Telus International Cda Inc

TSX:TIXT

Earnings Call Analysis

TELUS International Grows Amid Challenges

TELUS International (TI) ended a difficult year on a high note, increasing fourth-quarter revenues by 10% over the previous year and achieving an adjusted EBITDA margin of 23.7%. Despite tough economic conditions, new clients were acquired across various sectors, and growth continued with significant clients like TELUS Corporation and Google. TI's WillowTree team made strides in the financial sector and secured new business with existing clients. They also showcased an AI-powered chatbot proof of concept with a major North American bank, highlighting GenAI's role in enhancing customer service. TI also launched Experts Engine, leveraging their AI crowd community to offer generative AI builders high-quality, cost-effective training data sets, showcasing their ability to cater to specific, complex client needs.

TELUS International Ends the Year with Strong Performance and Cost Efficiency Gains

TELUS International closed a challenging year with notable successes, achieving a 10% year-over-year revenue growth in the fourth quarter and an improved adjusted EBITDA margin of 23.7%. This margin enhancement reflects the effectiveness of the company's cost efficiency initiatives.

New Client Partnerships and Market Share Expansion

The quarter witnessed several new client acquisitions including a North American customer engagement software company and a diverse clientele for WillowTree, consisting of players from personal finance, wireless, and biotech industries. Furthermore, existing relationships were strengthened, notably with TELUS Corporation, reflecting a commitment to support clients' digital evolutions. WillowTree, in particular, has seen an increase in market share within the financial services sector.

Innovations and Advanced Technologies Showcase

The company highlighted its innovative capabilities with WillowTree's development of a 3D volumetric capture studio, showcasing a virtual reality platform that powers 3D modeling used in both virtual and augmented reality spaces.

Strides in Generative AI and Data Security

TELUS showcased its suite of GenAI offerings, along with a mention by IDC about the success of its GenAI JumpStart Accelerator program. It also emphasized on the security of client data, ensuring separation from core large language models (LLMs) and a commitment to meeting upcoming EU AI regulations.

Leveraging Crowdsourcing and Launching Experts Engine Platform

To address generative AI development needs, TELUS is capitalizing on its expansive AI community and has launched the Experts Engine, which is an on-demand, tech-enabled sourcing solution for generative AI model builders. Working with industry giants like Google, the company is at the forefront of supporting the development of large language models and automatic speech recognition technologies.

Cutting-edge Work in Computer Vision and AI

TELUS International's computer vision team is actively engaged with clients to drive forward autonomous driving technologies. The company successfully completed a data annotation project for Thorn, marking its excellence in handling sensitive content with a high accuracy rate and lay a strong emphasis on annotator wellness.

AI-Driven Efficiency in Customer Inquiry Management

The in-house AI model developed for TELUS enables efficient categorization of customer inquiries and a human-in-the-loop process ensures continuous learning for the AI, reducing the need for human involvement in the long term. The company has proven its swift adaptability, learning the nuances of client language in mere hours.

Industry Recognitions and Awards

The company was honored with significant industry accolades, being named as both the Canadian and Global Partner of the Year for 2023 by Five9, which acknowledges TELUS International's leading position in the field.

Commitment to Sustainability and Community Engagement

TELUS International unveiled its new site in Costa Blanca, Morocco, incorporating eco-friendly design and technology. The company also underscored its dedication to community service with numerous projects, including building a school in Guatemala City that will serve 950 students and various other local community projects worldwide.

Looking Forward with Sustainability and Innovation

In accordance with its priorities and achievements in the year 2023, and looking forward to 2024 and beyond, TELUS International plans to release its second sustainability report in the spring. This underscores the company's ongoing commitment to sustainable practices and stakeholder engagement.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the TELUS International Fourth Quarter 2023 Investor Call. My name is Jonathan, and I will be your conference facilitator today. [Operator Instructions]

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

[Jason Mayr, executive]

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International's Q4 2023 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 and year, followed by Vanessa, who will provide some key financial highlights. We'll then open the line to questions from prequalified analysts before turning the call back to Jeff for his closing remarks.

Before we begin, I'd like to direct your attention to Slide 2 of the supplementary presentation available for download on this webcast and also available on our website at talusinternational.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 consider to be 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 Plus and EDGAR. I'd also like to remind everyone that all financial measures we're referencing on this call and in our disclosure are in U.S. dollars, unless specified otherwise and relate only to TELUS International results and measures.

With that, I'll now pass the call over to our President and CEO, Jeff Puritt.

[Jeffrey Puritt, executive]

Thank you, Jason. Good morning, everyone. TELUS International performed well to close what was a very challenging year for our industry. In the fourth quarter, TI grew revenues 10% year-over-year and importantly, saw a continued improvement in our adjusted EBITDA margin to exit the year at 23.7%, demonstrating the efficacy of our cost efficiency programs that we discussed over the past 2 quarters. Despite the continuing challenging macroeconomic environments, TI secured several new client wins this past quarter, including a North American customer engagement software and analytics company, Western Canada's premier heavy-duty truck and bus dealership, and a German research institution focused on innovative visual systems.

Additionally, our team at WillowTree also welcomed several new clients in the quarter, including a personal finance company, a U.S. wireless provider and an American biotech company. We also continue to grow business with our existing clients, including with our largest client TELUS Corporation, supporting their ongoing digital evolution of multiple areas, including TELUS Health in particular. As well, we've secured new engagements with other existing clients such as a Canadian multinational banking and financial services corporation and Google, our second largest client. Moreover, our team at WillowTree continues to gain incremental market share in the financial services vertical in which we already count numerous Fortune 500 brands as clients.

And I'll share more details about one of these clients in particular in a case study shortly. During the quarter, the WillowTree team also grew our business with existing clients, including an American hotel company and the world's largest brewing company that owns multiple global brands. Although macroeconomic conditions continue to constrain the full potential of our cross-selling efforts, TI and military are making progress in fostering our fully integrated go-to-market strategy with several proposals in various stages of review with clients in the logistics, e-commerce, financial services and technology industries.

