise would. So we have all of our unified 4 pillars in each of our businesses, but the real magic right now is where those businesses come together in a unified solution.

[Operator]

The next question is from Cassie Chan from Bank of America.

[Cassie Chan, analyst]

I guess I just wanted to ask what your expectations were for sort of tech and gaming vertical to kind of get back to positive year-over-year growth. It seems like you guys are getting some good momentum there, but just curious if you guys see an inflection point in the first half of next year or something.

[Jason Macdonnell, executive]

So maybe I'll address sort of the general question and Gopi, you can speak to sort of our outlook there. On tech and gaming, we obviously have solid expectations for the future with regard to our ability to continue to grow market share in that area. It is a space where we're seeing growth within existing, especially quarter-over-quarter. And we also see a lot of diversification of our product set and bringing to bear some of those that bundled portfolio as we've talked about.

I think gaming in general is a -- and more specifically is an area that has a lot of growth and opportunity, but it tends to be more volatile as well. So we're mindful of that. And on the tech side, we're really heartened by some of the new logos that we're seeing there as well as the growth to the existing clients that we partnered with over the years. Gopi, any top-ups from you?

[Gopi Chande, executive]

Jason, maybe I'll just -- Cassie, thanks for the question. So maybe just 2 top-ups. One, Jason touched on this, on the game side, we are seeing, in general, that sector and industry understandably being open to automation, AI, et cetera. So working to partner with them very proactively in terms of the transformation of their CX, perhaps in advance of some of the other adoption in other industries.

And then secondly, Cassie, maybe I'll use the opportunity just with our third largest client, which is included in that line. Maybe I'll use the opportunity to just talk about what we're seeing there. And with some of what we saw in 2023 and our decline with them, our plan this year was very much about stabilization, diversification, and that is coming to bear.

So essentially, what we're seeing with that third largest client is we have been successful in diversifying the geographies and languages in which we're supporting them on a trust and safety basis as well as having -- being invited to the table with some AI work as was referred to in our earnings release, et cetera.

We -- while we're still down with that client year-over-year, the plan is being executed as we hoped in the year with stabilization, and we're looking to see how we return that one to growth, which will make a big difference in terms of our -- the contribution it makes to this particular vertical.

[Cassie Chan, analyst]

Sorry. And then I was just wondering if I could just ask one follow-up question. I'm just curious about the margin levers in the business. I mean, obviously, like fourth quarter, you're kind of expecting stable margins. But obviously, as you hopefully accelerate revenues again in '25 and beyond, are there more levers in the business that we can think about? Or I guess, structurally, is around the 18% margin rate the right ZIP code to think about your business going forward?

[Jason Macdonnell, executive]

Gopi, why don't you take that one, and I'll top up.

[Gopi Chande, executive]

That would be perfect. So thanks, Cassie. So yes, looking at all of our margin levers with regards to the number you quoted there, 16% to 18% is a good way to look at our operating margins. I will just remind that we did redefine our adjusted EBITDA definition in year. And so as we look at that on an adjusted EBITDA basis, probably 14% to 15% or we're finalizing those numbers for next year.

But more importantly, to your point on the levers, so I'll leave more of this conversation for Jason, but of course, looking very closely at pricing and doing that very tactically on a customer-by-customer basis to see how we want to optimize that as we're starting to see stabilization. A few of the other items that I'll touch on are really garnering the return on investment on some of the investments that I touched on we made this year.

So really starting to garner the return for the dedicated sales individuals by verticals and seeing how we can stretch new logos and cross-selling through those investments, starting to -- while albeit smaller, but starting to see revenue generation from Fuel iX next year and some of those investments this year, -- and then similarly, did see a heightened amount of share-based compensation related to our WillowTree revised earnout.

And again, as we look forward to next year, very much looking to see how that combined business that Tobias spoke about in terms of WillowTree coming together as TELUS Digital Solutions, how will return to be able to support an improvement in our margins.

Having said all of that, as I mentioned, we still are in the investment phases. So there will be incremental investments next year. But generally, overall, we're looking for stabilizing margins. And then, Jason, maybe I can pass back to you just in terms of our approach on pricing.

[Jason Macdonnell, executive]

For sure. And I think the team is bringing to bear a very strategic approach to the pricing regime right now. We're ensuring that where we have existing customers that are either repricing or there's cost competition and renewals that we're able to actually address those with value-added opportunities that are quite differentiated in the marketplace.

