UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
OR
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2023 | |||||
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
OR
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report: | |||||
Commission File number: 001-39968
______________________________________________________________________________________________________
(Exact name of Registrant as specified in its charter)
______________________________________________________________________________________________________
Not Applicable
(Translation of Registrant’s name into English)
Province of British Columbia
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Chief Legal Officer & Corporate Secretary
TELUS International (Cda) Inc.
Tel: (604 ) 695-6400
(Name, telephone, e-mail and/or facsimile number and address of Company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading symbol | Name of each exchange on which registered | ||||||||||||
Toronto Stock Exchange | ||||||||||||||
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
At February 9, 2024, 106,830,312 subordinate voting shares were issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b of the Exchange Act. (Check one):
Accelerated filer o | Non-accelerated Filer o | Emerging growth company | ||||||||||||||||||
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
The term new or revised financial accounting standard refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements □
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). □
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
x Standards Board | ||||||||
o US GAAP | o Other | |||||||
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow o Item 17 o Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
TABLE OF CONTENTS
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INTRODUCTION
Unless otherwise indicated or where the context requires otherwise, all references in this annual report on Form 20-F (Annual Report) to the “Company”, “TELUS International”, “TI”, “we”, “us”, “our” or similar terms refer to TELUS International (Cda) Inc. and its subsidiaries. All references in this Annual Report to “TELUS” refer to TELUS Corporation and its subsidiaries other than TELUS International. All references in this Annual Report to “BPEA” refer to BPEA EQT, formed as a result of the combination of Baring Private Equity Asia and EQT Asia in 2022. All references to “TELUS International AI Data Solutions”, “TIAI Data Solutions”, “Lionbridge AI” or “TIAI” refer to our data collection, data annotation and search relevance business of Lionbridge Technologies, Inc, which we acquired on December 31, 2020, and Playment, an India-based leader in computer vision platform and services, which we acquired on July 2, 2021. All references to “WillowTree” refer to WT Blocker Corp and its subsidiaries, which we acquired on January 3, 2023.
We use various trademarks, trade names and service marks in our business, including TELUS, which is used under license from TELUS Corporation. For convenience, we may not include the ® or ™ symbols, but such omission is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by law. Any other trademarks, trade names or service marks referred to in this Annual Report are the property of their respective owners.
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “anticipate”, “assume”, “believe”, “contemplate”, “continue”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “may”, “objective”, “plan”, “predict”, “potential”, “positioned”, “seek”, “should”, “target”, “will”, “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.
These forward-looking statements include, but are not limited to, statements about:
•our ability to execute our growth strategy, including by expanding services offered to existing clients and attracting new clients;
•our ability to maintain our corporate culture and competitiveness of our service offerings;
•our ability to attract and retain talent;
•our ability to integrate, and realize the benefits of, our acquisitions, including our acquisition of WillowTree;
•the relative growth rate and size of our target industry verticals;
•our projected operating and capital expenditure requirements;
•our ability to mitigate pressures on profitability with cost efficiency efforts and otherwise manage our labor costs commensurate with the demand for our services; and
•the impact of global conditions on our and our clients’ businesses, including a potential economic recession, inflation, rising interest rates, geopolitical conditions, such as the Russia-Ukraine and Middle East conflicts and continuing impacts of the COVID-19 pandemic and its variants and related response measures.
These factors should not be construed as exhaustive and should be read with the other cautionary statements in this Annual Report. These forward-looking statements are based on our current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions, including the non-occurrence of the risks and uncertainties that are described in the filings made with the SEC and the applicable Canadian securities regulators or other events occurring outside of our normal course of business, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Annual Report may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this Annual Report. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. Comparisons of results for current and any prior periods are not
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intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data. These forward-looking statements speak only as at the date of this Annual Report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
This Annual Report contains estimates, projections, market research and other information concerning our industry, our business, and the markets for our services. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from our own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry and general publications, government data and similar sources.
In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors”. These and other factors could cause our future performance to differ materially from our assumptions and estimates.
Any references to forward-looking statements in this Annual Report include forward-looking information within the meaning of applicable Canadian securities laws.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
The annual consolidated financial statements of TELUS International included in this Annual Report are presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS-IASB), and consist of the consolidated statements of financial position as at December 31, 2023 and 2022, and the consolidated statements of income and other comprehensive income, changes in owners’ equity, and cash flows, for each of the years in the three-year period ended December 31, 2023.
In this Annual Report, unless otherwise specified, all monetary amounts are in U.S. dollars, all references to “US$”, “$”, “USD” and “dollars” mean U.S. dollars and all references to “C$”, “CDN$” and “CAD$”, mean Canadian dollars, and all references to “euro” and “€” mean the currency of the European Union.
ENFORCEMENT OF CIVIL LIABILITIES
We are incorporated under the laws of the Province of British Columbia, Canada, with our principal place of business in Vancouver, Canada. Some of our directors and officers, and the experts named in this Annual Report, are residents of Canada, the United States or elsewhere, and all or a substantial portion of their assets, and all or a substantial portion of the Company’s assets, are located outside of the United States. As a result, it may be difficult for shareholders who reside in the United States to effect service within the United States upon those directors, officers and experts who are not residents of the United States. It may also be difficult for shareholders who reside in the United States to realize in the United States upon judgments of courts of the United States predicated upon the Company’s civil liability and the civil liability of our directors, officers and experts under the United States federal securities laws. There can be no assurance that U.S. investors will be able to enforce against us, members of the TELUS International board of directors (Board), officers or certain experts named herein who are residents of Canada or other countries outside the United States, any judgments in civil and commercial matters, including judgments under the federal securities laws.
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PART I
ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 KEY INFORMATION
B.Capitalization and Indebtedness
Not applicable.
C.Reasons for the Offer and Use of Proceeds
Not applicable.
D.Risk Factors
Risk Factors Summary
Investing in our subordinate voting shares involves a high degree of risk. You should carefully consider the risks described in this “Item 3D—Risk Factors” before making a decision to invest in our subordinate voting shares. If any of these risks actually occur, our business, financial condition and financial performance would likely be materially adversely affected. In such a case, the trading price of our subordinate voting shares would likely decline and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:
•We face intense competition from companies that offer services similar to ours.
•Our business and financial results have been and could be adversely affected by a number of global conditions and the effects of these same conditions on our clients’ businesses and demand for our services.
•Because the majority of our costs is fixed in the short-term, we may experience a delay in our ability to immediately adjust our cost structure in response to prolonged lower client demand.
•Three clients account for a significant portion of our revenue and loss of or reduction in business from, or consolidation of, these or any other major clients could have a material adverse effect on our business, financial condition, financial performance and prospects.
•Our ability to grow and maintain our profitability could be materially affected if changes in technology, including without limitation generative artificial intelligence (GenAI), and client expectations outpace our service offerings and the development of our internal tools and processes or if we are not able to meet the expectations of our clients.
•Our growth prospects are dependent upon attracting and retaining enough qualified team members to support our operations and competition for talent is intense.
•If we cannot maintain our unique culture as we grow, our services, financial performance and business may be harmed.
•Our business could be adversely affected if we lose members of our senior management.
•We could be unable to successfully identify, complete, integrate and realize the benefits of acquisitions, including our acquisition of WillowTree, or manage the associated risks.
•The unauthorized disclosure of sensitive or confidential client and customer data, through cyberattacks or otherwise, could expose us to protracted and costly litigation, damage to reputation and cause us to lose clients / revenue.
•Our business may not develop in ways that we currently anticipate due to negative public reaction to offshore outsourcing, content moderation and proposed legislation, our use of artificial intelligence (AI) or otherwise.
•Our policies, procedures and programs to safeguard the health, safety and security of our team members, particularly our content moderation team members, may not be adequate, which could adversely affect our ability to attract and retain team members and could result in increased costs, including due to claims against us.
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•Our business would be adversely affected if individuals providing data annotation services through TIAI’s crowdsourcing solutions were classified as employees (not as independent contractors).
•The dual-class structure contained in our articles has the effect of concentrating voting control and the ability to influence corporate matters with TELUS.
•TELUS will, for the foreseeable future, control the TELUS International Board.
•The market price of our subordinate voting shares may be affected by low trading volume and the market pricing for our subordinate voting shares may decline as a result of future sales, or the perception of the likelihood of future sales, by us or our shareholders in the public market.
BUSINESS & OPERATIONAL RISKS
We face intense competition from companies that offer services similar to ours. If we are unable to differentiate to compete effectively, our business, financial performance, financial condition and cash flows could be materially adversely impacted.
The market for the services we offer is very competitive. We expect competition to intensify and increase from a number of our existing competitors, including professional services companies that offer consulting services, information technology companies with digital capabilities, and traditional contact center and business process outsourcing (BPO) companies that are expanding their capabilities to offer higher-margin and higher-growth services. In addition, the continued expansion of the services we offer and the markets we operate in will result in new and different competitors, many of which may have significantly greater local market recognition than we do, as well as increased competition with existing competitors who are also expanding their services to cover digital capabilities.
Many of these existing and new competitors have differing or greater financial, geographic, human and other resources, greater technological expertise, longer operating histories and more established relationships in the verticals that we currently serve or may expand to serve in the future. In addition, some of our competitors may enter into strategic or commercial relationships among themselves or with larger, more established companies in order to increase their ability to address client needs or enter into similar arrangements with potential clients. We also face competition from service providers that operate in countries where we do not have delivery locations because our clients may, to diversify geographic risk and for other reasons, seek to reduce their dependence on any one country by shifting work to another country in which we do not operate. All of these factors present challenges for us in retaining and growing our business.
From time to time, our clients who currently use our services may determine that they can provide these services in-house. As a result, we face the competitive pressure to continually offer our services in a manner that will be viewed by our clients as better and more cost-effective than what they could provide themselves.
Our inability to compete successfully could result in increased client turnover, revenue loss, pressures on recruitment and retention of team members, service price reductions and increased marketing and promotional expenses, or reduced operating margins which could have a material adverse effect on our business, financial performance, financial condition and cash flows.
Our business and financial results have been and could be adversely affected by a number of global conditions which are outside our control and these conditions could have an effect on our clients’ businesses and, as a result, levels of business activity, demand for our services and our and our clients’ liquidity and access to capital.
Certain global conditions which are outside our control, such as economic and geopolitical conditions, acts of violence or war, natural disasters or extreme weather events and global pandemics or epidemics, such as the COVID-19 pandemic and its variants and the related response measures, could have an adverse effect on our clients’ businesses. These conditions have created, and may continue to create, volatility, uncertainty and economic disruption. These impacts may be particularly impactful for us given that we have operations in 32 countries as of December 31, 2023, and we service clients across multiple geographic regions.
The global economy is in a period of uncertainty with respect to inflation, higher interest rates and slower economic growth. Some regions may experience a recessionary period and we cannot predict how long such conditions may last or what their ultimate impact may be on our business. Global economic conditions are impacting our business and may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our clients, increase the cost of borrowing and cause credit to become more limited, limit our ability to access financing or increase our cost of financing to meet liquidity needs or fund acquisitions, and affect the ability of our clients to use credit to purchase our services or to make timely payments to us, all of which could have a material adverse effect on our business, financial condition, financial performance and cash flows. Changes in the general level of economic activity, such as decreases in business and consumer spending, have resulted and could increasingly in the future result in pricing pressure on our services and a decrease or delay in demand for the products
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and services that our clients provide to their customers, and in turn, our clients’ demand for our own services. In addition, because the majority of our costs are fixed in the short-term, we have and may in the future experience a delay in our ability to adjust our cost structure in response to lower client demand. Global macroeconomic pressures have resulted and could continue to result in certain of our clients aggressively cutting their costs, which could result in reductions and delays in demand for our services, as well as delays in converting opportunities into spend commitments, all of which could reduce our revenues and profitability. We cannot predict the ultimate duration or scale of the current or any future demand reductions, delays and reduced growth from new clients, or the ultimate impact of these factors on our business. Continuing reduction or delay in demand from existing or potential clients could continue to reduce our revenue and profitability and factor into our decisions on workforce management.
Acts of violence or war may adversely affect worldwide financial markets and could potentially lead to, or exacerbate, an economic recession, which could adversely affect our business, financial performance, financial condition and cash flows. These events could negatively affect our clients’ levels of business activity and precipitate sudden significant changes in regional and global economic conditions and cycles. These events also pose significant risks to our team members and to our delivery locations and operations around the world. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts and wars. Any such event could have a material adverse effect on our business, financial performance, financial condition and cash flows.
In particular, in February 2022, Russia, aided by Belarus, commenced military operations in Ukraine, which are still continuing. A conflict in the Middle East, which began in October 2023, is also continuing. In response to the conflict in Ukraine, a number of countries, including the United States, Canada and other NATO countries, have imposed significant sanctions against Russia and Belarus, and a number of individuals and enterprises in both countries. The conflict in the Ukraine has caused migration and other demographic effects. Similar negative impacts for both our and our clients’ businesses could arise as a result of the armed conflict in the Middle East. Prolonged conflicts and the resultant negative impacts have, and may in the future, result in increased political uncertainties and volatility in the global economy, which has, and may in the future, affect businesses around the world, including our clients and us as a result. The scope, intensity, duration and outcome of the conflicts is uncertain. If the conflicts and the sanctions intensify, this may adversely impact our clients and their demand for our services, which may have a material adverse impact on our results of operations. Additionally, although we do not operate in Russia, Belarus, Ukraine or Israel, we have operations and team members in neighboring countries and any escalation of these conflicts could adversely impact our operations and team members in these countries, which could materially impact our ability to deliver services to our clients, and may have a material effect on our results of operations.
There is also no certainty that these current conflicts will not draw military or other intervention from additional countries, which could lead to much larger conflicts and/or additional sanctions, which could further negatively impact the global economy. In addition, we cannot predict the impact that an escalation of these conflicts may have on our clients and their financial conditions. Any material adverse effect on our clients, including due to these conflicts, could adversely impact us. Further, the risk of cybersecurity incidents has increased in connection with these ongoing conflicts. It is possible that these attacks could have collateral effects on critical communications infrastructure and financial institutions globally, which could adversely affect our operations and could increase the frequency and severity of cyber-based attacks against our information technology systems. The proliferation of malware from these conflicts into systems unrelated to the conflict, or cyberattacks against companies based in countries that have instituted sanctions, such as the United States, could also adversely affect our results of operations. To the extent the current these conflicts adversely affects our business, it may also have the effect of heightening many other risks disclosed in this Annual Report.
Additionally, our operations may continue to be disrupted by variants arising from the COVID-19 pandemic or other pandemics and related response measures, particularly if new viral variants cause infection rates to increase, requiring the imposition of quarantine or other response measures. Our ability to continue operations effectively during an epidemic or pandemic, or other outbreak of disease, is dependent on a number of factors, such as the continued availability of high-quality internet bandwidth, an uninterrupted supply of electricity, the sustainability of social infrastructure to enable our team members who are working remotely to continue delivering services, and on otherwise adequate conditions for remote-working, many of which may be outside of our control. In addition, the effects of a pandemic have previously caused and may in the future cause our clients, particularly those in impacted industries, to defer decision making, delay planned work, reduce volumes or seek to terminate current agreements with us, which could adversely affect our business and financial condition. To the extent an epidemic, pandemic, or other outbreak of disease adversely affects our business, financial condition, financial performance and cash flows, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
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Changes in technology and client expectations could outpace our service offerings and the development of our internal tools and processes, which could have a material adverse effect on our business, growth, financial performance, financial condition and cash flows.
