Earnings Call Transcript - TU Q3 2022

Operator, Operator

Good morning, ladies and gentlemen. Welcome to the TELUS International Third Quarter 2022 Investor Call. My name is Jonathan. I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speakers' remarks, there will be a question-and-answer period. As a reminder, today's program is being recorded. I would now like to introduce Jason Mayr, Senior Director, Investor Relations and TELUS Treasurer International. Mr. Mayr, you may begin your call.

Jason Mayr, Senior Director, Investor Relations and Treasurer

Thank you, Jonathan. Good morning, everyone. Thank you for joining us today for TELUS International’s Q3 2022 investor call. Hosting our call today are Jeff Puritt, President and Chief Executive Officer; and Vanessa Kanu, our Chief Financial Officer. As usual, we'll begin with some prepared remarks where Jeff will provide an operational and strategic overview of the quarter, followed by Vanessa, who will provide some key financial highlights. We'll then open the line to questions from prequalified analysts before turning the call back to Jeff for 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. 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. Additionally, Jeff and Vanessa will also discuss certain non-GAAP measures that the management team considers to be useful in assessing our company's underlying business performance. An explanation of these non-GAAP measures and a reconciliation to the comparable GAAP measures can be found in the appendices of today's supplementary presentation, along with the earnings news release issued this morning and regulatory filings available on SEDAR and EDGAR. I would also like to remind everyone that all financial measures we are 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.