To stay on WillowTree for a moment, last week, some of you may have tuned into a segment of the today show and cover the highly anticipated release of Apple's Vision Pro virtual reality specs, featured prominently during the show segment was the 3D volumetric capture studio located at Nova Southeastern University in Florida. That studio was built by our team at WillowTree for some, and it runs on our virtual reality capture and render platform that enables 3D modeling used in virtual and augmented reality. Specifically, our engineering team built the software platform and the camera interface for the studio.

We took the project from early-stage proof of concept and production ready within 3 months. Our team also built additional tools that ensure the successful integration of hardware and software, including a new Cloud render pipeline to leverage remote computing resources to produce 3D graphics and animations. As an update on Fuel iX, while it's still early days, we're encouraged by the engagement with clients and the contracts that are in various stages of negotiations. We believe our suite of GenAI offerings is a great enablement platform that provides enterprises with secure access to large language models, which would otherwise be too costly and time-consuming of an investment for many companies, especially those that are just getting started on their GenAI journeys.

In fact, IDC recently featured our GenAI JumpStart Accelerator program as an example of successful GenAI implementation, customer care business process services. The specific use case featured WillowTree's engagement with one of North America's leading banks. Over the span of 8 weeks, our team developed a proof of concept to validate the feasibility and viability of a trustworthy AI-powered chat bot for this banking clients' customer experience. As a starting point, our WillowTree team facilitated audience workshops determine best practices for AI technical and UX design, conducted product design and research around business outcomes and presented functional solutions and prototype education to project stakeholders upon finalization of the proof of concept.

Through user interviews, testing strategy, risk analysis and reporting, we were able to not only understand users' needs, mental models, expectations and desires related to AI-powered chat bots, but we also established UX guidelines and added to the bank's bought experience knowledge base simultaneously. The solution our WillowTree team worked on demonstrates the power of GenAI in enhancing customer service and empowering customers with a robust conversational financial literacy tools across all of our client discussions on GenAI. A key concern is the security and confidentiality of their data.

With our Fuel iX platform, we ensure client data stay separated from the core LLM models. Moreover, our clients can choose the right LLM tool for any given application, optimizing cost and reducing the risk of vendor lock-in within the rapidly evolving AI ecosystem. As the Fuel iX platform is deployed with clients, we work with them to launch specific modules, for example, a CX Asian support block based on each client's data set and current IT tools and infrastructure. Our platform enables clients to deploy, orchestrate and administer multiple GenAI applications quickly off of the same foundation to deliver value for clients while maintaining the ability to scale up as it starts with the client needs.

Fuel iX provides the flexibility and resiliency to avoid application obsolescence as the foundational model space rapidly evolves. Indeed, the generative AI space remains very active with regulatory oversight, a top priority to continue development and adoption in a responsible manner. In early December, the European Parliament and Council of the EU reached an agreement on the shape and content of the EU regulation on artificial intelligence, the AI Act, which, among other provisions for strict spatial recognition and deep fakes and defines how businesses can use AI. While the details in the final form of the act are still a work in progress, Onus is on industry participants to establish their own AI governance programs and processes to ensure compliance.

At TI, we anticipated this event and proactively adopted data practices consistent with the Draft Act. For example, we have already established governance processes for new technologies, including AI, to continuously assess the compliance of our revolving solutions with regulatory requirements and industry standards. Our global security and risk policy features and expanded segment on the acceptable use of AI tools, specifically including a dedicated section for generative AI with a focus on guardrails used in our approach to new technologies. Elsewhere, within our AI data solutions line of service, we're leveraging our scale from our million-plus crowdsource AI community to serve clients with their generative AI development needs.

To build upon this in December, we launched Experts Engine, a fully managed tech-enabled experts on-demand sourcing solution for generative AI model builders to help them more quickly, more accurately and more cost effectively secure the high-quality training data sets they need to build the most demanding foundation models, including large language models. At the core of expert engine is TI's proprietary machine learning model, conceived and built in-house here at TI.

Based on a client specific project requirements, Experts Engine programmatically matches the tasks to be performed such as data creation, collection, annotation and validation for the best qualified individuals and assign the correct quality control workflows to the project. Specifically for large-scale data projects, Experts Engine eliminates the overallocation of expertise to simpler task by ensuring the right contributors are working on the right tasks at all times. Ultimately, this enables us to better address more complex and customized data set requirements for our clients.

We've been seeing solid momentum in working with hyperscalers such as Google, in particular, in supporting the development of their large language models to enhance their respective GenAI products and services. TI is playing a central role in the reinforcement learning from human feedback lube and supervised fine-tuning, which thanks to our scale and resource management enables our AI crowd community to be more efficient and effective. Among other engagements, our AI data solutions team is currently supporting the development of an automatic speech recognition for pretrained language models owned by a Santa Clara-based company in the chip industry that is also at the forefront of AI.

On a similar note, our computer vision team continues to work with several clients to advance autonomous driving technologies as well as to provide data sets to help them develop and enhance various vehicle features, such as automated driving, diligent avoidance systems, auto-braking, lane departure warning and parking assistance systems to assist with development of the hands-free systems for urban and suburban driving as well as freeway automation. With an eye on continuous improvement in efficiency, our team uses semi-automated data tagging and selection algorithms in some cases for more than a dozen metadata parameters, and we equip our data labeling platform with pre-label to facilitate the optimization of computer vision annotation.

In a case study that spans both trust and safety and AI, there's incredibly important work we do for our client Thorn, an international organization committed to addressing the role of technology in the facilitation of human trafficking and child sexual exploitation. Founded in 2012, Thorn has data science and engineering teams focused solely on developing new technologies to use across the child safety ecosystem to accelerate victim identification, prevent revictimization and proactively preventive use. TELUS International successfully completed an in-facility data annotation project for Thorn, annotating 90,000 images and text strings from the clients' confidential database and the dark web over an 8-week period.