Our growth, profitability and the diversity of our revenue sources depend on our ability to develop and adopt new technologies to expand our existing offerings, proactively identify new revenue streams and improve cost efficiencies in our operations, all while meeting rapidly evolving client expectations. Recent and rapid developments with respect to and the popularization and commercialization of AI have created additional pressures on our business with respect to both the need to develop AI-related offerings to meet customer expectations and remain competitive and to integrate AI into our business processes and tools in order to create cost efficiencies. Although we are focused on maintaining and enhancing the range of our offerings, we may not be successful in anticipating or responding to our clients’ expectations and the integration of our technology solutions into our offerings may not achieve the intended enhancements or cost reductions in our operations. New services and technologies offered by our competitors may make our service offerings uncompetitive, which may reduce our clients’ interest in our offerings and our ability to attract new clients. This may increasingly become a challenge for us with respect to revenue derived from our customer experience (CX) business, which may be negatively impacted by the introduction of AI capabilities into our marketplace. Our failure to innovate, maintain technological advantages or respond effectively and timely to changes in technology could have a material adverse effect on our business, financial performance, financial condition and cash flows.
If we fail to establish our digital brand and successfully market our digital service offerings, our growth prospects, anticipated business volumes and financial performance may be adversely affected.
Certain of our existing and potential clients may know us primarily for our customer experience services. Our ability to realize our digital-first strategy and increase revenue across our core verticals depends on our ability to solution, sell and deliver our digital services. If we are not successful in establishing our digital brand and marketing our expanded service offerings to clients, our ability to shift our existing clients into more profitable digital services and attract new clients to these service offerings may be limited, which may adversely affect our growth prospects and anticipated business volumes and financial performance.
If we fail to maintain a consistently high level of service experience or to meet the service quality levels set out in some of our contracts, our ability to attract new and retain existing clients and team members could be adversely affected and our business could be adversely impacted or we could be subject to liability or penalties.
Our clients’ loyalty, likelihood to expand the services that they use with us and likelihood to recommend us is dependent upon our ability to provide a service experience that meets or exceeds our clients’ expectations and that is differentiated from our competitors. Our ability to attract and retain clients, and team members is highly dependent on our clients’ satisfaction ratings and the satisfaction ratings that our clients receive from their customers based on our services, all of which affects our reputation. If we are unable to maintain a consistently high level of service, our clients could change service providers, our revenues and profitability could be negatively impacted, and our reputation could suffer.
Further, most of our agreements with clients contain service level and performance requirements, including requirements relating to the quality of our services. Failure to meet these requirements could disrupt our clients’ businesses and result in harm to our reputation, reduce the likelihood that our clients continue or expand their business with us or recommend us to others, oblige us to pay penalties to clients under their contracts, reduce revenues or expose us to a claim for substantial damages, regardless of whether we are responsible for that failure.
We may enter into non-standard agreements or terms and conditions that are unfavorable to us because we perceive an important economic opportunity by doing so, the competitive environment requires it or our personnel did not adequately adhere to our guidelines for the entry into contracts. If we cannot or do not perform our contractual obligations with clients, we could face legal liability, and our contracts might not always protect us adequately through limitations on the scope and/or amount of our potential liability. In each of these cases, we might face significant legal liability and our business, financial performance, financial condition and cash flows could be materially and adversely affected.
If we fail to implement and communicate impactful environmental, social, governance (ESG) initiatives in accordance and at pace with changing regulations and expectations, our business could be adversely impacted.
TELUS International's reputation with team members, customers, investors and stakeholders is rooted in our commitment to a caring culture, which, among other things, prioritizes our ESG initiatives related to environmental sustainability, good governance, giving back to our communities and diversity, equity and inclusion. If we fail to live up to our commitments or successfully communicate our achievements in this regard or if we fail to do so on a timely basis, including if we fail to live up to the expectations of our clients, many of whom expect their service providers to embody the ESG priorities they do, it could result in adverse financial and operating results, and negatively impact our client acquisition and retention and our ability to attract and retain team members. These activities are central to our caring culture and are a differentiating factor for clients in
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selecting a service provider. As a result, we continue to invest in our ESG activities, including those managing energy and greenhouse gas reduction and water consumption efficiency. We also continue to invest in the communities where we live in order to improve the well-being of the communities where we live and work. The required levels of such investments may increase in the future as such activities become increasingly important to our clients and team members, which would increase our costs and may adversely affect our financial performance and cash flows.
We are vulnerable to climate change, natural disasters, technical disruptions, pandemics, accidents and other events impacting our facilities that could severely disrupt the normal operation of our business and adversely affect our business, financial performance, financial condition and cash flows.
Our delivery locations and our data and voice communications, including in Africa, Central America, China, Europe, India, North America and the Philippines, in particular, may be damaged or disrupted as a result of natural disasters or extreme weather events, including those resulting from or exacerbated by climate change, such as earthquakes, floods, volcano eruptions, heavy rains, winter storms, tsunamis and cyclones; epidemics or pandemics, or other outbreaks of disease; technical disruptions and infrastructure breakdowns including damage to, or interruption of, electrical grids, transportation systems, communication systems or telecommunication cables; issues with information technology systems and networks, including computer glitches, software vulnerabilities and electronic viruses or other malicious code; accidents and other events such as fires, floods, failures of fire suppression and detection, heating, ventilation or air conditioning systems or other events, such as protests, riots, labor unrest, security threats and terrorist attacks. Any of these events may lead to the disruption of information systems and telecommunication services for sustained periods and may create delays and inefficiencies in providing services to clients and potentially result in closure of our sites. They may also make it difficult or impossible for team members to provide our services.
Damage or destruction that interrupts our provision of services could adversely affect our reputation, our relationships with our clients, our leadership team’s ability to administer and supervise our business or may cause us to incur substantial additional expenditures to repair or replace damaged equipment or sites. We may also be liable to our clients for disruption in service resulting from such damage or destruction. Our resiliency and disaster recovery plans may not be adequate to provide continuity and reliability of service during disruptions or reduce the duration and impact of service outages sufficiently or at all. While we currently have commercial liability insurance, our insurance coverage may be insufficient or may not provide coverage at all for certain events. Furthermore, we may be unable to secure such insurance coverage at premiums acceptable to us in the future, or such insurance may become unavailable. Prolonged disruption of our services could also entitle our clients to terminate their contracts with us or require us to pay penalties or damages to our clients. Any of the above factors may materially adversely affect our business, financial performance, financial condition and cash flows.
Our client contracts, most of which can be canceled at any time, are generally long-term, requiring us to estimate the resources and time required for the contracts upfront, and contain certain price benchmarking, compliance-related penalties and other provisions averse to us, all of which could have an adverse effect on our business, financial performance, financial condition and cash flows.
Our client contracts typically range from three to five years and in many cases may be terminated by our clients for convenience with limited notice and without payment of a penalty or termination fee, do not have specific volume commitments and allow our clients to delay, postpone, cancel or remove certain services without canceling the whole contract, all of which would adversely impact our revenue. We may not be able to replace any client that elects to terminate or not renew its contract with us, which would reduce our revenues.
Additionally, our contracts require us to comply with, or facilitate, our clients’ compliance with numerous and complex legal and regulatory regimes on matters such as anti-corruption, internal and disclosure control obligations, data privacy and protection, cybersecurity requirements, wage-and-hour standards, and employment and labor relations. Many of our contracts contain provisions that would require us to pay penalties to our clients and provide our clients with the right to terminate the contract, which in some cases could result in high or unlimited liability, if we do not meet pre-agreed service level requirements. Failure to meet these requirements could result in the payment of significant penalties to our clients, which in turn could have a material adverse effect on our business, financial performance, financial condition and cash flows.
A few of our contracts allow the client, in certain limited circumstances, to request a benchmark study comparing our pricing and performance with that of an agreed list of other service providers for comparable services. Based on the results of the study and depending on the reasons for any unfavorable variance, we may be required to make improvements in the services we provide, reduce the pricing for services on a prospective basis to be performed under the remaining term of the contract, or our clients could elect to terminate the contract or reduce their business with us, any of which could have an adverse effect on our business, financial performance, financial condition and cash flows.
Some of our contracts contain provisions which, to various degrees, restrict our ability to provide certain services to other clients or to companies who are in competition with our clients. Such terms may restrict the same team members from
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providing services for competing clients, require us to ensure a certain distance between the locations from where we serve competing clients or prevent us from serving a competing client from locations in the same country, all of which reduce our flexibility in deploying our team members and delivery locations in the most effective and efficient manner and may force us to forego opportunities to attract business from companies that compete with our existing clients, even if such opportunities are more profitable or otherwise attractive to us.
We may face difficulties in delivering complex projects for our clients that could cause clients to discontinue their work with us, which may have a material adverse impact on our financial performance, financial condition and cash flows.
Our ability to continue to expand the nature, scope and complexity of our engagements depends on our ability to attract new or existing clients to an expanded collection of service offerings. For complex projects, we are more likely to compete with large, well-established international firms, many of which have greater resources and market reputation than we do. To compete for these projects, we will likely incur increased sales and marketing costs and will need to maintain close relationships with our clients and have a thorough understanding of their operations. Our success will depend upon a number of factors, including our ability to establish such relationships, form and retain a team with the necessary skills and meet our client needs at the necessary scale in the required timeframes. For example, if a new program requires us to hire a large number of team members with specific skills in a specific geography, we could face challenges in implementing the program on a client’s desired timetable or at all. Our failure to deliver services that meet the requirements specified by our clients could result in termination of client contracts, which could result in us being liable to our clients for significant penalties or damages and negatively impact our reputation. More complex projects may involve multiple engagements or stages, and there is a risk that a client may choose not to retain us for later stages or may cancel or delay additional planned engagements, which may be the more profitable portions of the overall planned engagement. Such cancellations or delays make it difficult to plan for project resource requirements and inaccuracies in such resource planning and allocation may have a material adverse impact on our financial performance, financial condition and cash flows.
We often face a long selling cycle, which may or may not be successful. If we are successful but fail to then successfully negotiate a contract, implement our services or, where applicable, run a pilot program, our business, financial performance, financial condition and cash flows may be adversely affected.
We often face a long selling cycle to secure a new client contract or launch a new program for an existing client, during which we typically incur significant business development expenses. If we are unsuccessful during the selling cycle, we will not receive revenues or reimbursement for our expenses. If we are successful, a long contract negotiation and implementation period could follow and, in some cases, a pilot program may also occur, all of which may not be successful. We begin to receive revenues only when implementation starts. When we are successful, our clients may experience delays in obtaining internal approvals or may fail to obtain approval at all, or may experience delays associated with technology or system implementations, thereby delaying or lengthening the implementation cycle. There is then a long ramping up period to commence providing the services, which may result in a further delay in us receiving revenues. If we are not successful in our sales cycle, negotiation of a contract, implementation of our services, running a pilot program, where applicable, or in maintaining or reducing the duration of unprofitable periods in our selling cycles, our business, financial performance, financial condition and cash flows may be adversely affected.
Our business may not develop in ways that we currently anticipate and demand for our services may be reduced due to negative reaction to offshore / nearshore outsourcing or automation, such as through the use of AI.
We developed our strategy for future growth based on certain assumptions regarding our industry, future demand in the market for our services and the manner in which we would provide these services, including the assumption that a significant portion of our services will continue to be delivered through offshore / nearshore facilities. The trend of transitioning key business processes to offshore / nearshore third parties may not continue and could reverse or may become less profitable or not profitable at all.
Some countries and special interest groups in the United States, Europe and other regions where we have clients have expressed a perspective that associates offshore outsourcing with the loss of jobs in a domestic economy. This has resulted in increased political and media attention to offshore outsourcing, especially in the United States. It is possible that there could be a change in the existing laws that would restrict or require disclosure of offshore outsourcing by our clients or impose new standards that have the effect of restricting the use of certain visas in the foreign outsourcing context. Some legislative proposals, if enacted as proposed, would increase the administrative and operational complexities of establishing or maintaining delivery locations in the locations where that legislation is introduced and could reduce client demand for our services. Such proposals include ones that require our delivery locations disclose their geographic locations, require notice to individuals whose personal information is disclosed to non-U.S. affiliates or subcontractors, require disclosures of companies’ foreign outsourcing practices, or restrict U.S. private sector companies that have federal government contracts, federal grants or guaranteed loan programs from outsourcing their services to offshore service providers. In addition, changes in laws and regulations concerning the transfer of personal information to other jurisdictions could limit our ability to engage in work that
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requires us to transfer data in one jurisdiction to another. Potential changes in tax laws may also increase the overall costs and economics of offshore outsourcing. Such changes could have an adverse impact on the economics of outsourcing for private companies in the United States, which could, in turn, have an adverse impact on our business with U.S. clients.
Similar concerns have also led certain European Union jurisdictions to enact regulations which allow team members who are dismissed as a result of transfer of services, which may include outsourcing to non-European Union companies, to seek compensation either from the company from which they were dismissed or from the company to which the work was transferred. This could discourage European Union companies from outsourcing work offshore and/or could result in increased operating costs for us. In addition, there has been publicity about the negative experiences, such as theft and misappropriation of sensitive customer data of various companies that use offshore outsourcing.
Additionally, we may face negative public reaction to increased automation of or reduction in employment positions through the use of AI or the other technologies by us or our clients, which could reduce the demand for many of our service offerings, particularly those involving AI. Increased negative public perception by public and private companies and related legislative efforts in economies around the world could have adverse impact on the demand for our services.
In providing our content moderation services, we may not meet the expectations of clients, their users, community members and government officials.
The content that our team members analyze is selected for review by our clients, often based on user referrals or automated identification, and is moderated by our team members, both manually and with the support of technology, based on policies and rules that are set by our clients.
Our team members use tools developed by our clients to identify content for moderation. These tools may fail to identify content that violates our clients’ content policies or community guidelines or, in certain jurisdictions, legal or regulatory requirements. This could be the result of deliberate evasive actions by users, limitations in our clients’ content identification tools, bias, errors, malfunctions and other factors. In particular, tools utilizing AI algorithms, which are based on machine learning and predictive analytics, can create accuracy issues, unintended biases and discriminatory outcomes that could lead to errors in content moderation decisions, which could harm our and our client’s brand and otherwise adversely affect our business. In addition, our team members may erroneously moderate content or fail to moderate content in accordance with our clients’ policies or rules, as a result of human error, the inadequacy or failure of technological tools that assist them in content moderation, or otherwise. Objectionable content that users, affected community members and government officials expect to be removed could therefore not be subject to review by our team members or could fail to be removed. As a result of similar factors, content that users, affected community members and government officials expect to remain on the platform could be removed by our content moderation team members. Our clients’ users, members of affected community members or government officials may disagree with our content moderation efforts.
Although the design of the methods employed to select content for review is not within the scope of the services we provide and each of our clients sets the parameters of the types of content that we are required to moderate, the failure to moderate (or not moderate) content that users, affected community members and government officials believe should be moderated (or not moderated) could adversely impact our reputation for content moderation service delivery and in the community generally, and our ability to attract and retain clients and team members. A failure to properly moderate content on our clients’ platforms could also expose us to liability to our clients or users of our clients’ platform. Additionally, a failure to moderate content in the manner expected by government officials in the markets where we operate, such as the requirement in some jurisdictions for us to accurately identify and eliminate certain content from our client networks, could subject us to sanction. Furthermore, clients may require us to assume liability for failure to comply with certain contractual requirements imposed by the client, which may increase our costs and materially impact our business, financial results and our results of operations.
Our inability to manage our rapid growth effectively could have an adverse effect on our business and financial results.
We have experienced rapid growth and expect to continue to expand our services, operations and number of team members. We expect to continue with our geographic expansion and develop and improve our internal systems in the locations where we operate in order to address the growth of our business, which we may not be able to do effectively or on a timely basis in order to meet the ongoing needs of our clients and to meet our current growth trajectory. Our inability to execute our growth strategy, to maintain the continued adequacy of our current systems or to manage our expansion, workforce capital and other resources effectively could have a material adverse effect on our business, financial performance, financial condition and cash flows.