Jeff Puritt, President and CEO

Thank you, Jason. Good morning, everyone, and thank you for joining us today. It's my pleasure to be speaking with you today along with Vanessa live from our TELUS International El Salvador site. We are here to join more than 1,000 TI key members, clients and other local stakeholders at our TELUS International Days of Giving volunteer event. Together, we are kicking off a massive rebuilding project to restore a child development center run by the global non-profit organization SOS Children's Village. This is on the heels of a terrific event in Guatemala City just a few days ago, where our team finished building a school, our 12th in Guatemala that will benefit more than 2,000 students. I'll use this opportunity to once again thank our team members for their passion, dedication and hard work in organizing these meaningful and vital events in the regions where we operate. Now moving on to our financial and operating results reported earlier this morning. For the third quarter of 2022, TELUS International delivered an 11% year-over-year increase in revenue or 16% on a constant currency basis, a solid result given the prolonged geopolitical uncertainties and macroeconomic challenges we continue to operate within. With the potential global recession looming, our attention and efforts have remained on the factors within our business that we can control. In this regard, our team's ongoing diligence in harvesting efficiencies and productivity in our operations helped to deliver strong double-digit profitability growth in Q3 with adjusted EBITDA up 15% year-over-year, and an adjusted EBITDA margin up 25.7%. Moreover, TI has continued to successfully deliver robust free cash flow up 56% year-over-year, enabling our continued rapid deleveraging. As we've shared in past quarters, TI partners with more than 600 clients globally, including many tech-forward enterprises and digital disruptors. We've benefited from the tailwinds of their growth over the years, which we've helped enable. More specifically, among our key verticals, clients in our tech and games, e-commerce and fintech sectors account for nearly 60% of our total revenue. While performance within these sectors has been mixed, there's no doubt that they've been under considerable pressure of late as the inflationary pressures and fears that businesses are facing have been increasingly impacting their own customers' purchasing behaviors. This in turn has further compounded challenges to our clients' revenue growth, which is being reflected through the Q3 earnings cycle, with many reporting lower than expected results and calling down their expectations for future growth. While concerns about a potential recession were starting to build last quarter, we did not anticipate the magnitude and the rapidity of the impact to our clients, especially since we engage in regular joint forecasting and capacity planning with them. These joint forecasts are typically quite reliable. So given what we now see, we have accordingly adjusted our own forecasted expectations for the next quarter. We view this as a short-term headwind that we will continue to successfully navigate through our demonstrated ability to focus on disciplined cost management to help us through these near-term external impacts. On a longer-term basis, there are several significant factors in our favor. Although a cooling economy and unchecked inflation naturally triggers companies to protect their earnings by freezing budget spending, many are doing so to meet earnings expectations in the very short-term. Once the proverbial dust settles in this regard, we anticipate that these companies will undoubtedly turn back to longer-term planning and strategies to sustainably manage their cost profile, which typically includes an increase in outsourcing activity to improve the effectiveness and efficiency of their operations. TI is poised to win in this environment, with our ability to partner with our clients to streamline, optimize, and modernize their processes to enable scalable digital solutions. Additionally, the trend toward vendor consolidation is gaining traction as more companies are looking to create trusted and strategic relationships with their suppliers to drive long-term benefits of digital transformation. We believe our integrated end-to-end digital capabilities make TI a one-stop shop solutions provider, giving us a significant edge in the market, while also opening the door for us to cross-sell complementary services that further support our clients' digital transformations. The projected growth of the global digital transformation market is expected to continue to expand as businesses across all industries streamline operations and amplify workforces through automation, migration of applications to the cloud, modernization of products, services and systems with AI, and delivering differentiated customer experiences that are seamless, personalized and secure. TI is very well positioned to be the next beneficiary here as well given we can compete successfully with a rather diverse set of industry players across sectors including globally diversified IT consulting companies, digital transformation providers, CX players, and single-threaded data annotation companies. Our agreement to acquire WillowTree only further amplifies TI's unique value proposition in this regard, unlocking exciting net new areas of opportunity. The impressive end-user experiences that they already design and build for clients like Anheuser-Busch InBev, FOX, Manulife, Marriott, PepsiCo and Synchrony, to name just a few, will be game-changers for our existing and new clients. Turning back to our Q3 results, our sales funnel, as of September 30th, remains robust. However, in line with my prior comments, we're seeing longer than typical ramp timelines on our new projects, and on existing program expansions resulting from our clients' more extensive due diligence processes in the face of the more challenging macroeconomic environment. To provide some color on TI's new logo wins in Q3, we onboarded a new multinational banking and financial services corporation, a leader in conversational commerce, and a leading provider of trucking roadside assistance in the United States. Each of these new clients across a diverse mix of industries rely heavily upon digital solutions to serve their customers, enable their businesses and generate incremental revenue, and TI is delivering the solutions that they need to level up their businesses. Within our existing client base, Q3 highlights include winning incremental business with an online game platform and creation system. This allowed us to expand our service volumes in a specific geography, notably by replacing a vendor that couldn't match TI's high service standards. We also grew our service contract with one of North America's largest energy services providers. Our AI team secured more business with a German car parts maker, and we increased our share of wallet with an American luxury retailer. Furthermore, our work with the world's largest e-commerce company continues to grow due to our exceptional track record of exceeding KPIs and the trust we've earned over the course of this partnership. In all of TI's engagements, our ultimate goal is to understand our clients' businesses, their needs and challenges in order to drive value in both the near and long term. With this in mind, allow me to share with you some recent in-depth examples of our team in action. In this first case, TELUS International implemented a comprehensive intelligent automation solution for a U.S.-based financial services company that provides title insurance protection and professional settlement services. Our client was looking for a digital automation solution that could provide their team with 24/7 support when responding to customer queries. This included guiding staff to accurate knowledge base information, handling refund and claim adjustments, and utilizing de-escalation techniques among other capabilities. Using our intelligent TELUS International Assistant platform, we implemented digital coworkers that enable the client support team to easily access the right information stored in their internal knowledge base. This significantly reduced search time from 6 minutes to 60 seconds while decreasing the average handle time and cut off customer inquiries by 9%. Overall, our solutions decreased employee effort and increased service quality and transaction efficiency as well as customer and employee satisfaction for this financial services client. Since then, the company's Customer Satisfaction Scores have jumped by 40% while escalation requests or queries received by supervisors have dropped by 80%. In conjunction with the implementation of TI's chatbot solution, the client also adopted our unique intelligent Insights platform to manage all of the client's digital workforce needs more effectively. In the next case study, one of our clients, a U.S.