The label data was used to train one of their machine learning AI models to identify online sexual harms to children. As this project required the annotation of highly sensitive material, we selected a team of annotators based on a number of key criteria, including seniority, skill profile and emotional maturity. The classification of work required the annotators to determine which offensive material category and imager texturing belong to. Due to the sensitive nature of the project, the team worked in secure rooms at a TELUS International facility using our in-house sanitation platform.

For heightened security, we set up a secure API and file transfer system so that the images were not stored locally. Our team members worked on a reduced schedule, but at full pay to mitigate the impact of prolonged exposure to the material. These team members also had access to our robust wellness program that included custom counseling and regular wellness check-ins. Our team delivered a project on time and with minimal revisions required achieving a 93% accuracy rate. Our client noted how TI consistently demonstrated a dedication to both the wellness of annotators and the quality of the project delivery as both aspects are critical for a successful annotation project.

For the final case study I'll share today, I'll focus on TELUS, our parent company. As you likely know, we sell TELUS across hundreds of programs, helping to augment and digitize their customer experience ecosystem, leveraging technology and talent to help them outpace their competition. To start, let me illustrate how TI's homegrown AI-enabled classification system is helping to manage TELUS' customers inquiries. Historically, customer inquiries or tickets were subject to a labor-intensive and rather inefficient process and which tickets were read, categorized and triaged manually by humans. With TI being a digital enabler for TELUS, we developed a proprietary and customized solution for them that automates this process, leveraging AI to allow technology to tackle most of this work.

We built a classification system, which is a combination of multiple customized models and an internally used language model. I'd like to stress here that we're not using ChatGPT in this particular instance, but rather a TI solution that has been trained on user-specific data to improve the accuracy and understanding of the client data. Each incoming ticket is analyzed by our AI model, which then categorize the ticket into a specific topic bucket and then takes appropriate actions without involving humans. The classification is not limited solely to topic, but also includes parameters such as urgency of response, sentiment or trend formation within larger groups of customers, language translation and ticket closure success, whereas the model identifies and retain for future use, the most successful resolution cases.

Any issuer ticket that is beyond the model's classification parameters is automatically routed to an administrator, a human, who manually assigns it to the correct category. This human-in-the-loop process helps train our model so that there's no need for human intervention for similar tickets in the future. The beauty of the solution is that we can adapt and start understanding the nuances and language of our client business, in this case, TELUS in a matter of just a few hours, not months or days, but hours. Reliable and specific sample data and the variety of this data for trading our model are critical elements to ensure the classification accuracy. Our deep partnership in history with TELUS has certainly enabled TI to develop expertise within the telecommunications space in particular and indeed helped us better engage with some of the world's leading communications and media companies with AI-enabled CX solutions, a suite of network optimization solutions and, of course, robust digital transformation capabilities.

In the fourth quarter, TELUS International was once again recognized externally with industry awards. In addition to being featured in the IDC report on GenAI applications in CX that I mentioned a moment ago, TI was named a leader in the IDC MarketScape for worldwide data labeling software for 2023. This global assessment evaluated vendors offering data labeling software technologies and capabilities, including TELUS International's proprietary AI data labeling platform. Earlier this week, Five9, our strategic partner for our Intelligent Cloud Data Contact Center as a Service application platform recognized TI as its Canadian Partner of the Year and notably its Global Partner of the Year for 2023. With Five9, we're working to reimagine CX in the Cloud.

The TI's agile and scalable solutions harnessing the power of generate AI to deliver for our clients and their customers end-to-end CX experiences and innovation and at the same time, drive better performance and cost efficiencies. And to start the new year, U.S. recruitment platform, Ripple Match, selected WillowTree as a 2024 campus forward award winner for our unwavering commitment to recruiting and hiring early career tech talent and the investments we continue to make in nurturing and retaining the next generation of diverse talent.

Offering opportunities for advancement and career growth that within our global footprint of inspiring facilities will continue to play a meaningful role in our team member satisfaction, engagement and retention. Increasingly, environmental impacts of our footprint are top of mind.

In November of 2023, we announced our new site in Costa Blanca, Morocco with a capacity for 800 team members providing AI data solutions and CX services. Completed in 3 phases: the construction of our state-of-the-art facility combines TELUS technology with our environmentally friendly ethos. The building was constructed to triple green certification standards and designed with numerous sustainable features, integrating the use of renewable energy through 2,000 square meters of solar panels on the roof to produce more energy than the building consumes and with more than 11,000 square meters of green space. Elsewhere at TI in the fourth quarter, our team members kept their commitment to give back to communities where we live and work. For example, in October, our team in northern Germany hosted their first TELUS day thanksgiving where our team refurbished a transitional refugee home for women and children. While our U.S. team members in Las Vegas refurbished Gray elementary school.

Meanwhile, in Ireland, our volunteers established the first Community Garden in Mahan, an area of the southern east side of Cork. Personally, I had the great pleasure of attending one of our data giving events in Central America in November, where more than 800 team members rolled up their sleeves to build our 13th school in Guatemala City. Over the course of just 8 hours, we built 9 classrooms, 2 principal offices of computer lab, a kitchen, 2 sets of bathroom and a multisport court that will benefit 950 students. As well in El Salvador, our more than 1,100 volunteers refurbished the SOS Children's Village child development center in Santa Tecla.

It's these tangible contributions by our team members and making our communities better that truly inspire me and are foundational to our differentiated culture at TI and reflect our broader approach to sustainability. To that end, we plan to release our second sustainability report in the spring, but you can learn more about our teams and companies progress towards our goals and achievements in 2023 as well as our priorities in 2024 and beyond to continue to address the environmental, social and governance aspects of our business, global operations and stakeholder engagement.

And finally, as you will have seen in our earnings release issued this morning, our Chief Financial Officer, Vanessa Kanu, has made the decision to leave TELUS International at the end of March. Before I turn the call over to her this morning, I'd like to take a moment to acknowledge and thank her for her many contributions to our company since she joined in 2020. It's difficult to summarize our achievements in the short time I have now, as Vanessa has been a pivotal member of my executive team, helping us navigate a period of rapid growth for TELUS International, including our successful IPO in February 2021.