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We rely on certain infrastructure and third party services in order to provide our solutions and run our business and any failure, disruption or loss of the right to use such infrastructure, or disruption in the supply of third parties’ goods and services, could have an adverse effect on our business, client relationships, financial performance, financial condition and cash flows.
In order to provide our solutions and run our business, we rely on certain infrastructure and third party providers for software, services and computer hardware, either purchased or licensed.
With respect to infrastructure, we depend on offshore and nearshore delivery locations to deliver services and so must maintain active voice and data communications and transmission among our delivery locations, our international technology hubs and our clients’ offices. Disruptions could result from, among other things, technical breakdowns, faulty systems or software, computer glitches, viruses and other malicious software, weather conditions, global pandemics and geopolitical instability. Further, our business continuity plans may not be successful in mitigating the effects of such events. We also depend on certain significant vendors for facility storage and related maintenance of our key technology equipment and data at those technology hubs, as well as for some of the third-party technology and platforms we sometimes use to deliver our services. With respect to services, we rely on a limited number of cloud computing providers for a distributed computing infrastructure platform for our business operations, or what is commonly referred to as a “cloud” computing service.
This infrastructure and third-party software, hardware, services, including cloud computing services, may not continue to be available, may not be available on commercially reasonable terms or we may experience a degradation of, disruption of or interference with their supply. Any adverse impact to our infrastructure or the right to use or failures of third-party hardware, software or services could impact our leadership team’s ability to administer and supervise our business and may result in delays in our ability to provide our solutions, maintain our quality of service or run our business until equivalent supply is developed by us or, if available, identified, obtained and integrated, which could be costly and time-consuming and may not result in an equivalent solution. In addition, if we cannot, or do not, meet our contractual obligations with vendors, they may have the right to terminate their contracts with us, in which case we may not be able to provide clients solutions and services dependent on the products or services provided to us by such contracts. Any of the foregoing could have an adverse effect on our business, client relationships, reputation, financial performance, financial condition and cash flows.
Clients could assert claims against us in connection with service disruption, reduce their business with us and/or cease conducting business with us altogether as a result of problems with the hardware we use to deliver services. Even if not successful, a claim brought against us by any of our clients would likely be time-consuming and costly to defend and could seriously damage our reputation and brand, making it harder for us to sell our solutions, any of which could have an adverse effect on our business, financial performance, financial condition and cash flows.
Additionally, certain vendors provide services to us pursuant to such vendors’ contracts with TELUS, and as a result, such services may be subject to interruptions due to factors beyond our control, or may be renegotiated from time to time without our participation on terms we cannot control. Any disruption of or interference with our use of these vendors or material changes in the price for such services would adversely impact our operations and our business, financial performance, financial condition and cash flows may be adversely impacted.
We may be unable to successfully identify, complete, integrate and realize the benefits of acquisitions or manage the associated risks, all of which could have a material adverse effect on our business, financial performance, financial condition and cash flows.
A key part of our business strategy is to continue to selectively consider acquisitions or investments, some of which may be material. Through the acquisitions we pursue, we may seek opportunities to expand the scope of our existing services, add new clients or enter new geographic markets. There can be no assurance that we will successfully identify suitable candidates in the future for strategic transactions at acceptable prices or at all, have sufficient capital resources or financing opportunities to finance potential acquisitions or be able to consummate any desired transactions. Our failure to complete potential acquisitions in which we have invested or may invest significant time and resources could have a material adverse effect on our business, reputation, financial performance, financial condition and cash flows. Financing of completed acquisitions may result, and in the case of WillowTree, has resulted, in the incurrence of indebtedness and the issuance of additional equity securities.
Acquisitions, including completed acquisitions, involve complex operational, technological and personnel-related challenges, which are time-consuming and require significant investment and may disrupt our ongoing business operations. Furthermore, integration involves a number of risks, including, but not limited to:
•diversion of management’s attention from operating our business;
•retaining and developing our relationships with key clients and seeking new revenue opportunities;
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•failing to retain key personnel of acquired companies, particularly to competitors, or facing resultant labor disputes, strikes or similar disruptions;
•facing legal and other risks and liabilities relating to the acquisition or the acquired entity’s historic operations, which may be unanticipated or undisclosed and for which we may not be indemnified fully or at all;
•integrations of our operations including, in the case of WillowTree, doing so in compliance with the agreements entered into with members of WillowTree management;
•completion of post-acquisition activities, such as alignment of employee cultures, corporate and accounting policies, controls and procedures, employee transfers and moves, information systems integration, optimization of service offerings and the establishment of control over new operations;
•information systems and other platform integration, including, where applicable, effective disclosure controls and procedures and internal control over financial reporting for the combined company, enabling us to continue to comply with IFRS-IASB and applicable U.S. and Canadian securities laws and regulations;
•difficulty comparing and integrating financial reporting due to differing financial and/or internal reporting systems;
•making any necessary modifications to internal controls over financial reporting to comply with applicable rules and regulations; and
•possible tax costs or inefficiencies associated with integrating the operations of the combined global company.
These factors could cause us to not fully or timely integrate acquired companies into our business, to fail to develop such companies in the way we expected or to fail to realize the anticipated growth, financial and/or strategic benefits, including but not limited to anticipated revenues and synergies of the acquisition, or cause the costs of achieving these benefits to be higher than expected, any of which could have a material adverse effect on our business, reputation, financial condition and results of operations.
In addition, following the completion of acquisitions, we may be required to rely on the seller to provide administrative and other support, including financial reporting and internal controls over financial reporting, and other transition services to the acquired business for a period of time. There can be no assurance that the seller will do so in a manner that is acceptable to us or at all.
We are subject to economic, political and other risks of doing business globally and in emerging markets.
We are a global business with a substantial majority of our physical assets and operations located outside Canada and the United States. In addition, an important component of our growth strategy is our continuing international expansion, including in Europe and Asia-Pacific. We continuously evaluate additional locations outside of our current operating geographies in which to invest in delivery locations, in order to maintain an appropriate cost structure for our client programs.
Due to the international nature of our business, we are exposed to various risks of international operations, including: adverse trade policies or trade barriers; inflation, hyperinflation and adverse economic effects resulting from governmental attempts to control inflation, such as the imposition of wage and price controls and higher interest rates; difficulties in enforcing agreements or judgments and collecting receivables in foreign jurisdictions; exchange controls or other currency restrictions and limitations on the movement of funds, such as on the remittance of dividends by subsidiaries; foreign currency fluctuations; inadequate infrastructure and logistics challenges; sovereign risk and the risk of government intervention, including through expropriation, or regulation of the economy; unexpected changes in regulatory regimes; challenges in maintaining an effective internal control environment with operations in multiple international locations, including language and cultural differences, expertise in international locations and multiple financial information systems; concerns relating to the protection and security of our personnel and assets; international trade and political disputes; and labor disruptions, civil unrest, political instability, wars or other armed conflict. These risks may be especially significant if we expand into less developed countries that have less political, social or economic stability and more vulnerable infrastructure and legal systems.
These risks may impede our strategy by limiting the countries and regions in which we are able to expand. The impacts of these risks may also only materialize after we have begun preparations and made investments to provide services in this new country or region. The exposure to these risks may adversely affect our ability to repatriate cash or require us to incur additional and/or unanticipated costs to mitigate the impact of these risks on our business.
Additionally, there continues to be a great deal of uncertainty regarding U.S. and global trade policies for companies with multinational operations like ours, and trade policies may change in a manner that disrupts our operations or otherwise negatively affects our business, financial condition and results of operations. As we continue to operate our business globally, our success will depend, in part, on the nature and extent of any such changes and how well we are able to anticipate, respond to and effectively manage any such changes.
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International trade and political disputes can also adversely affect the operations of multinational corporations like ours by limiting or disrupting trade and business activity between countries or regions. For example, we may be required to limit or halt operations, terminate client relationships or forego profitable client opportunities in countries which may, in the future, be subject to sanctions or other restrictions on business activity by corporations such as ours, by U.S., European or Canadian legislation, executive order or otherwise. Some of our clients have been targeted by and may, in the future, be subject to such sanctions. Additionally, failure to resolve the trade dispute between the countries may also lead to unexpected operating difficulties in certain countries, including enhanced regulatory scrutiny, greater difficulty transferring funds or negative currency impacts.
All the foregoing could have a material adverse effect on our business, financial performance, financial condition and prospects.
If we are not able to manage our resource utilization levels or price our services appropriately, our business, reputation, financial performance, financial condition and cash flows may be adversely affected.
Our profitability is largely a function of the efficiency with which we use our resources, particularly our team members and our delivery locations, and the pricing that we are able to obtain for our services. Our resource utilization levels are affected by a number of factors, including our ability to attract, train, and retain team members, transition team members from completed projects to new assignments, forecast demand for our services (including potential client reductions in required resources or terminations) and maintain an appropriate number of team members in each of our delivery locations, as well as our need to dedicate resources to team member training and development. The costs associated with our team members and our delivery locations are also impacted by our ability to quickly implement cost saving initiatives in response to declines in client demand, which may require longer notice periods and other processes that will delay the implementation of these initiatives due to employment regulations in the various jurisdictions in which we operate and/or other factors. The prices we are able to charge for our services are affected by a number of factors, including price competition, our ability to accurately estimate revenues from client engagements, our ability to estimate resources and other costs for long-term pricing, margins and cash flows for long-term contracts, our clients’ perceptions of our ability to add value through our services, introduction of new services or products by us or our competitors, and general economic and political conditions. Therefore, if we are unable to appropriately price our services or manage our resource utilization levels, there could be a material adverse effect on our business, reputation, financial performance, financial condition and cash flows.
TALENT-RELATED RISKS
Our growth prospects are dependent upon attracting and retaining enough qualified team members to support our operations, as competition for talent is intense, and failure to do so may result in an adverse impact on our business and financial results.
Our business is highly competitive and success is dependent on our ability to access, attract and retain skilled labor in diverse markets around the world. Our growth prospects, success and ability to meet our clients’ expectations and our growth objectives depend on our ability to recruit, train and retain team members with the right technical skills and/or language capabilities at competitive cost levels. In many of the geographies we operate there may be a limited pool of potential professionals with the skills we seek and we may not be able to train resources on a timely basis or at all. For example, the success of the TIAI business depends significantly on its ability to attract and retain a large number of individuals to serve as contributors, annotators and/or prompt engineers in various geographic markets and on our ability to upskill resources as required. If individuals choose not to offer their services through the TIAI crowdsourcing solution, or elect to offer them through a competitor’s solution, we may lack a sufficient supply of qualified individuals to service the entirety of our clients’ demand with sufficient speed, scale and quality or at all. The increased competition for these professionals increases our costs to recruit, train and retain team members, in particular, key sales and account management talent, without which it may reduce our ability to gain new business and maintain existing client relationships.
Additionally, our failure to provide training and innovative benefits to our team members could decrease our competitiveness as an employer and adversely impact our ability to attract and retain a skilled workforce. We have had to offer, and believe we will need to continue to offer, differentiated compensation packages, specific to the geography and skill sets of the required team members. We have also had to incur costs to provide specialized services and amenities to our team members that impact the profitability of our business. We may need to make significant investments to attract, train and retain team members and we may not realize sufficient returns on these investments. An increase in the attrition rate among our team members, particularly among our higher-skilled workforce, would increase our recruiting and training costs and decrease our operating efficiency, productivity and profit margins. From time to time, and over the course of 2023 in some regions, we have also experienced higher levels of voluntary attrition, and, in those periods, we have been required to expend time and resources to recruit and retain talent, restructure parts of our organization, and train and integrate new team members. Without the right support, we may see a decline in our ability to meet our clients’ demands, which may negatively impact our reputation and the demand for our services and we may not be able to innovate or execute quickly on our strategy, and our ability to achieve our
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strategic objectives will be adversely impacted and our business will be harmed. In addition, if TIAI’s top clients reduce the volume of services they receive from the TIAI business or otherwise limit, modify or terminate their relationships with us, we may lack sufficient opportunities for our independent contractors to provide annotation services, which may reduce the perceived utility of our solution.
Evolving technologies, competition and/or client demands may entail high costs associated with hiring, training or retaining team members, with the necessary backgrounds and skills to meet our customers’ expectations and to develop new business. Changing team member demographics, organizational changes, inadequate organizational structure and staffing, inadequate team member communication and training, changes in the effectiveness of our leadership, a lack of available career and development opportunities, changes in compensation and benefits, the unavailability of appropriate work processes and tools, client reductions and operational efficiency initiatives may also negatively affect team member morale and engagement, harm our ability to retain acquired talent from our acquisitions, increase team member turnover, increase the cost of talent acquisition and negatively impact service delivery and the customer experience. If we are unable to attract and retain sufficient numbers of highly skilled professionals, our ability to effectively lead our current projects and develop new business could be jeopardized, and our business, reputation and financial performance, financial condition and cash flows could be materially adversely affected.
If we cannot maintain our unique culture as we grow, our services, financial performance and business may be harmed.
We believe that our unique customer-first and caring culture has led to our ability to attract and retain a highly skilled, diverse, engaged and motivated workforce. This has driven our strong client retention and the higher satisfaction scores we receive from our clients’ and their customers, which has, in part, been responsible for our growth and differentiation in the marketplace. It may become more difficult to maintain this unique culture if we continue to evolve our products and services, grow into new geographies, open new delivery locations, increase the number of team members, experience changes to certain members of our management and acquire new companies. If we are not able to manage cultural differences among our team members, we may experience attrition and employment-related claims, which may negatively impact our culture. Further, the shift to remote work that has resulted following the COVID-19 pandemic and its variants and has, in some cases, led to a decline in team member engagement and the reporting by them of a sense of isolation and burnout, which has impacted our retention rates, may continue to do so and may also adversely affect our culture. If our unique culture is not maintained, our ability to attract and retain highly skilled team members and clients may be adversely impacted, and our operational and financial results may be negatively affected.
The limited elasticity of our labor costs relative to short-term movements in client demand could adversely affect our business, financial condition and financial performance.
Our business depends on maintaining large numbers of team members to service our clients’ business needs and on being able to quickly respond to new client programs or new programs for existing clients. We try, where possible, to not terminate team members in response to temporary declines in demand. Rehiring and retraining team members at a later date could force us to incur additional expenses and we may not be able to do so in a timely manner or even find the required skill set. Termination of our team members could have a negative impact on our hiring and recruitment efforts and the morale of the remaining team members and could involve the incurrence of significant additional costs in the form of severance payments, all of which would have an adverse impact on our operating profit margins. Legal requirements related to the termination of team members in the countries and cities where we operate may limit our ability to adjust our labor costs on a timely basis for unexpected changes in client demand, which could have a material adverse effect on our business, financial condition and financial performance. See also “— Our growth prospects are dependent upon attracting and retaining enough qualified team members to support our operations, as competition for highly skilled personnel is intense, and failure to do so may result in an adverse impact on our business and financial results”.
Team member wage increases in certain geographies may prevent us from sustaining our competitive advantage and may reduce our profit margin.
Our most significant costs are the salaries and related benefits of our team members. Our wage costs in certain countries where we operate have historically been significantly lower than wage costs elsewhere, including in particular in North America, which has been one of our competitive advantages. As economic growth increases in the countries where we benefit from lower wage costs, concurrent with increased demand by us and our competitors for skilled employees, wages for comparably skilled employees are increasing at a faster rate than elsewhere, which may, over time, reduce this competitive advantage. Similarly, inflationary pressures have, and could continue to, drive up wage costs in those areas where we operate and we are not always able to, and may not in the future, control such wage increases or pass them on to our clients in full or in any significant part. In connection with potential future growth and inflation, as well as unexpected increases in the complexity of work, we may need to retrain team members or increase our team member compensation more rapidly than in the past to remain competitive in attracting and retaining the quality and number of team members that our business requires, even if we are unable to increase
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the prices of our services. To the extent that we are not able to control or share wage increases with our clients, wage increases may reduce our margins and cash flows. We may not be successful in our attempts to control such costs.