-based wearable fitness tracker brand, asked us to help streamline their operations and enhance customer experience by automating tasks that previously required extensive time and effort from employees. The specific task at hand here was to develop an efficient solution to convert more than 60,000 salesforce data files for storage in the cloud within two weeks. Due to the sheer amount of manual work required by team members, this kind of project could typically take up to two months, if relying on humans alone. Instead, TI designed and implemented bots specifically robotic process automation or RPA bots. In total, 17 RPA bots logged into our client salesforce platform operating 24/7 to successfully convert all files in just four days with zero defects. RPA technology is an increasingly common solution available to help companies address operational inefficiencies, while simultaneously enabling employees to focus on more creative and complex work. In fact, research and markets estimate that the global RPA market will reach more than $25 billion by 2027, expanding at a compound average growth rate of approximately 41% over this period. Our expertise in intelligent automation favorably positions TI to gain share in this exciting space. Moving on to another example. Our AI data solutions team continues to work closely on new projects with one of our most tenured clients, a global tech giant, whose services include online advertising, cloud computing and more. This client needed an experienced partner to analyze data on merchant quality and validate risk assessment ratings to better understand the buyer experience and enhance the overall user experience. In addition, the client wanted support for the detection of counterfeit items and irregular shipping practices to eliminate fraudulent merchants and protect end customers. First, TI established a data review process to evaluate merchant performance based on a set of defined criteria. TI's experienced remote data evaluators follow this standardized process for each evaluation stage from purchase to refund. Guided by a strict playbook with clearly defined guidelines and criteria, our crowd community inputs merchant quality data into a dashboard for evaluation. This dashboard also provides benchmark quality data to support and align merchant evaluations on a global scale. To date, we have checked and identified more than 20,000 fraudulent transactions generating approximately $11 million in savings. We've also flagged a further 9,000 suspicious transactions within the program. In team-related news, we announced in late August the appointment of Beth Howen as TELUS International's Chief Transformation Officer. In this newly established role, Beth is leading the creation of more defined and robust processes around TI's product and service development portfolio. She is also supporting the next evolution of how we go to market, which will enable TI to further capitalize on the demand for customer experience partners with end-to-end digital service capabilities and expertise. With more than 25 years of experience in tech, Beth has held senior leadership roles in large and complex U.S. government agencies, non-profits and private sector organizations. This considerable knowledge she brings to TI will help us continue to optimize and grow our company's expertise in digital automation, product management and development, customer insights, consulting and enterprise transformation, solution development and global digital services delivery. In the third quarter, our global team members continued to receive industry recognition for their unwavering commitment to delivering the best of customer service. Everest Group, a leading global research and advisory firm released its Customer Experience Management PEAK Matrix assessment for 2022 in which it ranked TI a leader in the Americas. Notably, only six of 37 providers received this distinction as a result of Everest Group's ranking market success, vision and strategy, service focus and capabilities, digital and technological solutions, domain investments, and client feedback. TI was also named a star performer for this PEAK Matrix in the EMEA region. During the Clinton Global Initiative 2022 meeting in September, TELUS International was part of Everest Group's commitment to action to grow the impact sourcing market from its current level of 350,000 full-time employees to 0.5 million in three years. The commitment to action focuses on connecting marginalized individuals to new jobs working alongside service providers, government and non-governmental organizations in collaborative efforts, which TI has been committed to since our company's inception. In Q3, our team members around the world volunteered at many events focused on environmental stewardship. Over 500 TELUS International team members took part in the 10th anniversary of TELUS Days of Giving in Bulgaria, assembling 60 beehives to house 3.5 million bees and extracting 600 yards of honey to support 50 local beekeepers. During ECO TELUS Days of Giving events this past quarter, 350 volunteers in Guatemala and El Salvador installed 200 ecological stoves and 200 water filters in local homes to provide cleaner air for the community and safe water supplies for more than 1,000 people. In August, TELUS International launched Spectrum chapters in Guatemala and in El Salvador. Spectrum is TELUS International's LGBTQ2+ employee resource group to help encourage everyone at TI to bring their authentic selves to work. We also recently celebrated the launch of a new Connections chapter in Chengdu, China. Connections is a team member resource group with a mission to support and inspire women at TI to pursue career excellence through networking, personal and professional growth, recognition and community involvement. Before I hand off to Vanessa, I'd like to provide some additional context about WillowTree and share two case studies for those who were perhaps unable to attend our investor webcast last week, following our announcement. Founded in 2008, WillowTree is headquartered in Charlottesville, Virginia, and is led by their Founder and President, Tobias Dengel. The company operates 13 global studios across the U.S. and Canada as well as in Brazil, Portugal, Spain, Poland, and Romania. There are more than 1,000 highly skilled digital strategists, designers, engineers, and project managers, partner with more than 50 companies, many of whom are listed on the Fortune 500 list on mission-critical large-scale initiatives, delivering world-class digital products that bridge the highest quality customer experiences with measurable performance. The significant growth in our digital capabilities upon closing of the acquisition will help enable TI's mix shift to faster-growing digital services, along with improved diversification of industry verticals and service lines. Looking across the current M&A landscape, WillowTree stands out as a unique asset in that the company is both high growth and profitable with a global scale that will support a more effective joint speed to market versus if we had made multiple smaller subscale acquisitions and then tried to stitch them all together. We also believe the revenue synergies ahead are significant given the very limited client overlap that would indicate considerable white space in terms of TI cross-selling WillowTree services to our clients and vice versa. More specifically, we have already identified multiple opportunities within our parent company, TELUS, to further enhance and accelerate its digital transformation in addition to elevating its Optik TV offering as well as its TELUS Health, Agriculture, Consumer Goods, and Energy Software-as-a-Service businesses. To assist in further illuminating exactly what WillowTree does, I'll share a couple of high-profile project examples. Top of mind for me is the story of PepsiCo and the Super Bowl. Over the past eight years, WillowTree has become a key partner to PepsiCo, helping drive Pepsi's ongoing market leadership through its digital channels by leveraging their strategy, research, product design, and custom development solutions. Among the recent initiatives, WillowTree has supported, perhaps the most exciting, is the creation of Pepsi's Super Bowl 56 Halftime app. For 10 years now, Pepsi has been the title sponsor of the Super Bowl. And earlier this year, they partnered with WillowTree to help create a companion digital experience for the Super Bowl that would give consumers unprecedented access to the event. The team developed an app to put Pepsi front and center on a day where brands compete fiercely for consumer mindshare. In the lead-up to the Super Bowl, Pepsi engaged fans weekly with more than 30 in-app content drops, ranging from artists' merchandise giveaways to exclusive interactive photo filters that were built in partnership with Snap. On game day, WillowTree and Pepsi launched an in-app exclusive, the Pepsi Ultra Pass, that granted fans access to a groundbreaking fully immersive second-screen viewing experience, effectively putting them on stage with the artists during the live performance. The Super Bowl 56 Halftime Show was one of the most-watched halftime shows in the event's history. WillowTree ensured the app's back-end infrastructure was engineered to handle the significant load. The results were impressive. 85% of users streamed the full show in the app and Pepsi was the event's most talked-about brand, thanks in large part to the digital experience provided by WillowTree. Another case that illustrates WillowTree's exciting capabilities comes from their seven-year client partnership with FOX, which included developing a highly successful weather app. Described as precise, personal, and powerful and developed in close collaboration with the FOX team, WillowTree's FOX Weather App shows users the world's weather and long-range forecasts with beautiful visuals in a straightforward design. Other features include live streaming and video clips of severe weather as well as widgets on users' home screens that display information like sunrise and sunset, high and low temperatures, weather warnings, and peak ahead forecasts when relevant. Users can customize their experience by selecting locations that matter to them, like the homes of family members in other states or countries or favorite vacation spots and setting up long-range forecasts or subscribing to severe weather alerts. With more than 500,000 downloads, the FOX Weather App is the #1 most downloaded weather app in the App Store. As you can imagine, given the tremendous benefits to be realized by the acquisition of a fast-growing, profitable, scaled and scarce asset like WillowTree, it was an extremely competitive process, bolstered by our successful M&A track record and underpinned by our infrastructure, processes and unique transaction structure that will keep management motivated and focused on delivering profitable growth. We're confident in our ability to surface meaningful incremental value, including rapid deleveraging post-closing. This investment and the long-term growth strategy of our business is another exciting milestone in TI's journey, highlighting how we continue to position TI for profitable and sustainable growth. And I look forward to updating you on additional details of the transaction post-closing in early 2023 and providing progress updates in the quarters ahead. For those of you that may have not yet had their fill of me sharing my excitement about our WillowTree acquisition, the webcast recording along with presentation slides is available on our Investor Relations website. With that, I'll now invite our Chief Financial Officer, Vanessa Kanu, to take you through a detailed review of our financial results, after which I'll return to answer your questions.