We're also mindful of our ability to establish long term or take our long-term relationships and grow margin over time. And we're getting very precise at an account-by-account plan basis to make sure we have plans put in place and actions and tactics that we have been employing are starting to give rise to improvement.

I think on the efficiency side, when you look at the cost and expenses of the business. The great thing about TELUS Digital is we are fairly diversified in the sense of geo-optimal opportunities and looking at the various regions and where growth exists and Gopi touched on a bit of that as we see certain regions grow and show leading profitability, we can shift our emphasis, our investments and our efforts in sales to those regions.

As it pertains to our product portfolio and making sure we lean in hard on investments in sales when it comes to some of the more margin-rich services. That's another advantage we have, of course.

And then when you look more broadly at the business and where we can take it in terms of the particular product sets, and I talked about our digital AI data solutions product sets. and where there's more and more emerging margin capability when it comes to things like Expert Rater programs and ensuring that we are providing qualitative nutrients to these large language model opportunities, that's another area where we see great opportunity for margin accretion.

[Operator]

The next question is from Puneet Jain from JPMorgan.

[Puneet Jain, analyst]

I wanted to ask about the EPS guidance for the full year. So it looks like YTD, you already have $0.43 of earnings and the guidance is $0.39 to $0.44, which would imply a loss in Q4 at the midpoint. Can you elaborate what will drive negative earnings in Q4?

[Gopi Chande, executive]

For sure, Puneet. Thank you for the opportunity to give some more details on that. What we're seeing is really us refining some of our estimates. What we typically do at this time of year is develop our 3-year forecast, refine our 3-year forecast and our next year forecast. And as part of that, look at the recoverability an assessment of some of our assets, for instance, goodwill, et cetera.

One of the areas that we're looking at is the recoverability of some of our deferred tax assets. So our analysis is not complete, but we do have an estimate in our numbers to the extent that, that amount is not recoverable and there's a valuation allowance that needs to be applied. I do want to reiterate that, that would be a non-cash, pardon me, tax charge. So we have an estimate in our numbers.

Based on our current forecast, we do continue to expect to land within our annual range of $0.39 to $0.44, but closer to the lower end of that range, and that is not reflective of our core operations in Q4, but instead our annual assessment related to our deferred tax assets.

[Puneet Jain, analyst]

And this tax charge, non-cash tax charge will go in a tax line item?

[Gopi Chande, executive]

It would -- yes, it would be a valuation allowance, yes.

[Puneet Jain, analyst]

And then when -- like do AI use cases or conversations of applications of AI in an existing process, do they typically happen at the time of renewal or clients are clients proactively looking to change contract terms? Or maybe are you proactively taking some of those AI solutions to clients and disrupting existing contract terms to implement or implement AI solutions in those existing processes?

[Jason Macdonnell, executive]

Tobias?

[Tobias Dengel, executive]

Yes. Thank you. So thanks for the question. AI is top of mind for all our clients, right? It goes without saying. So these implementations don't wait for a renewal cycle on any implementation. It usually takes the form of 1 of 2 entry points, either there is a deep strategic review of the technology and the stack and how AI might be implemented with the client or it's a much more democratized approach with the client's front-end team, where we're looking at how to use the tool sets to make that team much more efficient.

And that could take the form of improving a knowledge bot, right? -- where many of our clients have literally hundreds of pages of documentations on their products. and using AI to help a frontline agent find that information quickly has an immediate impact often on average handle time. Or, for example, next best action, right, where an agent is looking at a script or a scenario with a client and they're trying to figure out what the next best offer to that client or that end customer might be or it's more operational, right?

So we have -- all of our clients expect us to do ongoing QA on what the team is doing and using AI to automate that QA in the context of the rubrics that our customers are asking us to use. All of these are examples of things that our clients are asking us to do as quickly as possible. So it certainly does not wait for the renewal cycle.

[Operator]

The next question is from Divya Goyal from Scotiabank.

[Divya Goyal, analyst]

Tobias, I'll dive a little bit more into this digitization of CX discussion that we are having here. Could you help us understand what are some of the challenges or restrictions that could actually hinder this increased digitization of CX at all? And are you currently being able to displace the existing well-established CX players when it comes to the digitization of CX given it is such an important initiative across the global enterprises.

[Tobias Dengel, executive]

Yes. So what holds it up, right? I think one of the things that we talk about a lot is humans in the loop. I think there's still a great deal of hesitancy by clients to want to use AI directly communicating with end users. I think that obviously is different industry by industry, use case by use case. We've proven it with TELUS that if we put the proper guardrails on the system, we can do that. But that is inconsistent client by client, industry by industry.