Our policies, procedures and programs to safeguard the health, safety and security of our team members, particular our content moderation team members, may not be adequate.
Despite our best efforts, we may not be able to implement best practices to safeguard our team members, independent contractors, clients and others at our worksites. As a result, we may experience negative impacts to our reputation, team engagement and operations and, where applicable, we may not have any or sufficient insurance coverage for any resultant legal liability or fines arising from health, safety or security incidents.
Of particular consideration are our content moderation team members given the challenging nature of their work, which may result in adverse physiological, psychological or emotional consequences. The wellness and resiliency programs that we provide to support our content moderators may be ineffective in mitigating the effects on them of the content to which they are exposed, which could lead to higher expenses to support our team members, higher levels of voluntary attrition and increased difficulty retaining and attracting team members. If we are not able to effectively attract and retain content moderation team members, we may experience a decline in our ability to meet our clients’ expectations, which may adversely impact our reputation, our revenue and the demand for our services.
We may be required under applicable law to provide accommodations for team members who experience or who assert they are experiencing health consequences as a result of performing content moderation. These accommodations could result in increased costs and reductions in the availability of team members who can perform these tasks, which could have a material adverse effect on our financial results. Our content moderation team members may also make claims under workers’ compensation programs or other public or private insurance programs in connection with negative health consequences experienced in connection with their employment, which could result in increased costs. We may also be exposed to claims by team members under applicable labor and other laws. Such litigation, whether or not ultimately successful, could involve significant legal fees and result in costly remediation, including payments for treatment and ongoing monitoring, preventative intervention and treatment costs, which could have a material adverse effect on our financial results. The measures we have implemented to safeguard the well-being of our team members may not be sufficient to mitigate the effects on team members or our potential liability under applicable law.
Our senior management team is critical to our continued success and the loss of members of that team could have a material adverse effect on our business, financial performance, financial condition and cash flows.
Our future success substantially depends on the continued services and performance of the members of our senior management team, and other key team members possessing certain technical and business capabilities, including industry expertise, that are difficult to replace. Specifically, the loss of the services of members of our senior management team, without immediate and suitable successors, could seriously impair our ability to continue to manage and expand our business. There is intense competition for experienced senior management and personnel with technical and industry expertise in our industry. Although we have entered into employment and non-competition agreements with all of our executive officers, certain terms of those agreements may not be enforceable and, in any event, these agreements do not ensure the continued service of these executive officers. Further, although we have engaged in succession planning for our senior management team, we may not successfully implement those plans. In addition, we currently do not maintain “key person” insurance covering any member of our management team. The loss of any of our key team members, particularly to competitors, without immediate and suitable successors, could have a material adverse effect on our business, financial performance, financial condition and cash flows.
In addition, the senior management of WillowTree continues to be critical to its success as part of the Company. The founder and chief executive of WillowTree and other key team members possessing technical and business capabilities, including industry expertise, could be difficult to replace and the loss of these members of WillowTree’s senior management team, without immediate or suitable successors, could have a material adverse effect on our business, financial performance, financial condition and cash flows.
If more stringent labor laws become applicable to us, if we are subject to more employment-related litigation, if our team members unionize, strike or cause other labor-related disruptions, or become part of workers’ councils, our business and financial results may be adversely affected.
Some of the geographies where we operate have stringent employee-friendly labor legislation, including legislation that results in or imposes financial obligations on employers. Therefore, in some countries, it may be difficult for us to maintain flexible human resources policies to dismiss team members when there is a business need, and our compensation and/or legal expenses may increase significantly. Additionally, in certain of the geographies in which we operate, we are subject to stringent wage and hour requirements, which has exposed us, and we expect will continue to expose us, to claims brought by individual team
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members and team member groups. Although these claims are not individually or in the aggregate material, we may be subject to more such claims in the future.
In addition, some of our team members may form unions, become part of workers’ councils or may become subject to collective bargaining agreements. In certain countries, we are subject to laws that could require us to establish a co-determined supervisory board, which could subject us to significant additional administrative requirements. As a result, we may be required to raise wage levels or grant other benefits that could result in an increase in our compensation expenses or lack of flexibility, or take on increased costs to address administrative requirements, in which case our financial performance and cash flows may be materially and adversely affected.
Furthermore, strikes by, or labor disputes with, our team members at our delivery locations and independent contractors that we retain may adversely affect our ability to conduct business. Work interruptions or stoppages could have a material adverse effect on our business, financial performance, financial condition and cash flows.
Our business would be adversely affected if the individuals providing data annotation services through TIAI’s crowdsourcing solutions were classified as employees and not as independent contractors.
We generally believe that the individuals who provide their data annotation services through TIAI’s crowdsourcing solution are independent contractors. However, the classification of certain individuals who provide their services through third-party platforms as independent contractors, like TIAI’s independent contractors, is currently being challenged in courts, by legislators and by government agencies in the United States, the European Union and other countries. TIAI may be involved in litigation related to this classification. We may not be successful in defending the independent contractor classification in the jurisdictions where we operate or where such classification is challenged. The costs associated with defending, settling, or resolving any future lawsuits (including demands for arbitration) relating to the independent contractor classification could be material to our business.
Changes to laws governing the definition or classification of independent contractors, or judicial decisions regarding independent contractor classification, could require classification of our independent contractors as employees (or workers, quasi-employees or other statuses in jurisdictions where those statuses exist) and/or representation of our crowd members by labor unions. If this were to occur, we could incur significant additional expenses for compensating independent contractors, potentially including expenses associated with the application of wage and hour laws (including minimum wage, overtime, and meal and rest period requirements), employee benefits, social security contributions, taxes (direct and indirect), and penalties. Further, any such reclassification could require us to change our business model for these services, which could consequently have an adverse effect on our business and financial condition.
FINANCIAL RISKS
Three clients account for a significant portion of our revenue and loss of or reduction in business from, or consolidation of, these or any other major clients could have a material adverse effect on our business, financial condition, financial performance and prospects.
We have derived and believe that, in the near term, we will continue to derive, a significant portion of our revenue from a limited number of large clients. For the years ended December 31, 2023, 2022 and 2021, three clients each accounted for more than 10% of our revenues. TELUS Corporation, our controlling shareholder and largest client for the year ended December 31, 2023, accounted for approximately 20.6%, 17.3% and 16.1% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively. Our second largest client for the year ended December 31, 2023, Google, accounted for approximately 13.1%, 11.9% and 11.0% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively. Our third largest client for the year ended December 31, 2023, a leading social media company, accounted for 11.2%, 15.8% and 17.7% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively.
Our largest client, based on our revenue earned from them, is TELUS, our controlling shareholder. We provide services to TELUS under a master services agreement which expires in January 2031 (TELUS MSA). The TELUS MSA provides for a minimum annual spend of $200 million, subject to adjustment in accordance with its terms, although TELUS has the ability to delay or terminate specific services for certain specified reasons with limited notice. See “Item 7B—Related Party Transactions—Our Relationship with TELUS—Master Services Agreement”. In addition, master services agreements with all other clients do not have minimum annual spend and the terms of these master service agreements permit our clients to delay, postpone or even terminate contracted services at their discretion and with limited notice to us.
The volume of work performed for specific clients or the revenue we generate can vary. For example, a client may demand price reductions, change its customer engagement strategy or move work in-house. Also, in many of the verticals in which we offer services, the continued consolidation activity could result in the loss of a client if, as a result of a merger or acquisition involving one or more of our clients, the surviving entity chooses to use one of our competitors for the services we
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currently provide, to reduce the services we provide to them or to provide the services we offer in-house. Our clients may also choose to consolidate their providers as they grow, as their business needs change, or as their leadership changes, and we could be removed from a client’s vendor network or be subject to a reduction in the services we provide. As a result of the foregoing, a major client in one year may not provide the same level of revenue in any subsequent year. Any significant reduction in or elimination of the use of the services we provide as a result of consolidation or our removal from a key client’s vendor network would result in reduced revenue to us and could harm our business. In addition, such consolidation may encourage clients to apply increasing pressure on us to lower the prices we charge for our solutions. All the foregoing could have a material adverse effect on our business, financial condition, financial performance and prospects.
If we are unable to accurately forecast our pricing models or optimize the mix of products and services we provide to meet changing client demands, or if we are unable to adapt to the changing pricing and procurement demands of our clients, our business, financial performance, financial condition and cash flows may be adversely affected.
Our contracts generally use a pricing model that provides for per-productive-hour or per-transaction billing models and compensation for materials and licensing costs. In some of our customer contracts, we commit to long-term pricing structures under which we bear the risk of cost overruns, completion delays, resource requirements, wage inflation and adverse movements in exchange rates in connection with these contracts. Industry pricing models are evolving, and companies are increasingly requesting transaction- or outcome-based pricing or other alternative pricing models, which require us to accurately forecast the cost of performance of the contract against the compensation we expect to receive. Also, we are seeing the commoditization of our services in the market place, where our competitors are offering services similar to ours at a lower cost. While we believe our services to be of higher quality, this commoditization has created competitive, pricing and other pressures, particularly given current macroeconomic conditions, such that our pricing models may not be representative of new contracts, adversely affecting the accuracy of our forecasting. Further, our forecasts are based on a number of assumptions relating to existing and potential contracts with existing and potential clients, including assumptions related to the team members, other resources and time required to perform the services and our clients’ ultimate use of the contracted service. If we make inaccurate assumptions in pricing our contracts, our profitability may be negatively affected. In addition, if the number of our clients that request alternative pricing models continues to increase in line with industry trends, we may be unable to maintain our historical levels of profitability under these evolving alternative pricing models and our financial performance may be adversely affected, or we may not be able to offer pricing that is attractive relative to our competitors. Some of our clients’ may continue to evolve their procurement methodology by increasing the use of alternative methods, such as reverse auctions. These methods may impact our ability to gain new business and maintain profit margins, and may require us to adapt our sales techniques, which we may be unsuccessful in doing in a timely manner or at all.
In addition, the revenue and income generated from the services we provide to our clients may decline or vary as the type and volume of services we provide under our contracts change over time, including as a result of a shift in the mix of products and services provided. For example, our lower-complexity interactions generate services with lower margins compared to our more complex, sensitive and localized content moderation and digital services, and a shift in the mix of these two types of services by a client could cause a meaningful change in our revenue from that client and the profitability of the services we provide. Furthermore, our clients, some of which have experienced significant and adverse changes in their business, substantial price competition and pressures on their profitability, have in the past and may in the future demand price reductions, decrease the volume of work or complexity of the services we are providing to them, automate some or all of their processes or change their customer experience strategy by moving more work in-house or to other providers, any of which could reduce our profitability. Any inability to accurately forecast the pricing that we use for our contracts, or any significant reduction in or the elimination of the use of the services we provide to any of our clients or any requirement to lower our prices that, in each case, we fail to anticipate or fail to anticipate on a timely basis, would harm our business, financial performance, financial condition and cash flows.
Our operating results may experience significant variability and, as a result, it may be difficult for us to make accurate financial forecasts and our actual operating results may experience variability, including falling short of our forecasts.
Our growth has not been, and in the future is not expected to be, linear as our period-to-period results fluctuate due to certain factors, including client demand, a long selling cycle, delays or failures by our clients to provide anticipated business, losses or wins of key clients, variations in team member utilization rates resulting from changes in our clients’ operations, delays or difficulties in expanding our delivery locations and infrastructure (including hiring new team members or constructing new delivery locations), capital investment amounts that may be inappropriate if our financial forecasts are inaccurate, changes to our pricing structure or that of our competitors, currency fluctuations, seasonal changes in the operations of our clients, our ability to recruit, train and retain team members with the right skill set, failure to meet service delivery requirements as a result of technological disruptions, the timing of acquisitions and other events identified in this Annual Report, all of which may significantly impact our results and the accuracy of our forecasts from period to period. For example, the volume of business with some of our clients in our Travel and Hospitality vertical is significantly affected by seasonality, with our revenue typically higher in the third and fourth quarters due to spending patterns of our clients with calendar fiscal years. As a result, it
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may be difficult for us to accurately make financial forecasts and our actual operating results may experience variability, including falling short of our forecasts.
We may need to raise additional funds to pursue our growth strategy or continue our operations, and we may be unable to raise capital when needed or on acceptable terms, which could lead us to be unable to expand or maintain our business.
From time to time, we may seek additional financing to fund our growth, enhance our technology, respond to competitive pressures or make acquisitions or other investments. We cannot predict the timing or amount of any such capital requirements at this time. General economic, financial or political conditions in our markets may deteriorate or other circumstances may arise, which, in each case, may have a material adverse effect on our cash flows and our business, leading us to seek additional capital. We may be unable to obtain financing on satisfactory terms, on a timely basis or at all. In this case, we may be unable to expand our business at the rate desired, or at all, or maintain our business and our financial performance may suffer. Financing through issuances of equity securities would be dilutive to holders of our shares.
If we are unable to collect our receivables from, or bill our unbilled services to, our clients, our financial performance, financial condition and cash flows could be adversely affected.
Our business depends on our ability to successfully obtain payment from our clients for work performed and to bill and collect on what are usually relatively short cycles. We evaluate the financial condition of our clients and maintain allowances against receivables, which we might not accurately assess. Actual losses on client balances could differ from what we anticipate and, as a result, we might need to adjust our allowances. Macroeconomic conditions could result, and have resulted, in financial difficulties for our clients which could cause clients to delay payments to us, request modifications to their payment arrangements or default on their payment obligations to us, including, in some cases, as a result of insolvency or bankruptcy. Timely collection of client balances also depends on our ability to complete our contractual commitments, including delivering on the service level our clients expect, and bill and collect our contracted revenues. If our client is not satisfied with our services or we are otherwise unable to meet our contractual requirements, we might experience delays in the collection of and/or be unable to collect our client balances and, if this occurs, our financial performance, financial condition and cash flows could be adversely affected. In addition, if we experience an increase in the time to bill and collect for our services, our cash flows could be adversely affected.
We are subject to additional regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports. Effective internal controls, together with adequate disclosure controls and procedures, are designed to prevent or detect material misstatement due to fraud or error and to provide reasonable assurance as to the reliability of financial reporting. Deficiencies in our internal controls may adversely affect our management’s ability to record, process, summarize, and report financial data on a timely basis. From time to time we may identify, and have in the past identified, material weaknesses in our internal control over financial reporting. We cannot provide any assurance that we will not identify new material weaknesses or that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. As a public company, we are required by Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) and applicable Canadian securities laws, including National Instrument 52-109—Certification of Disclosure in Issuers’ Annual and Interim Filings, to include a report of management’s assessment on our internal control over financial reporting and an independent auditor’s attestation report on our internal control over financial reporting in our annual reports on Form 20-F or Form 40-F, subject to certain exceptions. If we fail to comply with the applicable requirements of the Sarbanes-Oxley Act or applicable Canadian securities laws, we may be subject to sanctions, investigations or other enforcement actions by regulatory authorities, including the U.S. Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE), applicable Canadian securities regulators or the Toronto Stock Exchange (TSX), as applicable. Additionally, if we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately and timely report on our operating results or financial condition, which could adversely affect investor confidence in our company and the market price of our subordinate voting shares.