Vanessa Kanu, Chief Financial Officer

Thank you, Jeff, and good morning, everyone. Thank you all for joining us today. As usual, in my review of financial results, I will refer to some items that are non-GAAP measures. For descriptions and a reconciliation of our GAAP to non-GAAP measures, please see our earnings release and regulatory filings from earlier this morning. Now let me expand upon the components of our financial performance for the quarter. In the third quarter, we delivered revenue of $615 million, up 11% year-over-year on a reported basis and 16% on a constant currency basis, despite a challenging macroeconomic environment that has impacted the velocity of spend for some of our larger clients, who, as Jeff mentioned earlier, are approaching short-term spending decisions with more caution due to cooling demand in their own end customer markets. We can see this impacting many areas of the global economy with heightened uncertainty driving market volatility and near-term budget adjustments as negative headlines exacerbate fears of recession. In spite of all of this, TELUS International has stayed true to its strategy of focusing on profitable growth, robust free cash flow generation, and rapid deleveraging, all of which were successfully achieved during the third quarter and will continue to be of critical importance during challenging macroeconomic periods. Looking more closely at our revenue performance across industry verticals and geographies, our reported growth rates were negatively impacted by the weaker euro to U.S. dollar, as previously mentioned. The overall impact to our top-line growth was an unfavorable 500 basis points. As I speak to our vertical and geographic revenue performance, I will provide constant currency commentary where helpful. Starting with revenues by vertical. In the third quarter, our largest vertical, tech and games, grew 15% year-over-year on a reported basis. On a constant currency basis, this vertical grew by a very healthy 23% in the third quarter. Our second-largest client globally, a leading social media network whose revenues fall within the tech and games vertical, saw softer revenues in Q3 on a reported basis but was up 6% on a constant currency basis. Strong double-digit growth from many other notable clients in this vertical helps to moderate the impact of this one client to still achieve 23% year-over-year constant currency organic growth. In our e-commerce and fintech vertical, revenue declined 4% on a as-reported basis but grew 8% year-over-year in constant currency terms. This traditionally fast-growing vertical has recently experienced moderation in the rate of growth from certain fintech clients, even though we continue to expand our share of wallet with other e-commerce clients within this vertical, including the world's largest e-commerce company. Growth in our communications and media vertical remained strong, with quarterly revenues increasing 10% year-over-year, driven principally by higher revenue from TELUS Corporation, our parent company. Banking, financial services, and insurance or BFSI, continues to grow rapidly with revenues increasing 68% year-over-year, fueled by ongoing growth with leading financial institutions in North America and globally. Finally, to round out the top five verticals, clients in our travel and hospitality vertical grew by 19% year-over-year. In looking at our revenues by geography, revenues from Europe, which comprised 34% of our overall revenues, were down 9% year-over-year on an as-reported basis. While on a constant currency basis, we saw growth of 4% in Europe as that region as a whole continues to experience increased macroeconomic softness as compared to other regions. Revenues in North America, on the other hand, which comprised 26% of our total revenues, grew by an exceptional 27% year-over-year, while revenues in Asia Pacific and Central America, which comprised 24% and 16% of our total revenues respectively, each grew by a very healthy 23% year-over-year on an organic basis. Moving down the income statement, on to operating expenses. Salaries and benefits expense in the third quarter was $346 million, up 12% due to higher team member counts to support business growth and higher average employee salaries and wages, partially offset by the lower exchange rates across a variety of currencies relative to the U.S. dollar. As a percentage of revenue, salaries and benefits for the quarter was steady at 56% compared with the same quarter a year ago. Our goods and services purchased were $111 million in the quarter, an increase of 1% as higher crowdsource contractor costs from our AI business were partially offset by spend efficiencies during Q3 and the lower average exchange rates across a variety of currencies relative to the U.S. dollar. Share-based compensation expense in the third quarter was $6 million, a decrease of $15 million or 71% year-over-year, primarily due to the lower average share price during the quarter tied to recent market conditions. Acquisition, integration, and other charges in the third quarter were $7 million, an increase of just $1 million versus the same time last year. Our interest expense in the third quarter was also steady year-over-year at $10 million as lower average debt balances in our credit facility were offset by higher average interest rates during the period. As interest rates have risen steadily over the course of this year, we have continued to benefit from floating to fixed rate hedges that have fixed about half of our debt at very attractive negative LIBOR levels. Income tax expense in the third quarter was $26 million compared with $15 million in the same quarter of last year. At the same time, our effective tax rate decreased from 39.5% to 30.6%, primarily due to a decrease in non-deductible items and the decrease in withholding and other taxes as a percentage of net income before taxes, partially offset by an increase in adjustments recognized in the current period for income tax of prior periods. Looking at overall profitability, our adjusted EBITDA was $158 million in the third quarter, a year-over-year increase of 15%, driven by higher revenue earned from existing and new customers, partially offset by the higher salaries and goods and services purchase that I just spoke about. Adjusted EBITDA margin in the quarter was 25.7%, expanding not only quarter-over-quarter but also by 110 basis points year-over-year. The year-over-year expansion in margin was primarily achieved through cost containment measures in the quarter, along with certain retroactive pricing adjustments during the quarter, which helps us to maintain our best-in-class margins during this volatile period. Adjusted net income for the quarter was $87 million, up 24%, driven primarily by higher revenues from existing and new customers, partially offset by the higher costs I just spoke to and higher income tax expense. On a per-share basis, this translated into adjusted diluted earnings per share of the quarter of $0.32, up a very strong and healthy 23% year-over-year. Now turning to our cash flow and balance sheet. In the third quarter, we generated free cash flows of $98 million, up 56% year-over-year, driven by higher operating profit, higher net inflows from working capital and lower share-based compensation payments. As a percentage of revenue, free cash flow was 15.9% of revenue in Q3 compared to 11.3% in the year-ago period, an increase of 460 basis points year-over-year. Our capital expenditures in the quarter were $26 million, an increase of $3 million year-over-year, primarily attributed to facility build-outs in the Philippines as we grow business in that region and further investments in the AI data solutions software platform. As a percentage of revenue, our capital expenditures remained modest at around 4% of revenue. We have also continued to reduce our leverage, lowering our net debt to adjusted EBITDA leverage ratio, as defined for our credit agreement, to 1.3x as of September 30, a further improvement from 1.5x as of June 30, 2022. This improvement moves TELUS International into its lowest interest cost year, which saves us an incremental 25 basis points in interest costs prospectively. Our total available liquidity at the end of the quarter was approximately $982 million, which includes cash on hand of $143 million and our available capacity under our revolving credit facilities of $839 million. With a strong and healthy balance sheet and liquidity position, we continue to maintain meaningful capacity for strategic growth opportunities just like the recently announced WillowTree acquisition. And as we have demonstrated on a consistent basis, even during a downturn, our robust free cash flow profile enables us to rapidly repay debt. Moving on to team member count. At the end of the third quarter, we had 69,252 global team members, which was up 18% year-over-year and consistent with the prior quarter. While attrition in Q3 was stable relative to last quarter, we have intentionally adjusted the pace of our new hires to align with the current outlook. And turning to our outlook, given the macroeconomic environment, we are recalibrating our outlook to reflect softer client demand and slower sales cycles, particularly from our technology sector clients, as we spoke about earlier. We anticipate revenues in the range of $2.45 billion to $2.49 billion, reflecting a year-over-year increase of 11.7% to 13.5% on a reported basis and 16% to 18% on a constant currency basis. Given the further depreciation of the euro relative to the U.S. dollar, our outlook now assumes an average euro to U.S. dollar exchange rate of $0.98 for Q4. Given these exogenous factors, we are focusing on what we can control in terms of internal efficiencies and driving cost optimization initiatives. As a result, we are increasing our adjusted EBITDA margin to be in the range of 24.4% to 24.6%, reflecting our commitment to not just revenue growth at all costs, but profitable revenue growth at best-in-class margins. We expect to deliver adjusted diluted earnings per share in the range of $1.18 to $1.23, reflecting growth of 18% to 23% over last year. This assumes a weighted average diluted share count of approximately 270 million in each of the quarters. Similar to Jeff, I'd like to conclude my remarks with some commentary on our agreement to acquire WillowTree. As you may have heard on our investor call last week, not many companies were able to grow revenues in the first half of this year by 48%, while driving healthy profitability at approximately 20% adjusted EBITDA margin along with robust free cash flows. WillowTree's focus on high-value digital engagement, as evidenced by their leading annualized revenue per team member of approximately $190,000, puts them significantly ahead of peers, such as Globant and Java, EPAM, and even Accenture. While we expect this transaction to close early in 2023, integration planning has already begun. This early funding approach has served TI very well in our history. And given WillowTree will be our 10th acquisition, we have an established track record of successful acquisitions and corresponding integrations. In terms of deal structure, like many of our previous acquisitions, we've thoughtfully considered ways in which WillowTree management will be incented to ensure alignment of financial and operating goals. The equity rollover commitment that is in place as part of the deal considerations that we spoke about last week reinforces that WillowTree's management has significant skin in the game to continue to grow the business profitably together with TI. And as mentioned last week, we have secured committed financing for this transaction, reflecting an upside to our credit facility of $2 billion and extending it for a new five-year term. While our leverage at close will be around 3x, well within our steady-state leverage ratio range, we expect the robust cash flow generating capabilities of both TI and WillowTree will allow for continued rapid deleveraging. With that, let's move on to questions. I will kindly ask you to please keep it to one question at a time so that everyone can participate. Jonathan, now over to you.