I was honored to stand shoulder to shoulder with her and many of our senior leaders last year is finding had the opportunity to ring the closing bell at the New York Stock Exchange to commemorate the accomplishment. I greatly appreciated Vanessa's counsel and support as we've developed, iterated and executed upon our strategy amidst challenging global macroeconomic conditions. Just as importantly, I've admired Vanessa's indefatigable work assets, exceptional intellect expertise and insights as well as her ability to forge and sustain excellent relationships with our stakeholder community. And as that goes without saying, but I'll say it anyway, you will indeed be missed here at TI.

And now over to you, Vanessa to share the details of our financial results.

[Vanessa Kanu, executive]

Thank you very much, Jeff. Very much appreciate it. And good morning, everyone. Thank you all for joining us today. In the fourth quarter, we delivered revenue of $692 million, up 10% year-over-year on a reported basis and 9% in constant currency. On an organic basis, our quarterly revenue grew 3% year-over-year. For the full year, we generated revenue of $2.7 billion, up 10% on a reported basis and also 9% in constant currency and up 2% on an organic basis. Taking in the context of a very challenging year, this is a solid result, supported by the expansion in services provided to existing clients like TELUS Corporation and Google, amongst others, and the addition of new clients. This growth was tempered by meaningfully lower revenues from one of our largest clients, a leading social media company as well as a global financial institution client.

Looking at our top 3 clients. Revenue from TELUS and Google increased 31% and 32%, respectively, in Q4, while revenue from our third largest client, a leading social media network declined 31% year-over-year. For the full year, revenue from TELUS and Google increased 31% and 20%, respectively, while revenue from our third largest clients declined 22%. Excluding impacts from that social media network clients, our total revenue on an organic basis grew 9% in Q4 and 7% for the full year. Looking at our revenue by vertical. In the fourth quarter and for the year overall, the reported revenue growth rate by vertical were not materially impacted by foreign currency movements. Our largest vertical second game grew 1% year-over-year, while on a full year basis, second games grew 3%, with growth from Google driven by strong momentum in AI data solutions work, offsetting revenue declines from our third largest client.

Excluding again, this leading social media network client, our revenue in the Tech & Games vertical grew by approximately 16% year-over-year in both Q4 and for the full year. Revenue from the e-commerce and FinTech vertical increased 4% year-over-year driven by higher volume. For the full year, e-commerce and FinTech revenue declined due to a decline in service volumes during the first half of the year, which subsequently improved during the second half of the year. Our parent company TELUS Corporation continues to drive growth in our communications and media vertical with quarterly revenues increasing 21% year-over-year, while growing at 11% for the full year. Hela also continues to drive year-over-year growth in our health care vertical, which was up 83% in the quarter and an impressive 174% for the full year.

Banking, Financial Services and Insurance or BFSI, was largely flat year-over-year in Q4, reversing a declining trend seen over the prior 2 quarters as the impact of the volume reduction from a global financial institution client has now lapped starting this quarter. For the full year, revenue declined 6% due to a reduction in service volume from the aforementioned clients. Finally, our revenue from all other verticals, which includes shovel and hospitality, energy and utilities, retail and consumer packaged goods, amongst others, grew 8% year-over-year in Q4 and 24% for the full year.

Looking at our revenue by geography. Revenues in North America grew by 27% year-over-year in Q4 and 28% for the full year, driven by growth in Google, expanded volume from our parent company, TELUS Corporation and its business units as well as the addition of WillowTree clients across several industry verticals. We also saw strong growth in Central America, where revenues increased 26% in Q4 and 23% rather, for the full year, driven by TELUS, along with certain technology clients and growth in AI data solutions.

In Asia Pacific, our revenue grew 5% and 7% in Q4 and the full year, respectively, with contributions from again TELUS and across several other industry verticals and clients. Finally, and as expected, we saw a year-over-year decline in revenue from Europe of 8% in Q4 and 7% on a full year basis.

Moving on to operating expenses. Salaries and benefits in the fourth quarter were $406 million and for the full year, $1.66 billion, up 16% and 19%, respectively, year-over-year. The increase in both periods was due to increased average employee salaries, wages and higher team member counts, including additional key members from our acquisition of WillowTree as well as previously discussed cost imbalances earlier in the year, particularly euro. These increases were offset by the positive impact of our cost efficiency efforts initiated in the second quarter of 2023, including aligning our team member cancer service demand and adjustments of variable compensation accruals based on operating performance metrics.

Our goods and services purchased were $122 million in the fourth quarter, a decrease of 2% year-over-year while for the full year, goods and services decreased by 1% to $461 million due to the lower use of higher cost external contractors in our digital solutions business and the reduction of certain sales tax reserves based on our recent collection experience, which were partially offset by additional business services purchased in relation to WillowTree.

Share-based compensation expense in the fourth quarter was 0, while for the full year, it decreased by $4 million to $21 million. This decrease was due to lower expense associated with awards granted in relation to our acquisitions and a downward revision on the estimated performance achievements on certain non-market performance conditions, which were both partially offset by the prior year benefiting from a downward mark-to-market adjustments resulting from the decrease in our share price. Acquisition, integration and other charges in the fourth quarter were $7 million, a decrease of 70%, while for the full year were $55 million, up 38%, primarily due to expenses associated with our cost efficiency efforts, which included stock reduction to address lower service volume and acquisition and integration costs incurred in connection with our recent acquisitions.

Depreciation and amortization expense was $84 million in Q4 and $324 million for the full year, up 24% and 26%, respectively, primarily due to capital and intangible assets arising from our acquisition of WillowTree as well as additional organic capital investments over the year. In the fourth quarter, we recorded a gain of $20 million related to changes in business combination related provisions. This gain was due to a downward revision of our estimate of certain performance-based criteria tied to the WillowTree business and a reduction of our provision for written put options related to the acquisition.