In preparing our financial statements, we make certain assumptions, judgments and estimates, including in particular with respect to the book value of our goodwill, that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
In preparing our financial statements, we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results. We make assumptions, judgments and estimates for a number of items, including those listed in “Item 11—Quantitative and Qualitative Disclosures about Market Risk”. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.
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In connection with the acquisition of WillowTree and other acquisitions, we have recorded, and in connection with our acquisition strategy, we anticipate continuing to record a significant amount of goodwill. Our carrying value of goodwill is periodically tested for impairment on an annual basis, or more frequently if events or circumstances indicate that the asset may be impaired. We assess our goodwill by comparing the recoverable amounts of our cash generating unit to its carrying value. To the extent that the carrying value exceeds its recoverable amount, the excess amount would be recorded as a reduction in the carrying value of goodwill and any remainder would be recorded as a reduction in the carrying value of other assets on a prorated basis. In the event that the carrying amount of goodwill is impaired, any such impairment would be charged to earnings in the period of impairment. Since this involves the use of estimates and our judgment, we cannot assure that any future impairment of goodwill will not have a material adverse effect on our financial performance.
We may incur liabilities for which we are not insured, and may suffer reputational damage in connection with certain claims against us.
We could be sued directly for claims that could be significant, such as claims related to breaches of privacy or network security, infringement of intellectual property rights, violation of wage and hour laws, or systemic discrimination, and our contracts may not fully limit or insulate us from those liabilities. Additionally, in our contracts with our clients, we indemnify our clients for losses they may incur for our failure to deliver services pursuant to the terms of service set forth in such service contracts, and a limited number of our service contracts provide for high or unlimited liability for the benefit of our clients related to damages resulting from breaches of privacy or data security in connection with the provision of our services. Although we have various insurance coverage plans in place, that coverage may not continue to be available on reasonable terms or in sufficient amounts to cover one or more claims. The policies may also have exclusions which would limit our ability to recover under them, the limits under the policy may be insufficient, or our insurers may deny coverage following their investigation of a claim. Currently we do not have insurance in place for certain types of claims, such as patent infringement, violation of wage and hour laws, failure to provide equal pay in the United States and our indemnification obligations to our clients based on employment law, because it is either not available or is not economically feasible. The successful assertion of one or more large claims against us that are excluded from our insurance coverage or exceed available insurance coverage, or changes in our insurance policies, could have a material adverse effect on our business, financial performance, financial condition and cash flows. Furthermore, the assertion of such claims, whether or not successful, could cause us to incur reputational damage, which could have a material adverse effect on our business, financial performance, financial condition and cash flows.
We may not be able to comply with the covenants in our credit agreement, service our debt or obtain additional financing on competitive terms, which could result in a default of our credit agreement.
Our credit agreement contains various restrictive covenants. Our ability to comply with the restrictive covenants in our credit agreement, including the total Net Debt to Adjusted EBITDA ratio covenant, as defined in our credit agreement, will depend upon our future performance and various other factors, including but not limited to our financial performance, macroeconomic conditions and competitive factors, many of which are beyond our control. The credit agreement also contains covenants related to our relationship with TELUS, which are not in our control. We may not be able to maintain compliance with all of these covenants. In that event, we may not be able to access the borrowing availability under our credit agreement and we may need to seek an amendment to our credit agreement or refinance our indebtedness. There can be no assurance that we can obtain future amendments of or waivers under our existing and any future credit agreements and instruments, or refinance borrowings under our credit agreement, and, even if we were able to obtain an amendment or waiver in the future, such relief may only last for a limited period. Any noncompliance by us with the covenants under our credit agreement could result in an event of default thereunder, which may allow our lenders to accelerate payment of the related debt and/or to realize on security held by them under the credit agreement. It may also result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event our creditors accelerate the repayment of our indebtedness, we cannot assure you that we would have sufficient assets to make such repayment.
Our cash flow from operating activities will provide the primary source of funds for our debt service payments. If our cash flow from operating activities declines, we may not be able to service or refinance our current debt, which could adversely affect our business and financial condition. Our credit facility exposes us to changes in interest rates. We currently use an interest rate swap to effect a hedging relationship, which converts an amortizing portion of our credit facility to a fixed interest rate, thus reducing a portion of our variable rate interest exposure; however, such hedging activities may not be successful in fully mitigating the risk of increasing interest rates, which may increase our debt service payments.
Fluctuations in foreign currency exchange rates could harm our financial performance.
Our primary operating currency is the U.S. dollar, but we also generate revenue and incur expenses in other currencies, including the European euro, the Philippine peso and the Canadian dollar. As we expand our operations to new countries, our exposure to currency fluctuations will increase. Fluctuations in currency exchange rates between the U.S. dollar and other currencies we transact in may adversely impact our financial results and cash flows.
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Our financial performance could be adversely affected over time by certain movements in exchange rates, particularly if currencies in which we incur expenses appreciate against the U.S. dollar or if the currencies in which we receive revenues depreciate against the U.S. dollar. Although we take steps to hedge a portion of our foreign currency exposures, a portion remains unhedged and there is no assurance that our hedging strategy will be successful or that the hedging markets will have sufficient liquidity or depth for us to implement our strategy in a cost-effective manner. In addition, in some countries such as China, we are subject to legal restrictions on hedging activities, as well as convertibility of currencies, which could limit our ability to use cash generated in one country to invest in another and could limit our ability to hedge our exposures. Finally, our hedging policies only provide near term protection from exchange rate fluctuations. If currencies in which we incur expenses appreciate against the U.S. dollar, we may have to consider additional means of maintaining profitability, including by increasing pricing or reducing costs, which may or may not be achievable.
Our financial condition could be negatively affected if countries reduce or withdraw tax benefits and other incentives currently provided to companies within our industry or if we are no longer eligible for these benefits.
TELUS International operates in multiple jurisdictions with different tax policies and tax rates, which increases our exposures to multiple forms of taxation. Our tax expense and cash tax liability in the future could be adversely affected by various factors, including, but not limited to, changes in tax laws (including tax rates and the potential introduction of global minimum taxes), regulations, accounting principles or interpretations, the potential adverse outcome of tax examinations, our assessment of the availability of certain tax incentives and exemptions and international tax complexity and compliance. Changes in the valuation of deferred tax assets and liabilities, which may result from a decline in our profitability or changes in tax rates or legislation, could have a material adverse effect on our tax expense.
Our subsidiaries file tax returns and pay taxes in the various jurisdictions in which they are resident and carry on their business activities. Our tax expense and cash tax liability (including interest and penalties) could be adversely affected if a country were to successfully argue that any of our subsidiaries is resident in, or carries on business in, a country that is different from any jurisdiction in which it files its tax returns and pays taxes.
Certain cross-border payments may be subject to withholding taxes in the jurisdiction of the payer. Our tax expense and cash tax liability (including interest and penalties) could be adversely affected if a country were to successfully argue that any cross-border payments by our subsidiaries are subject to withholding tax in a manner or at a rate that differs from any amounts actually withheld in respect of any applicable withholding taxes. In addition, our tax expense and cash tax liability (including interest and penalties) could be adversely affected if a country were to successfully dispute the quantum and timing of any deduction related to any cross-border payment.
Additionally, certain of our delivery locations, such as those in India, Philippines, El Salvador and Türkiye, benefit from certain corporate tax incentives, benefits and exemptions. To the extent such favorable tax treatments are disputed, discontinued or phased out (like tax exemptions applicable to our Indian delivery locations), or we lose eligibility for them, our effective tax rate may increase and our financial condition and results of operations could be adversely affected.
Furthermore, our US subsidiaries are subject to the base erosion and anti-abuse tax (BEAT), which was enacted in 2017 as a part of the Tax Cuts and Jobs Act. The BEAT is a minimum tax that applies to the extent that a taxpayer’s BEAT liability exceeds the regular tax liability. The United States Internal Revenue Service (IRS) could disagree with our calculation of the BEAT liability or the interpretations on which those calculations are based and assess additional taxes, interest and penalties, adversely affecting our financial condition and results of operations.
If tax authorities were to successfully challenge the transfer pricing of our cross-border intercompany transactions, our tax liability may be different.
We have cross-border transactions among our subsidiaries in relation to various aspects of our business, including operations, financing, information technology, marketing, sales and delivery functions. Canadian transfer pricing regulations, as well as regulations applicable in other countries in which we operate, require that any cross-border transaction involving associated enterprises be on arm’s-length terms and conditions. We view the cross-border transactions entered into by our subsidiaries to be in accordance with the relevant transfer pricing laws and regulations. If, however, a tax authority in any jurisdiction successfully challenges our position and asserts that the terms and conditions of such cross-border transactions are not on arm’s-length terms and conditions, or that other income of our affiliates should be taxed in that jurisdiction, our tax liability, including accrued interest and penalties, may be different, which could cause our tax expense to be different, possibly materially, thereby changing our profitability and cash flows, which in turn could have a material adverse effect on our financial performance, effective tax rate and financial condition.
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Tax legislation and the results of actions by taxing authorities may have an adverse effect on our operations and our overall tax rate.
The Government of Canada or governing bodies in Canada or in other jurisdictions where we have a presence could enact new tax legislation which could have a material adverse effect on our business, financial performance, financial condition and cash flows. In addition, our ability to repatriate surplus earnings from our delivery locations in a tax-efficient manner is dependent upon interpretations of local laws, possible changes in such laws and the renegotiation of existing bilateral tax treaties. Changes to any of these may adversely affect our overall tax rate, or the cost of our services to our clients, which could have a material adverse effect on our business, financial performance, financial condition and cash flows.
Certain income of our non-Canadian subsidiaries may be taxable in Canada, and if the Canadian tax authorities were to successfully dispute the quantum of such income, our tax expense and tax liability may increase.
Certain income of our non-Canadian subsidiaries that is passive in nature or that has a particular connection to Canada may be taxable in Canada under the “foreign affiliate property income” (FAPI) regime in the Income Tax Act (Canada). Our tax expense and cash tax liability (including interest and penalties) could be adversely affected if the Canadian tax authorities were to successfully dispute the quantum of any FAPI earned by our non-Canadian subsidiaries, thereby adversely affecting our business, financial performance, financial condition and cash flows.
LEGAL & REGULATORY RISKS
We and our clients are subject to laws and regulations globally, which increases the difficulty of compliance and may involve significant costs and risks. Any failure to comply with applicable legal and regulatory requirements could have a material adverse effect on our business, financial performance, financial condition and cash flows.
The jurisdictions where we operate, as well as our contracts, require us to comply with or facilitate our clients’ compliance with numerous, complex, often evolving and sometimes conflicting legal regimes, both domestically and internationally. These laws and regulations relate to a number of aspects of our business, including ESG-related regulations, anti-corruption, internal and disclosure control obligations, data privacy and protection, cybersecurity incident and disclosure requirements, wage-and-hour standards, employment and labor relations, trade protections and restrictions, import and export control, tariffs, taxation, sanctions, data and transaction processing security, payment card industry data security standards, regulation of content moderation and AI-related regulations, records management, user-generated content hosted on websites we operate, privacy practices, data residency, sustainability including climate-related activities, corporate governance, anti-trust and competition, team member and third-party complaints, telemarketing regulations, telephone consumer regulations, government affairs and other regulatory requirements affecting trade and investment. Failure to perform our services in a manner that complies with any such requirements could result in violations of applicable law and in breaches of our contracts with our clients. The application of these laws and regulations to our clients is often unclear, evolving and may at times conflict. The global nature of our operations increases the difficulty of compliance. For example, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by regulations applicable to us or our clients, including Canada’s Corruption of Foreign Public Officials Act, the United States Foreign Corrupt Practices Act and the UK Bribery Act. We cannot provide assurance that our clients will not take actions in violation of our internal policies or Canadian or United States laws. Further, new regulations for climate-change disclosure and other sustainability efforts are being considered in many jurisdictions around the world and may be applied differently in different regions. An increasing number of countries is also considering adopting content moderation and AI-related regulations, including in particular in the European Union and in Canada. Compliance with these laws and regulations may involve significant costs, consume significant time and resources or require changes in our business practices that result in reduced revenue and profitability. We may also face burdensome and expensive governmental investigations or enforcement actions regarding our compliance, including being subject to significant fines. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers or our team members, prohibitions on the conduct of our business, and damage to our reputation, restrictions on our ability to process information, allegations by our clients that we have not performed our contractual obligations or other unintended consequences. In addition, we are required under various laws to obtain and maintain accreditations, permits and/or licenses for the conduct of our business in all jurisdictions in which we have operations and, in some cases, where our clients receive our services, including the United States, Canada and Europe. If we do not maintain our accreditations, licenses or other qualifications to provide our services or if we do not adapt to changes in legislation or regulation, we may have to cease operations in the relevant jurisdictions and may not be able to provide services to existing clients or be able to attract new clients. In addition, evolving regulations, in particular with respect to content moderation and AI, may impose additional restrictions or requirements on certain of our service offerings, which may increase the cost of service delivery or make our offerings less profitable or less attractive to our clients. Our failure to comply with applicable legal and regulatory requirements could have a material adverse effect on our business, financial performance, financial condition and cash flows.
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We and the third parties to whom we outsource services have experienced and continue to experience cyber-attacks.
Our network infrastructure is vulnerable to rapidly evolving cyber-attacks, and our user data and corporate systems and security measures may be breached due to the actions of outside parties (including malicious cyberattacks), team member or vendor error, malfeasance, internal bad actors, a combination of these, or otherwise. A breach may allow an unauthorized party to obtain access to or exfiltrate our data or our users’ or clients’ data. Additionally, outside parties may attempt to fraudulently induce team members, suppliers, users or clients to install malicious software, disclose sensitive information or access credentials, or take other actions that may provide access to our data or our users’ or clients’ data. Because modern networking and computing environments are increasing in complexity and techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, increase in sophistication over time or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we may be unable to anticipate these techniques, implement adequate preventative measures, or timely detect a compromise. If an actual or perceived breach of our security occurs (or a breach of a client’s security that can be attributed to our fault or is perceived to be our fault), the market perception of the effectiveness of our security measures could be harmed and we could lose clients. Security breaches also expose us to a risk of loss of this information, class action or other litigation brought both by clients and by individuals whose information was compromised, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability.
While we believe our team members undergo appropriate training with respect to cybersecurity and privacy, if any person, including any of our team members, negligently disregards or unintentionally or intentionally breaches controls or procedures with which we are responsible for complying with respect to such data or otherwise mismanages or misappropriates that data, or if unauthorized access to or disclosure of data in our possession or control occurs, we could be subject to significant liability to our clients or our clients’ customers for breaching contractual confidentiality and security provisions or for permitting access to personal information subject to privacy laws, as well as liability and penalties in connection with any violation of applicable privacy laws or criminal prosecution. Unauthorized disclosure of sensitive or confidential client or team member data, whether through breach of computer systems, systems failure, team member or vendor error or negligence, fraud or misappropriation, or otherwise, could damage our reputation and cause us to lose clients and result in liability to individuals whose information was compromised. Similarly, unauthorized access to or through our information systems and networks or those we develop or manage for our clients, whether by our team members or third parties, could result in negative publicity, damage to our reputation, loss of clients or business, class action or other litigation, costly regulatory investigations and other potential liability.