Operator, Operator

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

Ramsey El-Assal, Analyst

It feels like a very uneven demand environment across your verticals with pretty localized weakness, I guess, in e-commerce and fintech. I guess, can you provide some more color on sort of what's going on in that sector? And whether you feel good that some of the diversity, diversification in your business might shield you from similar trends evolving in these other verticals?

Jeff Puritt, President and CEO

Yeah, I think you're spot on. I think there is a high degree of heterogeneity within that e-commerce and fintech vertical for us. Some of those clients are crypto-centric businesses. And I think you've seen and heard from others that that sector has been candidly ravaged. And as a consequence, it's had an adverse impact, in part on us. Thankfully, we didn't have significant exposure there, but not meaningless. Conversely, we continue to support a fairly robust, and as I say, heterogeneous mix of e-commerce fintech providers. And in totality, we're cautiously optimistic that we're going to continue to see meaningful growth, as Vanessa shared, I think on a constant currency basis, still growth in that group, not where it had been historically, but in the fullness of time, we continue to be optimistic. And thankfully, we're not, as I said, over-exposed to the crypto subsector, if you will.

Operator, Operator

And our next question comes from the line of Tien-Tsin Huang from J.P. Morgan.

Tien-Tsin Huang, Analyst

I wanted to maybe ask you to elaborate on the cost containment that you're doing right now. Can you give us a little bit more detail or examples of that? And how much more can you do in the event that some of the volumes start to slow even more than you're anticipating now?

Vanessa Kanu, Chief Financial Officer

Tien-Tsin, I'll take your question, and maybe, Jeff, feel free to top up. So Tien-Tsin, we're not really doing anything unusual here from a cost containment perspective. I think you and hopefully the rest of the audience recognize that TELUS International has always been very focused on ensuring that the cost profile was highly aligned to the revenue growth profile. And we've always had pretty strong operating leverage within our financial model. As we've been looking at how Q3 has unfolded, as Jeff mentioned earlier, we've always engaged in joint forecasting with these clients. And as we did our forecast with these clients, last quarter, it was on the strength of those forecasts and the historical accuracy of those forecasts that we put our guidance together. As the quarter unfolded and we started to see signs of softness within those clients themselves, and we started to see that in our own business clearly, that meant that we needed to look at our cost profile and with a particular focus around third-party spending. In terms of internal team member counts, you may have heard me say in my prepared remarks, we're not reducing our internal team member counts. However, the pace of hiring, we have realigned to meet what we think are now the expected growth profile for at least the near term. So not cutting back on internal headcount per se or team member count, but certainly, looking at the pace of hires to ensure that we're not aggressively hiring relative to the current market environment. And then the rest of the cost containment is really around third-party spend. We're negotiating third-party contracts and ensuring that we're seeing efficiencies within that third-party cost bucket.