Our interest expense for the fourth quarter was $37 million, an increase of $25 million in the same quarter last year. And for the full year, interest expense increased $103 million to $144 million. These increases were primarily due to higher average debt levels on our credit facility, higher average interest rate and non-cash interest accretion recognized on the provision for written put options arising from the WillowTree acquisition. In Q4, our income tax expense was $14 million, and our effective tax rate was $26.9 million compared with a negative ETR of 9.7% rather, in the same quarter of the prior year, primarily due to a change in the foreign tax differential.

Income tax expense for the full year was $5 million, resulting in an effective tax rate or ETR of 8.5% compared with 26.8% in the prior year, with the decrease primarily due to a change in income mix as proportionately less income was earned in higher tax jurisdictions, while we also saw a reduction in adjustments recognized in the current period for income flat of prior period related to a favorable income tax settlement. These were partially offset by an increase in withholding taxes as a proportion of net income before tax. Moving on to profitability. Adjusted EBITDA was $154 million in the fourth quarter, a year-over-year increase of 4%, benefiting from the favorable impact of our cost efficiency efforts and certain other favorable items, including vendor volume rebates, lower variable incentives and favorable customer mix in the quarter.

Further, there were increased volumes in AI data solutions, namely with Google and digital enablement with TELUS. This helped to more than offset the impact of reductions in service demand, principally in Europe, wage inflation and accelerated ramp-up costs in the quarter for certain clients. Correspondingly, our adjusted EBITDA margin in the fourth quarter was 23.7%, expanding by 200 basis points quarter-over-quarter, while contracting 120 basis points year-over-year. For the full year, adjusted EBITDA was $583 million, a decrease of 4%, primarily due to the increase in salaries and benefits, outpacing revenue growth, resulting from lower utilization of team members in certain regions and changes in our revenue.

Adjusted EBITDA margin for the year was 21.5%, a contraction of 310 basis points from the prior year due to the previously mentioned cost imbalances, which were partially offset by cost efficiency efforts initiated in Q2 2023 and realized during the second half of the year. Adjusted net income in the fourth quarter was $72 million, a decrease of 24%, while adjusted diluted earnings per share was $0.26, a decrease of 26% year-over-year, largely as a result of the higher operating expenses, interest expense and tax expense outpacing revenue growth.

For the full year, adjusted net income decreased by 24% to $252 million, while adjusted diluted earnings per share was $0.91, a decrease of 26%. As an update to our cost efficiency efforts that I discussed with you in prior quarters, these programs, which again started in Q2 of 2023 and primarily encompassed team member count reductions in line with demand, rationalization of certain facilities and a reduction in certain third-party vendor costs have generated $104 million in annualized savings, up from the $96 million that I reported last quarter.

Approximately $46 million was recognized during the year, while the remaining $58 million will accrue to our benefit in 2024. More on that later. Now turning to the balance sheet and cash flow. At the end of the fourth quarter, cost and cash equivalents were $127 million, and our total available liquidity was $609 million. We generated free cash flow of $115 million, up 92% year-over-year, driven by lower income tax payments and higher net inflows from working capital in the quarter.

For the full year, free cash flow was $405 million, up 22%, primarily due to higher net inflows from working capital, which included higher cash receipts from TELUS Corporation as well as lower income tax payments and share-based compensation payments. These items were partially offset by lower operating profit and cash expenditures for transaction costs associated with the WillowTree acquisition. As a percentage of revenue, free cash flow was approximately 15% in 2023. Capital expenditures for the year decreased 11% to $93 million, primarily due to the deferral of noncritical sustaining spend and the rationalization of our facilities footprint and as part of our cost efficiency efforts mentioned earlier.

For the year, capital expenditures as a percentage of revenue were 3.4%. We also continued to reduce our leverage in Q4, lowering our net debt to adjusted EBITDA leverage ratio as defined by our per credit agreement to 2.8x as of the end of December and improvement from 2.9x as of the end of September 2023. We believe our robust cash flow profile will continue to drive further deleveraging through 2024. Speaking of 2024, let's turn to our outlook. Much like our industry peers, we remain cautious given the ongoing challenging demand environment with delayed decision-making expected to continue contributing to headwinds in Q1 and Q2 in particular, while we're hopeful to start seeing broader demand improvement in the second half of 2024.

Our outlook for revenue for 2024 is in the range of $2.79 billion to $2.85 billion, which represents revenue growth of 3% to 5% on a reported basis. We do not currently expect year-over-year foreign currency impact on revenue to be material. Within this outlook range, we continue to assume near-term shortness in revenue from our third largest client, offset by continued expansion of revenue with TELUS Corporation and further momentum with other large clients, including Google. As you may have seen in our earnings release, beginning in the first quarter of 2024, we will no longer exclude share-based compensation expense and changes in business combination-related provision and the tax effect of these items in our presentation of adjusted EBITDA and adjusted diluted earnings per share. The 2 charges, which largely offset in 2023 and are expected to also largely offset in 2024 are currently expected to create a minimal net impact on adjusted EBITDA or adjusted EBITDA margin.

However, the tax effect of such adjustments will impact adjusted net income, while our weighted average diluted share count has also been updated to reflect these adjustments. Accordingly, the ranges I'm about to share with you for these metrics are aligned with the modified presentation. For more information regarding this change, including a reconciliation of the previous and current presentation, please see the non-GAAP section of our earnings release. We will also be posting additional quarterly reconciliations to assist with your modeling to our Investor Relations website. For adjusted EBITDA, we expect a range of $623 million to $643 million, representing 7% to 10% year-over-year growth with adjusted EBITDA margin of 22.3% to 22.6%. Again, this includes the expectation of minimal net impact from the inclusion of postcard compensation expense and changes in business combination related provision to adjusted EBITDA.

We have set adjusted EBITDA growth to outpace revenue growth in 2024. In part due to the significant cost efficiency program we executed upon last year. While those executed programs will generate tailwinds going into 2024, as I referenced earlier, we also plan to invest in our business in a meaningful way this year in 2 key areas. First, we are investing meaningfully in our sales and marketing functions to the tune of $25 million in year by hiring of additional sales and sales enablement personnel to increase our geographic footprint, account coverage and vertical coverage as well.

