Expansion In AI And High-Demand Regions Will Improve Future Prospects

Key Takeaways

• Expansion in AI data solutions and geographic regions is poised to significantly boost TELUS International's revenue growth and market presence.
  
• Investments in operational efficiency and digital enhancements aim to improve cost structures, margins, and drive long-term revenue increases.
  
• TELUS International faces potential growth and margin pressure due to modest revenue growth, financial leverage, and challenges in content moderation and cost management initiatives.

Catalysts

Offers digital customer experience and digital solutions in the Asia-Pacific, the Central America, Europe, Africa, North America, and internationally.

• Expansion in AI data solutions, particularly with projects in large language model (LLM) development, positions TELUS Digital to capture increased revenue. The competitive dynamics and high demand from hyperscalers like Google indicate potential growth in this sector, which is expected to impact revenue positively.
  
• Investment in operational efficiencies, such as reducing attrition and optimizing workforce management, aims to improve cost structures and expand margins. The projected $50 million in-year savings from these initiatives in 2025 are expected to enhance net margins.
  
• Geographic expansion in high-demand regions like Africa and India, driven by strategic acquisitions and scaling operations, is set to deliver significant revenue growth. The focus on these growth areas could contribute to overall revenue expansion.
  
• The reacceleration of TELUS Digital’s digital solutions business and enhancements in digital offerings such as Fuel iX are designed to drive new investments and utilization, boosting earnings and potentially improving revenue streams.
  
• Continued focus on enhancing customer experience management through technology and service optimization is anticipated to improve utilization rates and customer retention. This can lead to improved revenue growth and potentially increase net margins over the long term.

TELUS International (Cda) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TELUS International (Cda)'s revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.3% today to 0.4% in 3 years time.
• Analysts expect earnings to reach $12.2 million (and earnings per share of $-0.0) by about March 2028, up from $-61.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $24.9 million in earnings, and the most bearish expecting $-542.2 thousand.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 138.7x on those 2028 earnings, up from -12.5x today. This future PE is greater than the current PE for the US Professional Services industry at 21.7x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.08%, as per the Simply Wall St company report.

TELUS International (Cda) Future Earnings Per Share Growth

Risks

• TELUS Digital's revenue showed a decline of 2% for the full year, and there is an expectation of just a modest 2% revenue growth for 2025, indicating potential challenges in achieving robust growth, which could impact future revenue.
  
• The anticipated adjusted EBITDA for 2025 suggests a year-over-year decline due to various adjustments, signaling potential pressure on net margins as a result of increased costs or lower efficiency despite stabilization efforts.
  
• The company has significant debt levels, with a net debt to adjusted EBITDA leverage ratio of 3.2x, and adjustments to credit agreements indicating ongoing financial risk which could affect earnings if economic conditions worsen.
  
• Content moderation services face volatility, especially with rapid changes in industry requirements and potential demand pressure in Europe, posing a risk to continued revenue from the trust and safety service sector.
  
• Continued investments of $65 million in 2025 and efforts to align costs may initially strain the net margins, especially in the first half of the year, while the expected $50 million of cost-saving initiatives could take time to materialize and offset investment costs, impacting earnings short term.

Valuation

• The analysts have a consensus price target of $4.571 for TELUS International (Cda) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.5, and the most bearish reporting a price target of just $3.53.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $12.2 million, and it would be trading on a PE ratio of 138.7x, assuming you use a discount rate of 10.1%.
• Given the current share price of $2.77, the analyst price target of $4.57 is 39.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.