National Bank drops rating on TELUS International

Disappointing quarterly projections from TELUS International (TELUS International Stock Quote, Charts, News, Analysts, Financials NYSE:TIXT) are cause for concern, according to National Bank Financial analyst Richard Tse, who in a Thursday report pulled back the reins. Tse moved his stock rating from “Outperform” to “Sector Perform” and slashed his 12-month target from $35.00 to $17.00, saying management’s release of preliminary second quarter numbers raises a number of questions.

Digital customer experience platform TELUS International released on Thursday preliminary second quarter 2023 financials, calling for revenue in the range of $660 to $668 million, good for a year-over-year growth rate of 6-7 per cent, and adjusted EBITDA in the range of $117-$120 million, which would represent a year-over-year drop of 20-22 per cent. (All figures in US dollars.)

As well, the company revised downward its full-year guidance. 2023 revenue had been previously pegged at $2,970-$3,030 million and is now projected to be $2,700-$2,730 million. Adjusted EBITDA was previously at $705-725 million and is now at $575-$600 million.

The company said in a press release that its clients are dealing with cost structure problems and staff downsizing, issues which have delayed and lowered their engagement with TIXT.

“During the second quarter, as a result of persistent global macroeconomic pressures, TELUS International experienced more pronounced and unexpected reductions in service demand from some of our larger clients, particularly within the technology vertical,” said Jeff Puritt, President and CEO of TELUS International, in a statement.

Tse said the preliminary numbers came in well below his and the consensus estimates. And he said that while on a conference call on Thursday evening, management suggested the current state of affairs is temporary, he is nonetheless left with some open-ended questions on TIXT.

Tse said since management was unclear on how and why it sees the current shortfall as temporary, his confidence in the visibility on future business for the company has been affected. Tse also voiced concerns around the moderation of TELUS’ margins going forward due to pricing pressures on clients and competitors in the space.

Admitting that he’s generally loathe to enact a rating downgrade based on news flow, Tse insisted that the size of the shortfall expressed in the preliminary numbers warrants the move.

“While a slight shortfall would have been reasonable in the current backdrop, the magnitude of the miss was surprising considering Management appeared to have reasonable visibility into its outlook,” Tse wrote.

“When combined with the Company’s pre-announcement conference call and comments around intense pricing pressures, we’re reluctantly moving to the sidelines – downgrading to Sector Perform (was Outperform) with a revised price target of $17 (was $35),” Tse wrote.

At the time of publication, Tse’s new target represented a projected one-year return of 15.6 per cent.