Second, we're investing $6 million of OpEx, not including the CapEx investment in internal transformation of our service delivery capabilities to enhance service quality and optimize our global cost of service, enabling us to further reduce our cost to serve on a longer-term basis. Normalizing for this meaningful investment of $31 million we're making this year, our adjusted EBITDA margin for the year would have otherwise been 23.5% at the midpoint of our guide. We believe these investments, while significant in 2024 are critical to our future revenue growth and indeed, profitability trajectory well beyond 2024. Our outlook calls for an adjusted diluted EPS range of 93 to 98 cents, representing growth of 7% to 13%. Our outlook assumes a weighted average diluted share count of approximately 292 million for the year. And finally, for the full year 2024, we expect our effective tax rate to be in the range of 22% to 26%, reflecting the expected jurisdictional mix of our earnings.

While we do not provide formal quarterly guidance, I would like to highlight certain seasonality factors that should be helpful in modeling quarterly cadence. We expect revenue seasonality of approximately 48% in the first half and 52% in the second half of 2024, and adjusted EBITDA seasonality of approximately 45% in the first half and 55% in the second half. The EBITDA SKU for the second half of the year reflects the aforementioned new investments to support growth and efficiency being incurred starting in the first half with the associated benefits ramping up throughout the year and beyond. As a reminder, our annual wage increases also kick in during the first half of the year, consistent with previous years. Both revenue and EBITDA SKUs reflect what we expect for our business with the effect being more pronounced in the first quarter in particular as we don't foresee the demand environment improving until later in the year.

Finally, our effective tax rate is also subject to seasonality being higher in the first half of the year and lower in the second. Lastly, before we move on to questions. Thank you, Jeff, for your kind words earlier. It has been an absolute honor to serve as CFO of TELUS International for the last 3.5 years and to have helped to guide with a resilient financial profile. Indeed, our compound annual growth rate from 2020 to 2023 has been remarkable, and I'm honored to have been a part of that while further building our foundation for the future. I have tremendous confidence in the company's leadership team, its strategy and future prospects and wish everyone at TI continued success. I will indeed be rooting for the team from afar.

With that, let's move on to questions. I kindly ask you to please keep it to one question at a time so that everyone can participate. Jonathan, over to you.

[Operator]

Our first question comes from the line of Tien-Tsin Huang from JPMorgan.

[Tien-Tsin Huang, analyst]

All the best to Vanessa. Thanks for help here. I wanted to ask, maybe if you don't mind, let's start with margin. I know you're going to get a lot of questions on revenue. Just a little bit more detail on the margin outlook and what levers you might be pulling to drive that second half improvement. I caught the investments, but I also heard things like some ramp-up costs. I want to make sure that's just typical, and I think subcontractor usage, things like that utilization? Any other call-outs there?

[Vanessa Kanu, executive]

Thanks, Tien-Tsin. Absolutely. I think I've called out the main items, and I think you're absolutely right. So our ramp-up costs are typically higher, particularly in Q1, and we actually started to see some of that in Q4. Nothing unusual there. That's our typical seasonal cadence, but we start to see that build up through the year. And of course, the revenue generation starts to accelerate. So we incurred the ramp-up costs starting early and then as the revenue starts to materialize and hit sort of run rate or proficiency levels, the EBITDA margin start to pick up as a result of that. So all that very normal as part of our typical cadence. I think what I would call out as being different this year indeed is the $31 million of investment that I called out.

And as mentioned in the prepared remarks, as we went through our planning for the year, whilst we do recognize that we want to get back to a 23% plus EBITDA margin, it was also critically important that we set aside investment for our future growth and future profitability. We do have a very strong and robust market, as we've discussed many times in the past. So whilst we're talking about macroeconomic headwinds in 2023 and short term, first half 2024, we do think the market will recover through the balance of 2024 and beyond. And so making those critical investments in our sales and marketing functions now will position us in a better way to be able to participate in that growth. And similarly, making the investments in our operations transformation will similarly enable us to have better agility to manage our delivery cost structure in the long term.

[Operator]

And our next question comes from the line of Dan Perlin from RBC Capital Markets.

[Daniel Perlin, analyst]

And Vanessa all the best as well. And again, just thank you for all the support to this process. But the question that I have is the sales and marketing investment that you're calling out here. I'm wondering how much of that, if any, is influenced by some of the year-end budget discussions that you're having with your clients? And specifically here, I'm kind of tailoring it away from the top 3, so if we exclude those for the moment and just think about the remainder and some of the new client wins you had.

[Jeffrey Puritt, executive]

Thanks, Dan. So we don't include TELUS is a recipient of our sales and marketing activity. As you might expect, given the nature of the relationship, whilst we certainly work as hard if not harder in some cases, to win and keep and grow TELUS business, given the proximity, we're not using traditional sales activity. We're certainly not commissioning salespeople in connection with that work, leaving aside the other top 2. But we continue to see an exciting and robust landscape for growth, particularly around next-gen AI-enabled solutions in particular.

And our significant increase in investment in sales, marketing, solution, the entire ecosystem to grow our capability is really a bit of a push me pull you in terms of a belief and confidence and an observation that this is going to be a target-rich fertile environment for growth. We just need more feet on the street to go out and capture those opportunities and cautiously optimistic that as Vanessa mentioned a few moments ago, by the second half of the year, this elongated pause caused by uncertainty in the macro, whether it's when or if interest rates gone plateau, some, hopefully, better geopolitical, global stability, et cetera, will unlock more meaningful transformational decision-making amongst our existing and targeted customer base in particular.

[Operator]

And our next question comes from the line of Ramsey El-Assal from Barclays.