But what's not inconsistent is the desire to improve efficiency for the frontline teams using the tools that I talked about before. And so that, again, often starts with a strategy or implementing specific tool sets for specific use cases. But the demand in those scenarios is very, very significant. And I think the differentiator for us versus the players you mentioned is literally how fast you can bring these solutions to them and show progress. Everyone is looking for this progress.

And all of our clients -- not all of our clients, but a significant majority of our clients use multiple providers. And I think over time, you can increase share if you show that you can do the work either at a more efficient, cost-effective outcome or a higher result in terms of customer satisfaction and user satisfaction, et cetera. So it's a very fluid game right now.

[Divya Goyal, analyst]

And I'll ask just a quick follow-up here. Jason, could you help us actually understand what is the exact work that TELUS Digital is currently doing with Google? And what is the stickiness level of that work and the longer-term tenure of that work that you're currently doing with Google?

[Jason Macdonnell, executive]

When you look at what we're doing with Google, essentially, the -- it's a diverse array of services, right? And when we have an opportunity to continue to expand that, whether it's helping them with their models and ensuring we're doing the data annotation and capabilities around those models and advancing that more into areas of the expert space as one example, whether it's making sure from a CX perspective that we are providing sufficient support and ensuring that we're bringing new AI and process into that space.

We are obviously wanting to expand further and deeper in our partnership with Google. It's also important to realize that we're also a user of Google services, and we're an important partner in that respect, and that continues to deepen the relationship.

So when we look at what we do specifically with Google, I won't go into too many areas of confidentiality or competitiveness. But ultimately, when it comes to the services that we're providing there, the service set is becoming more and more diversified. And I would say it's going up the value curve when it comes to the skill sets and the geographies in which we are working with them.

[Operator]

The next question is from Daniel Chan from TD Cowen.

[Daniel Chan, analyst]

Good to see the stabilization happen quarter-over-quarter. Can you give a little bit of color around how the pricing environment is trending? Do you think pricing pressure has pretty much bottomed here? We've seen some of your lower-priced competitors talk about them even walking away from some low-cost, low-margin projects. I'm wondering if you're seeing some stabilization on the pricing front?

And then maybe related to that, a bit of a history lesson, if you can, on what you saw in prior cycles, whether pricing stays down where it's at or whether there's opportunity for it to recover to historical levels.

[Jason Macdonnell, executive]

Sure. Why don't I take the first crack at it and then on the historical part, Gopi, perhaps you can weigh in on that. When -- pricing competitiveness is still pretty intense in the industry for sure. As I mentioned before, I think the way -- the best way to compete with price is on value, and that's something we've been able to do and continue to do successfully, and we're starting to see where that can bear fruit.

When it comes to where -- what is getting priced the most and where the most discounting is happening, I would say it's on more traditional legacy CX outsourcing versus roles that incorporate AI. And so that's a distinct advantage that we have, not only in our history of using AI with customer experience to great effect in the TELUS organization or other customers that we support, but ensuring that we take that more broadly and we advance it further and faster to outpace the price discounting that is happening in roles that don't use AI.

And I think the other element of it is, as I said before, we can flex our business and provide a more global optimization of where services come from to ensure that we continue to be able to compete on margin and be price competitive. And then the third thing that we have in our arsenal is our ability to be efficient from an operational and cost perspective. We're on track to deliver $30 million in cost efficiency. And so we expect to look to replicate some of those capabilities as we move forward.

And I think when I look at the arsenal of AI capabilities we're using internally for our operations, there's a fantastic opportunity to continue those efficiencies and allow us to compete on margin and price in the future and to continue to grow. So I think when I look at the market as it stands today, and you can understand that I want to be very balanced in this approach and outlook right now.

I am confident in our ability to compete on price. I'm confident in our ability to be able to grow margin with clients once we win them and grow the accounts. But I'm going to be fairly balanced in terms of our outlook. And we are seeing continued price competitiveness and pressure out there in select areas, which is why we need to diversify the business and continue our push into higher-value services, which we're doing quite effectively right now. Gopi, maybe you can top up on the history a bit.

[Gopi Chande, executive]

And maybe just before I do, Tobias, do you want to touch on what you're seeing on the digital solutions side?