In addition, certain third parties to whom we outsource certain of our services or functions, or with whom we interface, store our information assets or our clients’ confidential information, as well as those third parties’ providers, are also subject to the risks outlined above. Although we generally require our vendors to hold sufficient liability insurance and provide indemnification for any liability resulting from the vendor’s breach of the services agreement, a breach or attack affecting these third parties, any delays in our awareness of the occurrence of such breach or attack, or our any third parties’ inability to promptly remedy such a breach or attack, could also harm our reputation, business, financial performance, financial condition and cash flows, and could subject us to liability for damages to our clients and their customers. As part of our due diligence efforts, we require our suppliers to complete privacy and security assessments and we endeavor to include provisions in our contracts requiring compliance with IT security and privacy and data protection best practices and provisions granting us the right to audit compliance with these requirements. These efforts to ensure third parties have robust cybersecurity and privacy capabilities may not be sufficient to adequately protect our Company and its assets. Further, failure to select third parties that have robust cybersecurity and privacy capabilities may also jeopardize our ability to attract new clients, who may factor their assessment of risks of retaining us to include the risks posed by such third parties. Cyber-attacks penetrating the network security of our data centers or any unauthorized disclosure or access to confidential information and data of our clients or their end customers could also have a negative impact on our reputation and client confidence, which could have a material adverse effect on our business, financial performance, financial condition and cash flows.
The unauthorized disclosure of sensitive or confidential data (including customer, client, and/or employee data), through cyberattacks or otherwise, could expose us to potential harms including fines, fees, or penalties, protracted and costly litigation, reputational damage, and loss of business relationships.
We process, and sometimes collect and/or store sensitive data, including, but not limited to, personal data regulated by the General Data Protection Regulation (GDPR), The Personal Information Protection and Electronic Documents Act, California Consumer Privacy Act (CCPA), the California Invasion of Privacy Act, Personal Data Protection Bill of 2018, and the Data Privacy Act of 2012, of our clients’ end customers in connection with our services, including names, addresses, social security numbers, personal health information, credit card account numbers, checking and savings account numbers and payment history records, such as account closures and returned checks. In addition, we collect and store data regarding our team members. As a
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result, we are or may be subject to various data protection laws and regulations (as described above), and other industry-specific regulations and privacy laws and standards in the countries in which we operate, including the GDPR, the CCPA, HIPAA, the Health Information Technology for Economic and Clinical Health Act and the Payment Card Industry Data Security Standard. Failure to comply with applicable laws, regulations and standards could result in significant fines and penalties. The legislative and regulatory frameworks for privacy issues are rapidly evolving in many jurisdictions where we operate and are likely to remain uncertain and dynamic for the foreseeable future. The interpretation and application of such legal and regulatory regimes is often unclear or unsettled, and they may be interpreted and applied in a manner inconsistent with our current policies and practices, which may require changes to the features of our company’s platform or prohibit certain of our operations in certain jurisdictions. In addition, certain jurisdictions have adopted laws and regulations that restrict the transfer of data belonging to residents outside of their country. These laws and regulations could limit our ability to transfer such data to the locations in which we conduct operations, which would place limitations on our ability to operate our business.
Many jurisdictions, including all U.S. states, have enacted laws requiring companies to notify individuals and, in some instances, regulatory or other authorities of security breaches involving certain types of personal information. In addition, our agreements with our clients may obligate us to investigate and notify our clients of, and provide cooperation to our clients with respect to, such breaches. Many of our agreements with our clients do not include any limitation on our liability to them with respect to breaches of our obligation to keep the information we receive from them confidential. A failure to timely comply with these notification requirements could expose us to liability, including through statutory fines, fees, and penalties, as well as litigation on behalf of impacted clients or individuals.
Companies in the European Union have faced fines for violations of certain provisions under the GDPR and foreign governments outside of the European Union are taking steps to fortify their data privacy laws and regulations. For example, Brazil, India, the Philippines as well as some countries in Central America and Asia-Pacific and some U.S. states, have implemented or are considering GDPR-like data protection laws which could impact our engagements with clients (existing and potential), vendors and team members in those countries. The GDPR and the introduction of similar legislation in other jurisdictions increases the cost of regulatory compliance and increases the risk of non-compliance therewith, which could have an adverse effect on our business, financial performance, financial condition and cash flows.
Although our network security and the authentication of our customer credentials are designed to protect against unauthorized disclosure, alteration and destruction of, and access to, data on our networks, it is impossible for such security measures to be perfectly effective. There can be no assurance that such measures function as expected or are sufficient to protect our network infrastructure against attacks or other failures that could lead to data compromise, and there can be no assurance that such measures successfully prevent or mitigate service interruptions or further security incidents. Any actual or
perceived data compromise could have a negative impact on our reputation and client confidence, which could have a material
adverse effect on our business, financial performance, financial condition and cash flows.
Our team members, contractors, consultants or other associated parties may behave in contravention of our internal policies or laws and regulations applicable to us, or otherwise act unethically or illegally, which could harm our reputation or subject us to liability.
We have implemented and periodically review and update internal policies, including a code of ethics and conduct and policies related to security, privacy, respectful behavior in the workplace, anti-bribery and anti-corruption, security, localized labor and employment regulations, health and safety and securities trading in order to promote and enforce ethical conduct and compliance with laws and regulations applicable to us. Compliance with these policies requires awareness and understanding of the policies and any changes therein by the parties to whom they apply. We may fail to effectively or timely communicate internal policies or changes therein to our team members, contractors, consultants or other associates, and such persons may otherwise fail to follow our policies for reasons beyond our control. We are exposed to the risk that our team members, independent contractors, consultants or other associates may engage in activity that is unethical, illegal or otherwise contravenes our internal policies or the laws and regulations applicable to us, whether intentionally, recklessly or negligently. It may not always be possible to identify and deter misconduct, and the precautions we take to detect and prevent this activity may be ineffective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including harm to our reputation and the imposition of significant fines or other sanctions, all of which could have a material adverse effect on our client relationships, business, financial condition and financial performance.
Our business could be materially and adversely affected if we do not protect our intellectual property or if our services are found to infringe on the intellectual property of others.
Our success depends in part on certain methodologies, practices, tools and technical expertise. We engage in designing, developing, implementing and maintaining applications and other proprietary materials. In order to protect our rights in these various materials, we may seek protection under trade secret, patent, copyright and trademark laws. We also generally enter into
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confidentiality and nondisclosure agreements with our clients and potential clients, and third-party vendors, and seek to limit access to and distribution of our proprietary information. For our team members and independent contractors, we require confidentiality and proprietary information agreements. These measures may not prevent misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive advantage. Additionally, we may not be successful in obtaining or maintaining trademarks for which we have applied.
We may be unable to protect our intellectual property and proprietary technology or brand effectively, which may allow competitors to duplicate our technology and products and may adversely affect our ability to compete with them. Given our international operations, the laws, rules, regulations and treaties in effect in the jurisdictions in which we operate, the contractual and other protective measures we take may not be adequate to protect us from misappropriation or unauthorized use of our intellectual property, or from the risk that such laws could change. To the extent that we do not protect our intellectual property effectively, other parties, including former team members, with knowledge of our intellectual property may leave and seek to exploit our intellectual property for their own or others’ advantage. We may not be able to detect unauthorized use and take appropriate steps to enforce our rights, and any such steps may not be successful. Infringement by others of our intellectual property, including the costs of enforcing our intellectual property rights, may have a material adverse effect on our business, financial performance, financial condition and cash flows.
In addition, competitors or others may allege that our systems, processes, marketing, data usage or technologies infringe on their intellectual property rights. Non-practicing entities may also bring baseless, but nonetheless costly to defend, infringement claims. We could be required to indemnify our clients, particularly in the case of larger projects and clients, if they are sued by a third party for intellectual property infringement arising from materials that we have provided to the clients in connection with our services and deliverables. We may not be successful in defending against such intellectual property claims, regardless of whether a successful defense can be established, or in obtaining licenses or an agreement to resolve any intellectual property disputes. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, we cannot provide assurances that a future assertion of an infringement claim against us or our clients will not cause us to alter our business practices, lose significant revenues, incur significant license, royalty or technology development expenses, or pay significant monetary damages or legal fees and costs. Any such claim for intellectual property infringement may have a material adverse effect on our business, reputation, financial performance, financial condition and cash flows.
We may be subject to litigation and other disputes, which could result in significant liabilities and adversely impact our financial results.
From time to time, we are subject to lawsuits, arbitration proceedings, and other claims brought or threatened against us in the ordinary course of business. These actions and proceedings may involve claims for, among other things, compensation for personal injury, workers’ compensation, employment discrimination, wage and hour and other employment-related damages, damages related to breaches of privacy or data security, breach of contract, property damage, liquidated damages, consequential damages, punitive damages and civil penalties or other losses, or injunctive or declaratory relief. In addition, we may also be subject to actions by state regulators and other government entities, class action lawsuits, including those alleging violations of the Fair Labor Standards Act, state and municipal wage and hour laws, or the laws applicable to the classification of independent contractors.
Due to the inherent uncertainties of litigation, particularly class action lawsuits, and other dispute resolution proceedings, we cannot accurately predict their ultimate outcome. Accordingly, the magnitude of the potential loss may remain unknown for substantial periods of time, we may be required to devote substantial resources to defend such lawsuits and our costs could be substantial. The ultimate resolution of any litigation or proceeding through settlement, mediation, or a judgment could have a material adverse impact on our reputation and adversely affect our financial performance and financial position.
TELUS RELATIONSHIP RISKS
TELUS and its directors and officers have limited liability to us and could engage in business activities that could be adverse to our interests and negatively affect our business.
TELUS and its directors and officers have no legal obligation to refrain from engaging in the same or similar business activities or lines of business as we do or from doing business with any of our clients. Any such activities could be averse to our interests and could negatively affect our business, financial performance, financial condition and cash flows.
Potential indemnification liabilities to TELUS pursuant to various intercompany agreements could materially and adversely affect our businesses, financial condition, financial performance and cash flows.
The agreements between us and TELUS, among other things, provide for indemnification obligations designed to make us financially responsible for liabilities that may exist relating to our business activities. If we are required to indemnify TELUS
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under the circumstances set forth in the agreements we enter into with TELUS, we may be subject to substantial liabilities. Please refer to “Item 7B—Related Party Transactions—Our Relationship with TELUS”.
Certain of our executive officers and directors may have actual or potential conflicts of interest.
Certain of our executive officers and directors may have relationships with third parties that could create, or appear to create, potential conflicts of interest. Our executive officers and directors who are executive officers and directors of our significant shareholders could have, or could appear to have, conflicts of interests such as where our significant shareholders are required to make decisions that could have implications for both them and us. See “Management”.
We may have received better terms from unaffiliated third parties than the terms we will receive in our agreements with TELUS.
We entered into a number of agreements with TELUS, including the TELUS MSA, the transition and shared services agreement, the master reseller agreement and the network infrastructure services agreement. These agreements were negotiated by us with TELUS and may not reflect terms that would have been agreed to in an arm’s-length negotiation between unaffiliated third parties. For more information on the agreements we have entered into, or will enter into, please refer to the section entitled “Item 7B—Related Party Transactions”.
SUBORDINATE VOTING SHARES RISKS
The dual-class structure contained in our articles has the effect of concentrating voting control with TELUS, which impacts our ability to influence corporate matters that are subject to a shareholder vote.
We have two classes of shares outstanding: multiple voting shares and subordinate voting shares. Our multiple voting shares have ten votes per share and our subordinate voting shares have one vote per share. TELUS and BPEA are the only shareholders who hold the multiple voting shares. As of the date hereof, TELUS has approximately 85.4% of the combined voting power of our outstanding shares and BPEA has approximately 10.5% of the combined voting power of our outstanding shares.
As a result of the dual-class share structure, TELUS controls a majority of the combined voting power of our shares and therefore is able to control all matters submitted to our shareholders for approval until such date that TELUS sells its multiple voting shares, chooses to voluntarily convert them into subordinate voting shares or it retains less than 10% of our outstanding shares on a combined basis, which would result in the automatic conversion of its remaining multiple voting shares into subordinate voting shares. This concentrated control limits or precludes your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transaction requiring shareholder approval. The voting control may also prevent or discourage unsolicited acquisition proposals that you may feel are in your best interest as one of our shareholders. Future transfers by holders of multiple voting shares, other than permitted transfers to such holders’ respective affiliates or to other permitted transferees, will result in those shares automatically converting to subordinate voting shares, which will have the effect, over time, of increasing the relative voting power of those holders of multiple voting shares who retain their multiple voting shares. For additional information, see “Item 10B—Memorandum and Articles of Association”.
In addition, because of the ten to one voting ratio between our multiple voting shares and subordinate voting shares, the holders of our multiple voting shares will continue to control a majority of the combined voting power of our outstanding shares even where the multiple voting shares represent a substantially reduced percentage of our total outstanding shares. The concentrated voting control of holders of our multiple voting shares will limit the ability of our subordinate voting shareholders to influence corporate matters for the foreseeable future, including the election of directors as well as with respect to decisions regarding amending of our share capital, creating and issuing additional classes of shares, making significant acquisitions, selling significant assets or parts of our business, merging with other companies and undertaking other significant transactions. As a result, holders of multiple voting shares will have the ability to influence or control many matters affecting us and actions may be taken that our subordinate voting shareholders may not view as beneficial. The market price of our subordinate voting shares could be adversely affected due to the significant influence and voting power of the holders of multiple voting shares. Additionally, the significant voting interest of holders of multiple voting shares may discourage transactions involving a change of control, including transactions in which an investor, as a holder of the subordinate voting shares, might otherwise receive a premium for the subordinate voting shares over the then-current market price, or discourage competing proposals if a going private transaction is proposed by one or more holders of multiple voting shares.
Even if TELUS were to control less than a majority of the voting power of our outstanding shares, it may be able to influence the outcome of such corporate actions due to the director appointment rights and special shareholder rights we granted to TELUS in our shareholders’ agreement. See “—TELUS will, for the foreseeable future, control the direction of our business, and the concentrated ownership of our outstanding shares and our entry into a shareholders’ agreement with TELUS will prevent you and other shareholders from influencing significant decisions”.
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TELUS will, for the foreseeable future, have the ability to control the direction of our business, and the concentrated ownership of our outstanding shares and our shareholders’ agreement with TELUS will prevent you and other shareholders from influencing significant decisions.
We entered into an amended shareholders’ agreement with TELUS and BPEA providing for certain director nomination and a number of special shareholder rights for TELUS. Under the terms of the shareholders’ agreement, we agreed that our Board will consist of 11 directors, unless TELUS determines otherwise. We also agreed to nominate six individuals designated by TELUS as directors for as long as TELUS continues to beneficially own at least 50% of the combined voting power of our outstanding multiple voting shares and subordinate voting shares. Should TELUS cease to own at least 50% of the combined voting power of our outstanding multiple voting shares and subordinate voting shares, we have agreed to nominate to our Board such number of individuals designated by TELUS in proportion to its combined voting power, for so long as TELUS continues to beneficially own at least 5% of combined voting power of our outstanding multiple voting shares and subordinate voting shares, subject to a minimum of at least one director. In addition, the shareholders’ agreement provides that: (1) for so long as TELUS continues to beneficially own at least 50% of the combined voting power of our multiple voting shares and subordinate voting shares, TELUS will be entitled, but not obligated, to select the chair of the Board and the chairs of the human resources committee (Human Resources Committee or HRC) and governance and nominating committee (Governance and Nominating Committee or GNC); and (2) for so long as TELUS has the right to designate a nominee to our Board, it will also be entitled, but not obligated, to designate at least one nominee to our Human Resources Committee and Governance and Nominating Committee and one nominee for our appointment to our audit committee (Audit Committee or AC); provided that such Audit Committee nominee will be independent, and in each case of (1) and (2), subject to compliance with the independence requirements of applicable securities laws and listing requirements of the NYSE and the TSX. Under the shareholders’ agreement, TELUS also has the right to designate one director as an observer to the Audit Committee. The shareholders’ agreement had originally provided for committee appointment rights for BPEA, but it has been amended to eliminate such rights. For more information on these director nomination rights, see “Item 7B—Related Party Transactions—Our Relationship with TELUS and BPEA—Shareholders’ Agreement”.