[Ramsey El-Assal, analyst]

And echoing the same sentiment has [indiscernible] it's been a real pleasure. I wanted to ask about the large social media customer and how we should think about eventually growing over the headwind there? Do you have visibility to an anniversarying point or period or do they continue to ramp down or delay or not engage with incremental projects such that it is pushing out that anniversary line into the future. Just trying to think through that.

[Jeffrey Puritt, executive]

Great question, Ramsey. Nice to hear your voice. I can tell you that we are all hands on deck trying to address that very issue and continue to be cautiously optimistic that we are indeed that let's call it, the bottom and looking to improve and turn around the opportunity. It's been candidly a bit frustrating in that regard, but we understand both the responsibility and the opportunity associated with that engagement in particular. And we're working, as I say, all hands on deck to see if we can't find a way to unlock and tap into what we see as continued significant opportunity there. But right now, it is still a challenge. And so what's reflected in our outlook for 2024 is a conservative view of the current run rate.

[Operator]

And our next question comes from the line of Stephanie Price from CIBC.

[Stephanie Price, analyst]

Vanessa, echoing everybody else, great working with you, and good luck in the future. I just want to hone in on AI. So a few weeks ago, Appen announced loss of the Google contract, and it sounds like you've been broadening your relationship with Google. Hoping you can talk a bit about Google on the AI side and maybe more broadly throughout your customer base, what you're seeing around AI?

[Jeffrey Puritt, executive]

So we too saw that announcement from Appen. We've been the beneficiary of continued growth and opportunity in serving Google, indeed around helping them on the generative AI front, as I mentioned in my prepared remarks earlier, Stephanie, and previously barred now GenAI, we're quite proud of and excited about the participation role that we had there and continue to have. And again, as Vanessa suggested, dissimilar from our competitor, we anticipate continued growth and opportunity serving them, and we continue to be the recipient of accolades and complements for the quality and timeliness of our support for them.

And we're excited about not just continuing to grow that relationship, but the spin-off, the repurposing, the follow-on opportunities where what we're learning in serving them and helping them to build their large language model and looking for repurposing those applications into an enterprise-centric private Cloud-based large language model that gives enterprise clients like TELUS, for example, the opportunity to leverage the functionality and the overall efficiency, productivity, profitability, fine experience enhancement benefits of that generative AI capabilities without having to run the risk of putting their confidential proprietary customer information into the public domain. We see that as a very, very exciting opportunity going forward. And again, a source of competitive advantage and differentiation for us given there are not a lot of us out there who have the kind of credentials and experience helping to build these hyperscaler centric LLM at first instance.

[Operator]

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

[Divya Goyal, analyst]

All the best, Vanessa with the next things in the future. Moving on to some of the questions here, Jeff and Vanessa, I wanted to actually get some color broadly on the revenue growth across all these clients. The TELUS and Google were very strongest clients. You did mention good traction on WillowTree. I'm thinking from a modeling standpoint, how should we expect Google and TELUS to continue to grow, given Meta is shrinking and how should we expect the other revenue segment other than these 3 client segments to continue to grow over the next few quarters, not longer term?

[Vanessa Kanu, executive]

Divya, it's a good question. I think we are going to refrain from guiding by clients. I think we also want to be cognizant of the more gradual we get on a client-by-client basis, the more disclosures out there. Some of it is obviously competitive. Obviously, not the TELUS piece, but Google and others. I think all we can offer at this point is really good with the midpoint of our guide. We don't expect the growth in TELUS to slow down. We expect that to continue.

We expect that growth in Google, frankly, to continue. And as we just said, and as I said in my prepared remarks, we are expecting a bit of a decline continuing in that third largest client. So that particular larger clients, I would step it down a little bit from the Q4 exit rate, but we think there will be a bit more softness there and then apply whatever is left to the client. I don't think we can offer much more specificity than that without getting into individual client-by-client guidance.

[Operator]

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

[Aravinda Galappatthige, analyst]

All the best to Vanessa, I enjoyed working with you the time we had. And my question is actually on the cash flow. I mean, you generate pretty good free cash flow of $400 million, which is meaningful, but it was a bit of a bump in terms of EBITDA conversion to free cash flow. Given that you're looking for 7% to 10% EBITDA growth, and that's on top of -- that's even with the definitional changes there. Is it fair to assume that free cash flow can also grow in 2024, recognizing that there can be some timing issues around working capital?

[Vanessa Kanu, executive]

Aravinda, absolutely. We exited our free cash flow as a percentage of revenue was 15% in 2023. I expect it to be in that range in 2024. It's not even slightly better. So you are absolutely in the right ballpark. As you know, this is a very critical priority for us for deleveraging reasons. And as we've talked in the past, we've got a number of initiatives around improving working capital, et cetera. So we are not slowing down on those. And part of that free cash flow is going to contribute to significant deleveraging in 2024.

[Operator]

Our next question comes from the line of Cassie Chan from Bank of America.

[Jinli Chan, analyst]

As well Vanessa and a pleasure and best of luck. I just wanted to ask around the broader demand improvement that you're expecting in the back half, are you expecting to come from specific verticals like high-tech or specific ingredients like Europe? And does that also, the 24 outlook, does that include any material impact from specific AI-related bookings or services that you guys have booked this year?

[Jeffrey Puritt, executive]

Cassie, thanks for the question. We're anticipating uplift across the board. The only area of continued softness through 2024 that is reflected in our guide is really Europe. We have work to do, frankly, in terms of rebuilding our sales and marketing capability there and finding a better way to tap into the opportunity there, challenging for sure, but we have seen others out there that are successfully finding a way to grow their European derived revenues.

And frankly, we have to do better in that regard. Same for Europe, we're anticipating healthy growth across the board geographically. And in terms of service lines, again, we think all 4 service lines will see meaningful improvement, particularly in the back half of the year. And for sure, AI is going to be the standout for us going through the entirety of 2024 and beyond, not just in the back half. In terms of industry verticals, again, we're seeing really exciting growth in health care.

