Accelerated Digital Adoption Will Fuel AI And Global Consulting Expansion

Key Takeaways

• Accelerating demand for AI data solutions and automation positions TELUS International for outsized revenue and margin growth well beyond consensus expectations.
  
• Deep integration with TELUS Corp and expertise in trust, safety, and digital consulting enable long-term partnerships and expanding share in high-growth outsourcing segments.
  
• Reliance on legacy services, margin pressures from wage inflation, tough competition, client concentration risk, and goodwill impairment all threaten sustainable growth and earnings stability.

Catalysts

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

• Analyst consensus expects moderate revenue upside from AI data solutions and LLM projects, but this materially understates the scale and speed of opportunity, as recent industry consolidation has turbocharged demand for neutral, independent AI data vendors-TELUS Digital's pipeline is primed for a multi-year surge in high-value LLM annotation and model evaluation work that could accelerate revenue growth well above consensus expectations.
  
• While analyst consensus focuses on incremental operational efficiency savings, TELUS International is rapidly embedding AI and automation deep within its service delivery, creating a feedback loop of lower attrition, higher productivity, and differentiated service quality that has strong potential to drive a step-change expansion in net margins and EBITDA, outpacing the $50 million annual improvement forecasted.
  
• As global enterprises accelerate digital transformation mandates post-pandemic, rising discretionary spend and compressed transformation timelines are increasing project size and deal velocity in digital consulting-the resulting backlog of new logo wins and expanded wallet share across verticals like healthcare, automotive, and communications suggests sustained double-digit revenue growth from digital solutions over the next several years.
  
• TELUS International's integration with TELUS Corp's global telecom and healthcare ecosystems offers extensive cross-sell and upsell opportunities; the company is positioned to increasingly secure long-term, outcome-based partnerships that not only boost revenue stability but structurally increase utilization rates and margin profile.
  
• Given the mounting regulatory focus on data privacy, content moderation, and cybersecurity worldwide, TELUS International's proven track record in trust and safety, paired with expanded AI-enabled quality control, will enable it to capture outsized share of the fastest-growing digital outsourcing segments and outperform consensus revenue forecasts in these areas.

TELUS International (Cda) Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on TELUS International (Cda) compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming TELUS International (Cda)'s revenue will grow by 6.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -14.1% today to 1.3% in 3 years time.
• The bullish analysts expect earnings to reach $42.7 million (and earnings per share of $0.05) by about August 2028, up from $-383.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 45.7x on those 2028 earnings, up from -2.7x today. This future PE is greater than the current PE for the US Professional Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.05%, as per the Simply Wall St company report.

TELUS International (Cda) Future Earnings Per Share Growth

Risks

• TELUS International's reliance on traditional customer experience and content moderation services faces long-term structural risk from rapid generative AI and automation adoption, as highlighted by management's acknowledgment that simpler content moderation work is being substituted by AI capabilities, which threatens both future revenue growth and the size of the addressable market.
  
• Persistent margin pressure driven by wage inflation and elevated labor costs, especially in key geographies like Europe and the US, is a significant and ongoing challenge noted repeatedly in the company's commentary and reflected in the declining adjusted EBITDA margin to 13.4 percent, pointing to long-term impacts on net margins and profitability.
  
• Highly competitive pricing and commoditization in the customer experience and BPO segments are putting downward pressure on billing rates, with the company noting that growth in new service areas is only partially offsetting contraction in legacy services and basic work for clients like Google, which could compromise both revenue growth and long-term margin expansion.
  
• High client concentration risk was evidenced by the disclosure that the parent company TELUS represents 26 percent of year-to-date revenue and by ongoing revenue volatility with key clients such as Google, which leave the company highly exposed to shifts in client budgets, insourcing, and pricing renegotiation, creating unpredictability in both top-line results and earnings stability.
  
• The recent goodwill impairment, triggered by updated assumptions involving lower perpetual growth rates and lower projected cash flows due to enduring margin pressures, signals management's recognition of slower earnings growth prospects and raises questions about the company's ability to drive sustainable increases in free cash flow and long-term shareholder value.

Valuation

• The assumed bullish price target for TELUS International (Cda) is $5.25, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of TELUS International (Cda)'s future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.25, and the most bearish reporting a price target of just $3.4.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $3.2 billion, earnings will come to $42.7 million, and it would be trading on a PE ratio of 45.7x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $3.7, the bullish analyst price target of $5.25 is 29.5% 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.