Jeff Puritt, President and CEO

The only thing I'd add, Tien-Tsin, is on the offset, if you will, focusing on securing price increases as pervasively as possible to provide us with the additional headroom we need in order to try and continue to balance the business. As we've discussed many times, I think you'll recall during our IPO roadshow, you and I specifically talked about that offset, the potential toggle of revenue growth versus profitability. And I said then and would continue to believe now that of the two, I want to be focused on profitable growth, not just growth for the sake of growth. And so in this particularly pressurized environment, staying disciplined in that regard, I think is continuing to serve us well. And as long as we continue to remain in the double-digit top-line revenue growth zone, which we are, which is 16% on a constant currency basis, and continue to deliver meaningful profitable growth, again, 16% EBITDA growth, I feel like we are appropriately managing those somewhat competing considerations on occasion as we weather through what I anticipate will be three, six, perhaps nine months of continued challenge.

Operator, Operator

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

Stephanie Price, Analyst

I hope we can talk a little bit about the mix of growth between new wins versus existing customer expansion. Just wondering if it's changed at all given the current environment here?

Vanessa Kanu, Chief Financial Officer

Stephanie, it's Vanessa here. I'll start, and Jeff, please feel free to top up. The mix of new versus existing, I wouldn't suggest has changed meaningfully in terms of the recognized revenue in the quarter. I think so as you kind of look at our overall revenue profile, about 10% of the revenue in any given quarter will be new client contribution, so to speak. That tends to take a couple of quarters to really ramp up. So in the immediate quarter, the revenue contribution doesn't tend to be as meaningful, but it is over the course of time as those new clients tend to build up and ramp up over time. So I don't think the profile is that different when you look at the recognized revenue. In terms of new wins, I think going back to Jeff's earlier points, we are seeing sort of a longer sales cycle. So the funnel continues to be very, very robust. And that's the funnel of not only growth from existing clients, but also growth from new clients. That's a robust funnel, but particularly as it pertains to new clients, we are seeing elongated sales cycles and longer decision timeframe. And that's frankly, partly what was reflected in the outlook that we put together this morning.

Operator, Operator

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

Divya Goyal, Analyst

I wanted to understand the impact on client demand, particularly regarding the legacy business like the BPO CX business. Did you observe a significant impact on the digital side as well? Additionally, while I know you don't provide guidance for fiscal 2023 yet, how do you expect the cycle to develop over the next few quarters?

Jeff Puritt, President and CEO

So maybe I'll take the first half, Divya, and Vanessa can speak to the second half. I'm not sure that I can discern any meaningful difference between the timeliness, the slowdown, the overall demand dynamic between our DCX and digital IT, both continue to be reasonably strong. I think the real challenge for us has been the slowdown in decision-making. So by way of specific example, we generally are seeing either net new or growth through existing opportunities that would come to our attention through either RFP or direct bid opportunities. We'd enter into negotiations discussions and a decision would be taken by the client, and we'd be off to the races between three, six, nine months. And on renewals, considerably less than that, again, across both DCX and digital IT. What we've been seeing now over the last couple of months has been continued discussion and opportunities around demand. So we're not seeing a lessening in the overall size of our funnel, but customers seem to be taking a lot longer to pull the trigger on finally saying, okay, let's get going and signing off on the statement of work and/or a new master services agreement. So this is what is, I guess, tempering our enthusiasm in the near term, but continuing to provide us confidence in the longer term because no one is saying we simply don't see a path to continuing with this plan, project transformation or otherwise. What we're seeing is, we need to slow things down because of the uncertainty of what's going to happen with our own customer-consumer demand in the near term. And so we just want to proceed a little bit more cautiously. In terms of the '23 outlook, I'll leave that to my colleague.

Vanessa Kanu, Chief Financial Officer

So we're not providing 2023 guidance this morning. But I think we can all agree that if you even think about sort of estimations of GDP growth rates are lower today than they were even say, six months ago or frankly even three months ago. And I think we can also probably agree that the headwinds, the macro headwinds that we're all talking about not just this morning, but for the last several weeks, are probably not going to end after this earnings call ends today. So I think based on that, while we're not giving 2023 guidance, we could probably assume that the macro softness we have today is probably going to continue for a little while longer. But consistent with our past practice, we will provide guidance for 2023 concurrent with our Q4 results, which will be in early February.

Operator, Operator

And our next question comes from the line of Jesse Wilson from William Blair.

Jesse Wilson, Analyst

This is Jesse on for Maggie. So Jeff, you provided some examples of clear cost-saving solutions and intelligent automation in the AI data solutions offering as well. Are you seeing longer sales cycles even for these types of work?

Jeff Puritt, President and CEO

Yes. I mean, just it feels like everybody is moving with a degree of caution right now just because of the continued uncertainty. I think the looming recession is a euphemistic expression I keep hearing and I think others are recognizing, suggesting it's not looming any longer, it's here. And as a consequence, folks are just being a lot more cautious, taking a lot longer in terms of their own diligence to validate that they really need to move forward with these expenditures at this particular juncture. And as I said just a moment ago in response to Divya's question, it's not like I'm hearing anyone say we are just back-burnering this project. The need for this particular project or evolution in our own capability to better serve our clients and do more with less. They're just taking longer to get on with it, which is, as you can imagine, it's frustrating, disappointing, but we obviously want to continue to be ready to go and engaging with these clients on a regular basis so that when they're finally comfortable to move, we're right there.