As of the date hereof, TELUS has approximately 85.4% of the combined voting power of our outstanding shares. Pursuant to the amended shareholders’ agreement, BPEA has agreed not to, directly or indirectly, sell, transfer or otherwise dispose of any multiple voting shares or subordinate voting shares in any transaction or series of transactions over a three-month period with gross proceeds of $30 million or more without first providing TELUS with a right to purchase such shares. Should such right of first offer be provided and exercised, the combined voting power of our outstanding shares held by TELUS may increase further. As long as TELUS controls at least 50% of the combined voting power of our outstanding shares, it will generally be able to determine the outcome of all corporate actions requiring shareholder approval, including the election and removal of directors. Even if TELUS were to control less than 50% of the combined voting power of our outstanding shares, it will be able to influence the outcome of such corporate actions due to its director appointment rights .
In addition, pursuant to the shareholders’ agreement, until TELUS ceases to hold at least 50% of the combined voting power of our outstanding shares, TELUS will have special shareholder rights related to certain matters including, among others, approving the selection, and the ability to direct the removal, of our chief executive officer, approving the increase or decrease of the size of our Board, approving the issuance of multiple voting shares and subordinate voting shares, approving amendments to our articles and authorizing entering into a change of control transaction, disposing of all or substantially all of our assets, and commencing liquidation, dissolution or voluntary bankruptcy or insolvency proceedings. As a result, certain actions that our Board would customarily decide will require consideration and approval by TELUS and our ability to take such actions may be delayed or prevented, including actions that our other shareholders, including you, may consider favorable. We will not be able to terminate or amend the shareholders’ agreement, except in accordance with its terms. See “Item 7B—Related Party Transactions—Our Relationship with TELUS—Shareholders’ Agreement”. We also entered into a collaboration and financial reporting agreement with TELUS that, among other things, specifies that certain matters or actions we take require advance review and consultation with TELUS. The agreement also stipulates certain actions that require Board approval. See “Item 7B—Related Party Transactions—Collaboration and Financial Reporting Agreement”.
TELUS’ interests may not be the same as, or may conflict with, the interests of our other shareholders. Holders of our subordinate voting shares will not be able to affect the outcome of any shareholder vote while TELUS controls the majority of the combined voting power of our outstanding shares and TELUS will also be able to exert significant influence over our Board through its director nomination rights.
As TELUS’ interests may differ from ours or from those of our other shareholders, actions that TELUS takes with respect to us, as our controlling shareholder and pursuant to its rights under the shareholders’ agreement, may not be favorable to us or our other shareholders. TELUS has indicated that it intends to remain our controlling shareholder for the foreseeable future.
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Our dual-class structure may render our subordinate voting shares ineligible for inclusion in certain stock market indices, and thus adversely affect the trading price and liquidity of our subordinate voting shares.
We cannot predict whether our dual-class structure will result in a lower or more volatile market price of our subordinate voting shares, in negative publicity or other adverse consequences. Certain index providers have announced restrictions on including companies with multi-class share structures in certain of their indices. For example, S&P Dow Jones has changed its eligibility criteria for inclusion of shares of public companies on the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500, to exclude companies with multiple classes of shares. As a result, our dual-class structure may prevent the inclusion of our subordinate voting shares in such indices, and mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not be able to invest in our subordinate voting shares, each of which could adversely affect the trading price and liquidity of our subordinate voting shares. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structure and our dual-class structure may cause shareholder advisory firms to publish negative commentary about our corporate governance, in which case the market price and liquidity of the subordinate voting shares could be adversely affected.
We are a controlled company within the meaning of the listing requirements of the NYSE and, as a result, we rely on exemptions from certain corporate governance requirements; you will not have the same protections afforded to shareholders of companies that are subject to such requirements.
TELUS controls a majority of the combined voting power in our company, which means we qualify as a controlled company within the meaning of the corporate governance standards of the NYSE. We have elected to be treated as a controlled company. Under these rules, we have elected not to comply with certain corporate governance requirements, including the requirements that: our Board is composed of a majority of independent directors, as defined under the NYSE listing requirements; our Human Resources Committee is composed entirely of independent directors; and our Nominating and Governance Committee is composed entirely of independent directors.
As a result, our Board is not composed of a majority of independent directors. Although our Audit Committee is composed entirely of independent directors, we do not expect that our Human Resources Committee and Governance and Nominating Committees will be composed entirely of independent directors for the foreseeable future.
If TELUS sells a controlling interest in us to a third party in a private transaction, we may become subject to the control of a presently unknown third party.
TELUS owns a controlling interest in our company. TELUS has the ability, should it choose to do so, to sell its controlling interest in us in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company. Such a transaction could occur without triggering the rights under the Coattail Agreement (as defined in “Item 10B—Memorandum and Articles of Association—Certain Important Provisions of our Articles and the BCBCA—Take-Over Bid Protection”) and may occur even if the multiple voting shares are converted into subordinate voting shares.
If TELUS privately sells its controlling interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other shareholders. In addition, if TELUS sells a controlling interest in our Company to a third party, our future indebtedness may be subject to acceleration and our other commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described herein and may have a material adverse effect on our business, financial performance, financial condition and cash flows.
Holders of our subordinate voting shares may be subject to dilution resulting from an investment by certain eligible management team members in subordinate voting shares of our Company in connection with the WillowTree acquisition.
Certain eligible management team members of WillowTree reinvested in our Company at the closing of the acquisition, in the form of securities to be settled over three years beginning in 2026, subject to certain performance-based criteria, in cash or in a combination of cash and up to 70% in subordinate voting shares at our option. Should we elect to settle such reinvestment securities in subordinate voting shares, holders of our subordinate voting shares will be subject to dilution. The greater the proportion of the reinvestment that we elect to settle in subordinate voting shares and the better the performance of WillowTree, the greater the expected extent of the dilution will be.
As a foreign private issuer, we are not subject to certain U.S. securities law disclosure requirements that apply to a domestic U.S. issuer, which may limit the information publicly available to our shareholders.
As a foreign private issuer we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and therefore there may be less publicly available information about us than if we were a U.S. domestic issuer. For example, we are not subject to the proxy rules in the United States and disclosure with respect to our annual meetings is governed by Canadian requirements. In addition, our officers, directors and principal shareholders are exempt from
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the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules thereunder. Therefore, our shareholders may not know on a timely basis when our officers, directors and principal shareholders purchase or sell our securities.
We are exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While we comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the Exchange Act and Regulation FD, and holders of our subordinate voting shares should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. Additionally, we have four months after the end of each fiscal year to file our annual report with the SEC and are not required under the Exchange Act to file or furnish quarterly reports with the SEC as promptly as U.S. domestic companies whose securities are registered under the Exchange Act.
Additionally, as a foreign private issuer, we are not required to file or furnish quarterly and current reports with respect to our business and financial performance. We intend to continue to submit, on a quarterly basis, interim financial data to the SEC under cover of the SEC’s Form 6-K. Furthermore, as a foreign private issuer, we intend to continue to take advantage of certain provisions in the NYSE listing requirements that allow us to follow Canadian law for certain governance matters. See “Item 16G—Corporate Governance”.
Our operating results and share price may be volatile, and the market price of our subordinate voting shares may drop below the price you pay.
Our quarterly operating results are likely to fluctuate in the future in response to numerous factors, many of which are beyond our control, including each of the risks set forth in this section. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general natural, economic, market or political conditions, could subject the market price of our subordinate voting shares to price fluctuations regardless of our operating performance. Our operating results and the trading price of our subordinate voting shares may fluctuate in response to various factors, including the risks described above.
These and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our subordinate voting shares to fluctuate substantially. Fluctuations in our quarterly operating results could limit or prevent investors from readily selling their subordinate voting shares and may otherwise negatively affect the market price and liquidity of subordinate voting shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the shares. If any of our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation. We may also decide to settle lawsuits on unfavorable terms. Furthermore, during the course of litigation, there could be negative public announcements of the results of hearings, motions or other interim proceedings or developments, which could have a negative effect on the market price of our subordinate voting shares.
The market price of our subordinate voting shares may be affected by low trading volume.
The relatively low trading volume of our subordinate voting shares may limit your ability to sell your shares. Although our subordinate voting shares are listed for trading on the NYSE and the TSX, the trading volume has not been significant. Additionally, a large percentage of our share capital currently consists of multiple voting shares, which are not listed for trading on an exchange. Reported average daily trading volume in our subordinate voting shares in 2023 has been approximately 220,170 subordinate voting shares on the NYSE and 211,657 subordinate voting shares on the TSX. Limited trading volume subjects our subordinate voting shares to greater price volatility in response to news in the market and may make it difficult for you to sell your subordinate voting shares at a price that is attractive to you. Low volume can also reduce liquidity, which could adversely affect the market price of our subordinate voting shares. In addition, in the past, when the market price of a security has been volatile, holders of that security have instituted securities class action litigation against the company that issued the security. If our shareholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could adversely affect our profitability and reputation.
Future sales, or the perception of future sales, by us or our shareholders in the public market could cause the market price for our subordinate voting shares to decline.
Sales of a substantial number of our subordinate voting shares in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of subordinate voting shares or multiple voting shares that are convertible into subordinate voting shares, intend to sell, could reduce the market price of our subordinate voting shares. In December 2023, BPEA converted 32,550,000 of its multiple voting shares into subordinate voting shares.
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We have no current plans to pay regular cash dividends on our shares and, as a result, you may not receive any return on investment unless you sell your shares for a price greater than that which you paid for it.
We do not anticipate paying any regular cash dividends on our shares for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our financial performance, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our shares is solely dependent upon the appreciation of the price of our shares on the open market, which may not occur. See “Item 8A—Consolidated Statements and Other Financial Information—Dividend Policy” for more detail.
Our articles, and certain Canadian legislation contain provisions that may have the effect of delaying or preventing a change in control, limit attempts by our shareholders to replace or remove our current directors and affect the market price of our subordinate voting shares.
Certain provisions of our articles, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors may be willing to pay for our subordinate voting shares. For instance, our articles contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders’ meetings. A non-Canadian must file an application for review with the minister responsible for the Investment Canada Act and obtain approval of the Minister prior to acquiring control of a “Canadian business” within the meaning of the Investment Canada Act, where prescribed financial thresholds are exceeded. Furthermore, limitations on the ability to acquire and hold our subordinate voting shares and multiple voting shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. Otherwise, there are no limitations either under the laws of Canada or British Columbia, or in our articles on the rights of non-Canadians to hold or vote our subordinate voting shares and multiple voting shares. Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders. See “Item 10B—Memorandum and Articles of Association—Certain Important Provisions of Our Articles and the BCBCA”.
Because we are a corporation incorporated in British Columbia and some of our directors and officers are residents of Canada, it may be difficult for investors in the United States to enforce civil liabilities against us based solely upon the federal securities laws of the United States. Similarly, it may be difficult for Canadian investors to enforce civil liabilities against our directors and officers residing outside of Canada.
We are a corporation incorporated under the laws of the Province of British Columbia with our principal place of business in Vancouver, Canada. Some of our directors and officers and the experts named herein are residents of Canada and all or a substantial portion of our assets and those of such persons are located outside the United States. Consequently, it may be difficult for U.S. investors to effect service of process within the United States upon us or our directors or officers or such experts who are not residents of the United States, or to realize in the United States upon judgments of courts of the United States predicated upon civil liabilities under the U.S. Securities Act of 1933, as amended (Securities Act). Investors should not assume that Canadian courts: (1) would enforce judgments of U.S. courts obtained in actions against us or such persons predicated upon the civil liability provisions of the U.S. federal securities laws or the securities or blue sky laws of any state within the United States or (2) would enforce, in original actions, liabilities against us or such persons predicated upon the U.S. federal securities laws or any such state securities or blue sky laws.
Similarly, some of our directors and officers are residents of countries other than Canada and the assets of such persons may be located outside of Canada. As a result, it may be difficult for Canadian investors to initiate a lawsuit within Canada against these non-Canadian residents, and it may be difficult to realize upon or enforce in Canada any judgment of a court of Canada against these non-Canadian residents since a substantial portion of the assets of such persons may be located outside of Canada. In addition, it may not be possible for Canadian investors to collect from these non-Canadian residents on judgments obtained in courts in Canada predicated on the civil liability provisions of securities legislation of certain of the provinces and territories of Canada. It may also be difficult for Canadian investors to succeed in a lawsuit in the United States, based solely on violations of Canadian securities laws.
There could be adverse tax consequences for our shareholders in the United States if we are a passive foreign investment company.
Based on the Company’s income, assets and business activities, the Company does not believe that it was a “passive foreign investment company” (PFIC) for its 2023 taxable year and the Company expects that it will not be classified as a PFIC for U.S. federal income tax purposes for its current taxable year or in the near future. The determination of PFIC status is made annually at the end of each taxable year and is dependent upon a number of factors, some of which are beyond the Company’s control, including the relative values of the Company’s assets and its subsidiaries, and the amount and type of their income. As a result, there can be no assurance that the Company will not be a PFIC in 2024 or any subsequent year or that the IRS will agree with
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the Company’s conclusion regarding its PFIC status and would not successfully challenge our position. If we are a PFIC for any taxable year during which a U.S. person holds our subordinate voting shares, such U.S. person may suffer certain adverse U.S. federal income tax consequences, including the treatment of gains realized on the sale of subordinate voting shares as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on subordinate voting shares by individuals who are U.S. persons, the addition of interest charges to the tax on such gains and certain distributions and increased U.S. federal income tax reporting requirements. If, contrary to current expectations, we were a PFIC for U.S. federal income tax purposes, certain elections (such as a mark-to-market election or qualified electing fund election) may be available to U.S. shareholders that may mitigate some of these adverse U.S. federal income tax consequences. U.S. purchasers of our subordinate voting shares are urged to consult their tax advisors concerning United States federal income tax consequences of holding our subordinate voting shares if we are considered to be a PFIC. See the discussion under “Item 10E—U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.
Our articles provide that any derivative actions, actions relating to breach of fiduciary duties and other matters relating to our internal affairs will be required to be litigated in Canada or the United States, as the case may be, which could limit your ability to obtain a favorable judicial forum for disputes with us.
Our articles include a forum selection provision that provides that, unless we consent in writing to the selection of an alternative forum, the Supreme Court of British Columbia, Canada and the appellate courts therefrom, will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf; (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us; (iii) any action or proceeding asserting a claim arising pursuant to any provision of the Business Corporations Act (British Columbia) (BCBCA) or our articles; or (iv) any action or proceeding asserting a claim otherwise related to the relationships among us, our affiliates and their respective shareholders, directors and/or officers, but excluding claims related to our business or such affiliates. The forum selection provision also provides that our security holders are deemed to have consented to personal jurisdiction in the Province of British Columbia and to service of process on their counsel in any foreign action initiated in violation of the foregoing provisions. This provision does not apply to any causes of action arising under the Securities Act, or the Exchange Act. The Securities Act provides that both federal and state courts have concurrent jurisdiction over suits brought to enforce any duty or liability under the Securities Act or the rules and regulations thereunder, and the Exchange Act provides that federal courts have exclusive jurisdiction over suits brought to enforce any duty or liability under the Exchange Act or the rules and regulations thereunder. Unless we consent in writing to the selection of an alternative forum, the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) shall be the sole and exclusive forum for resolving any complaint filed in the United States asserting a cause of action arising under the Securities Act and the Exchange Act. Investors cannot waive, and accepting or consenting to this forum selection provision does not represent a waiver of compliance with U.S. federal securities laws and the rules and regulations thereunder. See “Item 10B—Memorandum and Articles of Association—Certain Important Provisions of our Articles and the BCBCA—Forum Selection”.