[Tobias Dengel, executive]

Yes. So we are seeing a stabilization of demand, and I would even say a slight increase of demand, resulting ultimately in stable prices. The -- I think what's going on here for -- there's more spend coming back into digital products. I think some of that is that many projects have been deferred for the last 18 to 24 months.

As interest rates come down, we expect that many of these projects will get green lit at our clients because they are often capitalized. So there's a meaningful impact of where interest rates are. And so we're seeing demand come back and pricing is stable, but we would expect that pricing at least stays stable. And hopefully, just given the demand profile increases, especially as we can differentiate ourselves in terms of the services we provide.

[Gopi Chande, executive]

Thanks, Tobias and Jason. And maybe I'll just close off there. I think they both touched on the themes I was going to go to. So again, part of how we're looking at rebound or return on pricing is really within a couple of factors. So one, we know there's some sector pressures and then secondly, macroeconomic pressures.

So Tobias touched nicely on what we hope and expect to see happen as some of the macroeconomic pressures ease and interest rate environment becomes slightly less constrained. And we do expect that as that demand and supply balance shifts that we will be able to move up the chain in pricing, especially because of the services and how we deliver them and what we deliver.

For the sector itself, again, every time it will go through an evolution, I think it will come out new in terms of what we'll be able to charge. And what we're very focused on is the delivery of what our services and differentiating those and how we deliver those services.

And so again, as that stabilizes, we do think it looks a bit different in terms of the digitization that Tobias and Jason both spoke to and those insights that we can bring to our clients. So evolution on the sector side and then some stabilization improvement due to macroeconomic is what we're expecting.

[Operator]

The next question is from Maggie Nolan from William Blair.

[Margaret Nolan, analyst]

In your prepared remarks, when you spoke about adjusted EBITDA margin, you referenced the higher mix of AI services as well as some increasing exposure to digital services. Can you be a little bit more explicit about the margin profile of your different offerings, maybe where they can go from here and the expected mix over time for some of these offerings as well?

[Jason Macdonnell, executive]

Gopi, why don't you speak to the margin aspect and then Tobias, maybe on the mix side?

[Gopi Chande, executive]

Perfect. So Maggie, we don't directly disclose the margin profiles for each of our service lines. But we have shared, and I can continue to share that what we're seeing currently in what I'll call our traditional AI business, meaning our data annotation, that is currently lower than what we in our CX and our trust and safety. It's still healthy. It's still mid-20s. And so it's a very healthy business. It's just as we change the shift -- pardon me, the mix shift, you will see a bit of a shift there.

And again, it gets difficult over time to actually delineate the AI and then the CX business in that as we're applying digitization to CX, we expect to see a different margin profile there as that is the work that we're delivering. It is a different margin profile on newer nascent work that we're getting around pilots and proof of concepts. But Tobias, maybe I'll pass to you there just in terms of what you're seeing in that pricing environment as well as the shift in mix that we expect to see.

[Tobias Dengel, executive]

Yes. I mean I think your key point there, Gopi, is right on is that it's going to be harder and harder to differentiate between some of these service lines as they begin to be offered in a bundled unified way to our clients. Right now, AI-related revenue is about 15% of revenue, and that's growing at 13% a year. So as you might expect, our clients are very interested in the AI-related bundle and the digital-related bundle, especially when combined with CX.

And so I would -- our aspiration is that we think less about mix and more about what is the unified set of services we can provide that create value over time to our clients. And as I think Jason said at the very top of the call, we're very excited about some of the conversations and some of the early implementations we're doing with our clients in that regard.

[Olena Lobach, executive]

Thank you, and thank you, Carl, for moderating the Q&A. Unfortunately, this is all the time we have left for questions, but we will make sure to follow up with everyone and reconnect. Thank you for your participation. I will now turn the call over to Jason for his closing remarks. Jason, over to you.

[Jason Macdonnell, executive]

Thank you all for your time and engagement with us today. In closing, I'd like to reinforce our commitment to and confidence in achieving a gradual return to growth at TELUS Digital. Our focus on differentiated customer service and the continued evolution of our business to a technology-centric model sets proper perspective for our specific efforts to drive recovery in our operating and financial performance.

I want to emphasize and set your expectations right. It will be a gradual process, but we expect to see improvements and look forward to sharing those with you all. As we look ahead to the holiday season, on behalf of our team, I'd like to wish you all the best for a happy and healthy end of the year. Our next quarterly investor call will take place in February. Until then, take good care, and goodbye for now.

[Operator]

This concludes the TELUS Digital's Q3 2024 Investor Call. Thank you for your participation, and have a nice day.