Operator, Operator

And our next question comes from the line of Keith Bachman from BMO.

Keith Bachman, Analyst

Jeff, I wanted to ask about the sensitivity of the economy, particularly regarding Europe. I think you mentioned that growth in constant currency was about 4%, but I may have missed that detail. It appears that the economy in Europe is weaker than in the U.S., and your growth there is below the weighted average. I'm trying to understand how we should approach this as the U.S. seems to be heading into a recession. While I think you had a solid quarter overall, I'm curious about how a potential slowdown in U.S. growth, as well as in other regions, could impact what you're seeing in Europe, which is significantly lower than the growth in Asia. How can we connect these factors to assess the risks for 2023?

Jeff Puritt, President and CEO

Good question. It seems to me that there is a clear distinction between the experiences in Europe and North America, as indicated by the results we just shared. Our outlook for the remainder of the year suggests that this trend will continue. As Vanessa mentioned, we are not yet in a position to provide guidance for 2023, even though I would like to. What I can say is that I remain optimistic about the local economy's ability to support meaningful double-digit growth. This is partly due to where businesses are in their life cycle and their willingness to embrace digital transformation. I have noticed that our North American customers are ahead in utilizing these capabilities at scale. While concerns about a recession remain, there is a widespread belief that digital transformation can help businesses achieve more with fewer resources. Historically, there was a belief that spending more was necessary to achieve more, and spending less meant getting less. However, digital transformation allows for spending less while gaining more. For example, some of the case studies I've mentioned show that by using bought solutions and implementing self-help and automation, companies can reduce support costs while improving outcomes, such as faster service times and higher customer and employee satisfaction. I believe that our North American opportunity remains more robust in the short term, and even if the economy worsens, I don't expect our growth from that region to drop to 4%. I anticipate we will stay in the double-digit growth range.

Operator, Operator

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

Dan Perlin, Analyst

I had a question about, I guess, really the overall cost structure in kind of the current environment and then maybe even the go-forward to the extent we're in a recession. So rather than kind of ask you questions about like where can you pull the toggles, my question is, are you in an environment where the rate of change of your input costs are probably going up faster than your ability to pass that through, like how long do you think you're going to be able to sustain a positive margin trajectory? And my sense is, and we've heard this from other companies, companies that have longer-term contracts with CPI escalators, I mean, you can kind of push some costs through, but it seems like the near-term input costs are just so much greater?

Vanessa Kanu, Chief Financial Officer

I'll start, and Jeff, feel free to add if needed. This question about TELUS International seems to come up frequently. However, we have consistently demonstrated our ability to maintain margins each quarter through actual results rather than just theory. To address your query, you're correct that input costs are rising quickly. We've discussed wage inflation extensively in prior calls. While other types of inflation exist, wage inflation has been our primary concern, and we have managed it effectively. We initially projected margins of around 24%, and now we are guiding towards a profitability yield increase to between 24.4% and 24.6%. This shows our sustainability in this area, and we are tackling it from various angles. We are passing some of the increased inflation costs onto customers, although there is a limit to how much we can do that. Nonetheless, we have seen success in passing on some increases, which is evident in our margin performance. Additionally, we continue to focus on improving efficiencies within our business. Historically, we have maintained strong operational leverage, and we intend to keep it that way. In terms of our overall cost management, we are not engaging in unsustainable practices. Unlike many companies announcing significant workforce reductions, you won’t see such headlines regarding TELUS International. Our approach to maintaining profitability relies on enhancing efficiency while navigating current challenges. I feel optimistic that achieving a higher profitability yield in this environment reflects solid execution.

Daniel Perlin, Analyst

No, I agree. I thought the margin targets were quite impressive in the current environment. I was just trying to think about to the extent that that escalates against you.

Vanessa Kanu, Chief Financial Officer

We are optimistic about our plans for 2022. At this moment, I am not ready to provide guidance beyond 2022 until we make an official announcement. However, I believe that the successes we have achieved in the past will continue into the future. Regardless of how inflation trends, we will ensure to pass on any price increases we can. We have experienced success so far, and we will keep managing our cost structure in ways that won’t hinder the long-term growth of the organization.

Jeff Puritt, President and CEO

And the one top up there, Dan, would be the continued improvement in the mix shift. As we continue to progress the proportion of our revenues that are derived from less labor-intensive delivery models, that creates headroom, that provides a bit of relief for us in terms of managing that inexorable wage inflation dynamic that all of we in the technology services sector are forced to deal with on a regular basis. I think it's a fair question, but I have to say, when I hear and read some of your peers continue to question our ability to sustain these margins when we've been doing so quarter in and quarter out, not just throughout our tenure as a public issuer, but as one will have seen in the three-year historical financials we've filed as part of our IPO. And although one wouldn't have had visibility to it, for every year of our existence prior thereto, it starts to weigh on me when folks continue to question our ability to manage this business at these margin levels for the longer term when not only have we demonstrated we're doing so, but the level we're at is best in class across our entire peer group.

Operator, Operator

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

Richard Tse, Analyst

I had a question on WillowTree. How would you compare WillowTree to your other acquisitions? Would you say it's sort of easier or harder to integrate on your model relative to the other names? And I guess, on a related question, I'm just kind of curious like how many WillowTree-type companies are there out there in the market today?