And those of you who have been following our story since our IPO debut, will remember that I have been lamenting our failure to have better success in the growth there. And I am so excited about what we derived last year, not just exclusively, but in fairness, significantly off the back of enabling TELUS Health, and we then being able to repurpose that experience and expertise on behalf of other health care providers as well. I think we will recognize that technology and patient experience excellence is going to be how we solve the world's challenges around affordability and access for health care.

And the EAP solutions that TELUS provides in particular, via its LifeWorks acquisition that we think is going to be a fantastic engine for continued growth across the board. So again, I think in totality, we're not singling out one area in particular. We think it's going to be across the board.

[Operator]

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

[Daniel Chan, analyst]

With some of your large customers talking about implementing more AI to drive efficiencies, is there a risk of a structural change to some programs like search quality ratings, content moderation that will be completely displaced by AI? I guess this is a question related to the App and Google disengagement. Just want to make sure it's a vendor consolidation play rather than, let's say, a structural shift in some of the work that they provide them.

[Jeffrey Puritt, executive]

Good question. I can tell you, we've certainly not heard from Google in particular or others, suggesting that the spend is going away. So to that point, specifically, just raised about the competition. We've enjoyed already some of that work from them. MAPS program, in particular, for example, that have been supported by them is now supported by us. And based on the conversations that we have and as you can imagine, given the magnitude, complexity and tenure of the relationship, we have regular ongoing daily, weekly conversations with them, we're seeing upside. There's no question that technology disruption is a risk across the landscape, whether it's in legacy data annotation for search activity or for content moderation. We obviously have a bit of an Achilles CEO around our third largest client.

And as I said before, working diligently to find a way to mitigate that. But outside of that, we continue to believe in the thesis that underpinned our investment back 4 years ago now that got us into content moderation at scale with tools and platforms and capabilities, and we continue to see meaningful upside opportunities there. And goodness you can't read a news article today without seeing someone somewhere talking about the shifting regulatory landscape, the understandable sensitivity and concern about the impact of content on the audience, not just for the use of the world, but for all of us, and we continue to believe that we have a meaningful opportunity to participate in that ecosystem as a consequence of our skills, experience, scale and in particular, are bifurcated but concurrent focus not just on the efficacy of the outcomes we can produce through the use of our digital first responders, but our focus on the wellness of that digital first responder community as well, which again, I think is a source of differentiation and competitive advantage.

[Operator]

And our next question comes from the line of Richard Tse from National Bank Financial Markets.

[Richard Tse, analyst]

All the best to you Vanessa and thanks a lot for your help. With respect to the competitive environment, I think a few quarters ago, you talked about the pricing environment or intimate that it was a little bit more competitive. Perhaps you can update us in terms of where that stands today.

[Jeffrey Puritt, executive]

Sorry, one more time? I'm not sure I understood the question.

[Richard Tse, analyst]

Yes. I think a few quarters ago, you suggested that the pricing environment from a competitive standpoint had become a little bit more fierce. And I'm not sure if you have any updates on that, but just curious to see where that would stand today.

[Jeffrey Puritt, executive]

Yes. Thanks for the reminder. Indeed, I think that continues to be the case. I don't see sort of an exacerbation a worsening of that, if you will, but I'm certainly not seeing a safety valve or a relaxation of that sensitivity. I think what I was referencing before continues to be a pervasive feature across the landscape, whether it's hyperscalers, enterprise or even down market somewhat. I think we are well and truly in a world where everybody is expecting more better for less. And therefore, it's incumbent upon reservice providers to find a way to step up to that challenge.

And that's again why I continue to be optimistic about our opportunity, given the credentials we have, the experience we have and the head start we garnered in terms of investing in tools and technology, where, again, you've heard me say this before, drinking our own champagne, eating our own gourmet cooking, as Vanessa pointed out, the ongoing investments inside TI to continue to enhance and amplify our ability to serve our customers, not just in terms of quality, but to do it in a way that creates the headroom we need to continue engendering the profitability returns that we're looking for, and again, I think it's a sign of the times, and I don't see that changing anytime soon.

[Operator]

And that's all the time that we have for questions. That concludes the question-and-answer session. I'd like to hand the program back to Jeff Puritt for any further remarks.

[Jeffrey Puritt, executive]

Thanks, Jonathan. As always, I appreciate all of the thoughtful questions and continued engagement. The team at TI has worked diligently over the past 2 quarters to improve our performance in the second half of 2023. And as we said we would, we exited the year with a margin profile much closer to our historical average with improved cost base that sets us up much better for the year ahead. While the macro environment remains challenging and the sentiment across our industry is still cautious. We will continue to deliver strong profitable growth and free cash flow yield as the demand environment recovers. Before we end our call, I'd like to provide some additional details regarding our CFO transition.

I'm thankful indeed that Vanessa has agreed to remain at TI until the end of March to help ensure a smooth handover to her successor, Gopi Chande, who will officially assume the role of CFO beginning on the 4th of March. Over the past 14 years, Gopi has proven herself a trusted leader adviser and advocate at TELUS, with an evolving portfolio of responsibilities. As Vice President, Finance and Controller, she contributed significantly to transformative projects, such as TELUS' $7 billion multiyear rollout of its award-winning pure fiber network across Canada and supported the operational and financial transformation of TELUS' customer service delivery and customer experience teams.

Most recently, as Senior Vice President and Treasurer, Gopi led a comprehensive portfolio across TELUS' Treasury, Corporate Development, Investor Relations, pension and sustainability teams. Prior to TELUS, Gopi developed 10 years of experience with KPMG, working in Vancouver, Budapest and the Silicon Valley.

I look forward to welcoming Vote to my executive team. She brings a wealth of experience as we continue to drive growth and diversification across TELUS International with an ongoing focus on profitability and industry-leading free cash flow yield in 2024 and beyond. We look forward to meeting many of you in the near future via at investor conferences or other opportunities and otherwise, we'll be back to report on our progress in early May when we release our first quarter 2024 results. Thank you all for your continued interest in and support of TI. And for those of you celebrating it, happy Lunar New Year. May the year of the dragon and bring all of us in our families, good health and happiness.

[Operator]

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