Jeff Puritt, President and CEO

Richard, that's a great question. Firstly, I believe there are no other companies like WillowTree on the market. As you might imagine, we've been putting considerable time and effort into assessing potential candidates for some time now. This acquisition is very much aligned with what Vanessa and I have been discussing since our IPO roadshow, and even more so in the past year. I hope this didn't catch anyone off guard regarding what WillowTree can offer TELUS International in terms of expertise and scale, especially concerning the design and build aspects of our delivery ecosystem. Regarding the integration roadmap compared to other transactions, I don't want to underestimate its complexity. Integration is crucial for determining whether acquisitions contribute to shareholder value. As Vanessa mentioned, we've dedicated a lot of time and effort to this, starting independently with available information, to identify how to maximize synergy potential through this combination. After the agreement is executed, we aim to work closely with WillowTree's leadership, though we're waiting for antitrust approval before we can fully proceed. What makes this acquisition exciting, beyond the impressive revenue growth and profitability, is the people at WillowTree and our cultural alignment. In our industry, some may view culture as just a soft concept, but it significantly impacts how potential teams, customers, and stakeholders interact. I felt a strong connection with Tobias and his leadership team from the outset. They manage their assets the same way we do, so I'm optimistic about the collaboration between our services and theirs. Even during our customer discussions, when Tobias introduced me to some clients, they expressed eagerness to explore our trust and safety content moderation services, which WillowTree currently lacks. Therefore, we're quite confident about the integration prospects, potentially even more than we were with the Lionbridge deal, which had additional complexities that this acquisition does not face.

Operator, Operator

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

Daniel Chan, Analyst

Another question on WillowTree. You had some exposure to the consumer goods segment, just given some of the examples you provided. Given the current macro backdrop, and we've seen some weakness in consumer retail, how did you get comfort around the exposure in your due diligence? And how did the macro dynamics impact how you thought about the timing to execute that deal?

Jeff Puritt, President and CEO

Another good question. I think consumer goods is an exciting area of opportunity. And the challenges that that sector and others are having right now, as I mentioned, at least inferentially in my comments earlier, I think as they look to manage through these current challenging times, finding ways to leverage automation through technology and innovation is going to be a key component of their survival and success. So we believe there's going to continue to be an embracing of the capabilities that WillowTree has. And as I think you know, our sister organization TELUS Ag and Consumer Goods gives us some pretty meaningful visibility into opportunity for synergy realization. And as you might expect, as part of this early integration planning, my WillowTree colleagues are already speaking directly with my TELUS Ag and TELUS Health colleagues, for example, about areas of opportunity for collaboration. So obviously, we're mindful of these macro dynamics, but near-term and through the longer term, we think there's lots and lots of exciting opportunity to really exploit the WillowTree expertise and capabilities to help these clients continue to win.

Operator, Operator

Our final question for today comes from the line of Ryan Potter from CIBC.

Ryan Potter, Analyst

So the outlook implies a pretty wide range for 4Q, like I'm getting to about 7% to 16% constant currency growth. Are there any reasons behind this? Like has visibility reduced at all given the macro? Are you giving yourselves a buffer for the clients? And also, could you probably kind of discuss your overall budgeting and outlook formation process?

Vanessa Kanu, Chief Financial Officer

Ryan, I noticed that you're from Citi, not CIBC as suggested. We do have a range reflecting the current uncertainty. I understand that you typically converge around the midpoint of the range, but there's certainly a noticeable level of uncertainty. For example, FX remains extremely volatile; each quarter, we've had to adjust our FX expectations downward, which has not improved. Additionally, some of our large technology clients are facing their own earnings pressures. For these reasons, we've allowed for some cushion in our implied Q4 guidance. However, from a constant currency perspective, we're still seeing healthy year-over-year growth for the full year. If we look at the full year rather than just Q4, we anticipate a revenue growth rate of 16% to 18% in constant currency, which we believe is a solid figure considering the current climate and the associated margin profile. Regarding budgeting, as several of our clients are also in their budgeting cycles, we are at a similar stage. As Jeff mentioned, there are two aspects to consider: the current short-term situation and the long-term growth trajectory of our organization and the sectors we serve. We remain optimistic about long-term prospects and want to convey that message. I don't foresee a long-term decrease in growth for areas such as content moderation, AI, digital IT, or CX. However, we do need to consider the current landscape, which is reflected in our guidance, and we will provide more insights about 2023 alongside our Q4 earnings.

Operator, Operator

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

Jeff Puritt, President and CEO

Thanks, Jonathan, and thank you all for your questions. As always, we appreciate you taking the time to join us for our quarterly investor calls. Since our inception in 2005, TI has demonstrated its resilience in the face of various challenges, extracting value along the way that has served to guide our company's differentiated approach to service quality excellence. We believe that the ongoing necessity for digital transformation continues to create significant long-term opportunities for TI, and we remain well positioned to capture our fair share, thanks to our 70,000 highly engaged team members and an AI community of more than 1 million talented members, our diverse set of end-to-end digital capabilities and new economy services, our globally scaled and agile delivery model, our relentless focus on efficiency and productivity within our operations and our caring culture that's brought to life through volunteer initiatives like our TELUS Days of Giving here in Central America, to name but a few. These foundational elements of our business will also help us continue to execute upon our strategy of profitable growth, driving robust cash flow complemented by thoughtful M&A. Many of you may have heard me share the sentiment about our company on other occasions, but I believe it bears repeating, especially in this current challenging economic cycle within which we're operating. TI's unique combination of people, culture and capabilities and the equal emphasis we place on what we do and how we do it, will continue to support our ability to attract and retain top talent; design, build and deliver best-in-class client outcomes; and ultimately win in the marketplace. And I believe we've only yet just scratched the surface of the possibilities ahead of us. With this thought in mind, Vanessa and I have a very busy conference agenda lined up from now until early December where we hope to connect with many of you in person. Otherwise, our next quarterly investor call will take place in February of 2023. And in the meantime, please keep yourselves and loved ones safe. Thank you, again, and goodbye.

Operator, Operator

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