The enforceability of similar forum selection provisions in other companies’ organizational documents, however, has been challenged in legal proceedings in the United States, and it is possible that a court could find this type of provision to be inapplicable, unenforceable, or inconsistent with other documents that are relevant to the filing of such lawsuits. If a court were to find the forum selection provision in our articles to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions. If upheld, the forum selection provision may impose additional litigation costs on shareholders in pursuing any such claims. Additionally, the forum selection provision, if upheld, may limit our shareholders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage the filing of lawsuits against us and our directors, officers and employees, even though an action, if successful, might benefit our shareholders. The courts of the Province of British Columbia and the United States District Court for the Southern District of New York may also reach different judgments or results than would other courts, including courts where a shareholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than to our shareholders.
TELUS International (Cda) Inc. depends on its subsidiaries for cash to fund its operations and expenses, including future dividend payments, if any.
Our ability to fund and conduct our business, service our debt and pay dividends, if any, in the future will principally depend on the ability of our subsidiaries to generate sufficient cash flow to make upstream cash distributions to us. Our subsidiaries are separate legal entities, and although they are wholly-owned and controlled by us, they have no obligation to make any funds available to us, whether in the form of loans, dividends or otherwise. Claims of any creditors of our subsidiaries generally will have priority as to the assets of such subsidiaries over our claims and claims of our creditors and shareholders. To the extent the ability of our subsidiaries to distribute dividends or other payments to us is limited in any way, our ability to fund and conduct our business, service our debt and pay dividends, if any, could be harmed.
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If securities or industry analysts cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our subordinate voting shares, the price and trading volume of our subordinate voting shares could decline.
The trading market for our subordinate voting shares is influenced by the research and reports that industry or securities analysts publish about us, our business, our market and our competitors. If any of the analysts who cover us or may cover us in the future change their recommendation regarding our subordinate voting shares adversely, or provide more favorable relative recommendations about our competitors, the price of our subordinate voting shares could decline. If any analyst who covers us or may cover us in the future were to cease coverage of our company, we could lose visibility in the financial markets, which in turn could cause the price or trading volume of our subordinate voting shares to decline.
Our organizational documents permit us to issue an unlimited number of subordinate voting shares, multiple voting shares and preferred shares without seeking approval of the holders of subordinate voting shares.
Our articles permit us to issue an unlimited number of subordinate voting shares, multiple voting shares and preferred shares. We anticipate that we may, from time to time, issue additional subordinate voting shares in the future in connection with acquisitions or to raise capital for general corporate or other purposes.
Subject to the requirements of the NYSE and the TSX and applicable securities laws, we are not required to obtain the approval of the holders of subordinate voting shares for the issuance of additional subordinate voting shares, should we do so. Although the rules of the TSX generally prohibit us from issuing additional multiple voting shares, there may be, with the approval of TELUS, certain circumstances where additional multiple voting shares may be issued, including with applicable regulatory, stock exchange and shareholder approval. Any further issuances of subordinate voting shares or multiple voting shares will result in immediate dilution to existing shareholders and may have an adverse effect on the value of their shareholdings. Additionally, any further issuances of multiple voting shares will significantly lessen the combined voting power of our subordinate voting shares due to the ten-to-one (10-to-1) voting ratio between our multiple voting shares and subordinate voting shares. TELUS and BPEA, as holders of our multiple voting shares, may also elect at any time or, in certain circumstances, be required to convert their multiple voting shares into subordinate voting shares, which would increase the number of subordinate voting shares. See “Item 7B—Related Party Transactions”.
Our articles also permit us to issue an unlimited number of preferred shares, issuable in series and, subject to the requirements of the BCBCA, having such designations, rights, privileges, restrictions and conditions, including dividend and voting rights, as our Board may determine and which may be superior to those of the subordinate voting shares. The issuance of preferred shares could, among other things, have the effect of delaying, deferring or preventing a change in control of the Company and might adversely affect the market price of our subordinate shares. We have no current or immediate plans to issue any preferred shares. Subject to the provisions of the BCBCA and the applicable requirements of the NYSE and the TSX, we are not required to obtain the approval of the holders of subordinate voting shares for the issuance of preferred shares or to determine the maximum number of shares of each series, create an identifying name for each series and attach such special rights or restrictions as our Board may determine. See “Item 10B—Memorandum and Articles of Association”.
ITEM 4 INFORMATION ON THE COMPANY
A.History and Development of the Company
TELUS International (Cda) Inc. was incorporated under the BCBCA on January 2, 2016. We directly or indirectly own 100% of all of our operating subsidiaries. Our delivery locations, from where team members serve our clients, are operated from subsidiaries located in the relevant jurisdiction. Our subordinate voting shares began trading on the NYSE and the TSX on February 3, 2021, under the symbol “TIXT”.
Our headquarters and principal executive offices are located at Floor 7, 510 West Georgia Street, Vancouver, British Columbia, Canada V6B 0M3 and our telephone number is (604) 695 3455. Our website address is www.telusinternational.com. The information on or accessible through our website is not part of and is not incorporated by reference into this Annual Report, and the inclusion of our website address in this Annual Report is an inactive textual reference only.
We are subject to the informational requirements of the Exchange Act and applicable Canadian securities laws and are required to file or furnish, as applicable, reports and other information with the SEC and applicable Canadian securities laws. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. Filings in Canada are made on the Company’s SEDAR+ profile at www.sedarplus.ca . which is administered by the Canadian securities
administrators.
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B.Business Overview
Our Operations and Principal Activities
We design, build and deliver next-generation solutions, including AI and content moderation, to enhance the CX for global and disruptive brands. The Company’s services support the full lifecycle of its clients’ AI-led transformation journeys, enabling them to more quickly embrace disruptive or emerging technologies to deliver better business outcomes.
TELUS International’s integrated solutions span AI advisory, digital strategy, innovation, consulting and design, transformation lifecycle including managed solutions, intelligent automation and end-to-end AI data solutions including computer vision capabilities, as well as omnichannel CX and trust and safety solutions including content moderation.
Fueling all stages of company growth, we partner with brands across high growth industry verticals, including tech and games, communications and media, eCommerce and fintech, banking, financial services and insurance, healthcare, retail, consumer, energy and utilities, and travel and hospitality. Given that we are a service-based company, we rely on the strength of our global team’s experience and knowledge to serve our customers’ needs and tend not to use raw materials.
Our Global Team and the Markets Where We Compete
As of December 31, 2023, we have more than 75,000 team members in 32 countries around the world. Our delivery locations are strategically selected based on a number of factors, including access to diverse, skilled talent, proximity to clients and our ability to deliver our services over multiple time zones and in multiple languages.
The global reach of our delivery locations enables us to deliver our full suite of solutions across geographies and customize the delivery strategy for our clients according to their evolving needs. We have established a presence in key global markets, which supply us with qualified technology talent and have been recognized as an employer of choice in many of these markets. We believe that our global and diverse team members have the nuanced cultural knowledge and empathy to deliver all of our services.
To deliver services for TELUS International AI Data Solutions, we use a crowdsourcing model, which allows us to access talent that is global, flexible and scales to meet the geographic, demographic or cultural data needs of our clients. Contributors are provided with purpose-built educational materials and tools and, through our proprietary platform, we have the ability to track each contributor’s ’ efficiency, virtually oversee quality management protocols, and process payments to our one million annotators across more than 118 countries. This AI community is organized through a framework that provides for contributor sourcing, education and management that is supported by team members around the world.
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In Asia-Pacific, we have 15 delivery locations. Our talent acquisition in Asia-Pacific benefits from a local emphasis on education, creating a highly qualified workforce with extensive language capabilities. In India and the Philippines, for example, we are able to attract skilled team members with expertise in next-generation technology with substantial language capabilities.
Through our caring culture, we are able to engage and develop these team members which leads to higher tenure and proficiency.
In Central America, we have eight delivery locations in close proximity to our large North American client base. Our team members in Central America are drawn from a large population of fluent English and Spanish speakers. In our delivery locations in Central America, we benefit from developed telecom and energy infrastructure. In Guatemala, we benefit from an engaged workforce and regionally competitive labor costs. In El Salvador, we gain access to a young and educated population.
In Europe, we have 27 delivery locations, with a number of these locations being in close proximity to client locations. Our multilingual team members are selected from a skilled talent pool in a centrally located geographic location. For example, in Bulgaria, we are able to employ an educated and skilled team; in Romania, there is a large talent pool with technology skills; and in Ireland, talent converges from many global origination points, creating a diversified talent pool. We also have extensive coverage in Germany, where we can focus on meeting the high demand for German-language support but also benefit from the availability of many skilled workers, who are drawn to Germany as one of the largest global and European Union economies. In Türkiye, as a transcontinental country that sits between Europe and Asia, we benefit from multilingual resources who speak Turkish, Kurdish and Arabic.
In North America, we have three delivery locations and recruit from a skilled talent pool with geographic proximity to many of our largest clients. Additionally, North America is where the majority of our sales, marketing, operational support and services team members work from a virtual office environment, which facilitates collaboration, and in some cases collocation, with our clients. A flexible work environment enables us to attract and retain talent, improve agility, operational efficiency and productivity of our organization, as well as enable robust business continuity planning.
In Africa, as part of our ongoing strategic geographic expansion efforts, we established a presence in South Africa and Morocco during 2023. Our new facility in Cape Town, South Africa enables us to tap into the large pool of native English speaking talent, while in Casablanca, Morocco our site leverages a rich and multilingual talent pool with proficiency in languages such as Arabic, French, English and Spanish. Both of these locations align favorably with time zones for efficient delivery into North American and European markets, ensuring cultural alignment, quality, and scalability.
For details regarding our revenue by industry verticals and geographic regions, please see “Item 5A—Operating Results—Revenue”.
Our Customers
Our more than 650 clients include companies that believe customer experience is critical to their success. We seek to work with disruptive companies and leaders in their respective sectors. We have built long-tenured relationships with these companies within our core targeted industry verticals, including tech and games, communications and media, eCommerce and fintech, banking, financial services and insurance, healthcare, retail, consumer, energy and utilities, and travel and hospitality. Within some of these industry verticals, we serve clients across several sub-sectors. For example, within tech and games, we serve some of the leading social networks and search engines, as well as high-growth online games, ride sharing and real estate technology companies. Additionally, we partner with leading providers of digital assistants, search engines and advertising networks in the delivery of our TELUS International AI solutions. Within eCommerce and fintech we serve both traditional and next-generation payments and point of sale providers, business-to-business and business-to-consumer software-as-a-service companies, online marketplaces and large financial services institutions.
Our customers, which we believe to be among the most respected names in their industries, trust us to support their brands and reputations. We are able to execute on emerging customer experience challenges which enables high client referenceability that can strengthen our credibility with clients in existing and new verticals and help drive growth.
Our relationship with TELUS, our largest client and controlling shareholder, has been instrumental to our success to date. TELUS provides us with access to revenue visibility, stability and growth, as well as strategic partnership with respect to co-innovation within the communications vertical, customer service excellence focus and an internationally recognized social purpose impact.
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Company History and Evolution
Since our founding in 2005, we have evolved and grown our business from an in-house customer care provider for TELUS to a CX innovator that designs, builds and delivers next-generation solutions, including AI and content moderation, for global and disruptive brands. Today, we believe we have a category-defining value proposition with a unique approach to combining both AI-fueled technology transformation and CX capabilities.
In February 2021, TELUS International completed the largest, at that time, technology IPO in the history of the TSX. With an initial market capitalization of CAD$8.5 billion, TELUS International’s IPO surpassed TELUS’ valuation from 2000, and became the fifth largest IPO in TSX history by total proceeds raised.
From 2005, when TELUS acquired a controlling interest in Ambergris Solutions, a boutique CX provider in the Philippines catering to traditional U.S.-based enterprise clients, to present, we have made a number of additional significant organic investments, as well as acquisitions, with the goal of better serving our growing portfolio of global clients. We expanded our delivery platform to access highly qualified talent in multiple geographies, including in Asia, Central America, Europe and North America, and developed a broader set of complex, digital-centric capabilities. It was clear to us that digital enablement would become increasingly vital for our clients, and as a result we focused our expansion strategy on developing this expertise organically and, in some cases, accelerating our growth through strategic acquisitions. Continuing this journey, we added WillowTree, a premier, full-service digital product provider focused on end-user experiences, to TI’s portfolio and further expanded our global footprint by establishing presence in South Africa and Morocco in 2023.
Unique and Caring Culture
Our unique and caring culture
In 2023, we introduced our newly evolved TELUS International values:
•we passionately put our customers and our communities first;
•we embrace change and innovate courageously; and
•we grow together through spirited teamwork.
Our unique and caring culture is rooted in the principles of ESG
Our ESG priorities are:
•supporting a sustainable planet for all by embracing the principles of refuse, reduce, reuse, repurpose and recycle;
•hiring, motivating and promoting our diverse talented team, who exceed customer expectations through impact sourcing programs;
•giving back to the communities where we live, work and serve by creating meaningful and lasting impact through the efforts of our team members; and
•adhering to principles of strong corporate governance.
TELUS International’s unique caring culture promotes diversity, equity, and inclusivity through its policies, team member resource groups and workshops, and equal employment opportunity hiring practices across the regions where it operates.
Since 2007, the Company has positively impacted the lives of more than 1.2 million citizens around the world, building stronger communities and helping those in need through large-scale volunteer events and charitable giving.
In 2023, our social impact and volunteer initiatives were focused on:
•Children’s education: School construction and renovations, educational scholarships, IT equipment and educational materials donations to educational institutions, teen entrepreneurship learning sessions and tutoring sessions.
•Community Employment Programs: HOPE, Work for Her which provide training, mentorship, language skills etc.
•Health & Wellness: Blood donation drives, mental health awareness events, food drives and fitness camps.
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•Environmental Initiatives: Improving the environment by planting 25,100 trees (Guatemala, India, and the Philippines), installing 270 eco stoves and an equal number of water filtration systems (El Salvador and Guatemala), as well as supporting biodiversity through bees and bee hives with 590,000 new bees (Romania, Guatemala and Ireland).
In 2023, five TELUS International Community Boards contributed $500,000 to charitable projects in Bulgaria, El Salvador, Guatemala, the Philippines and Romania. The TELUS International Community Boards have provided $5.6 million in funding to grassroots charitable organizations since 2011.
ESG Oversight
Our Board oversees the ESG strategy and direction for our Company, facilitated through biannual ESG updates from our executive leadership team, primarily from the Chief Corporate Officer and the Chief Legal Officer & Corporate Secretary. The Board oversees the ESG priorities, commitments and policies that we set, including oversight of climate-related risks and opportunities and broader climate change strategy.
TELUS International’s ESG priorities are:
•hiring, motivating and promoting our diverse, talented team who exceed customer expectations, including through impact sourcing programs;
•giving back to the communities where we live, work and serve by creating meaningful, lasting impact through the efforts of our team members;
•supporting a sustainable planet for all by embracing the principles of refuse, reduce, reuse, repurpose and recycle; and
•adhering to principles of strong corporate governance.
The 2023 TELUS International Sustainability Report will be released in early 2024.
Our Growth Strategy
Our Company uses a number of direct marketing techniques such as a lead-generating website and social media promotion, thought leadership pieces, and search engine optimization, focused on niche and targeted markets. Our sales strategies are tailored to our core targeted industry verticals, including tech and games, communications and media, eCommerce and fintech, banking, financial services and insurance, healthcare retail, consumer, energy and utilities, and travel and hospitality.
We are dedicated to building on our current capabilities in digital transformation and customer experience management by deploying the following growth strategies:
Expand Our Current and Potential Services with Existing Clients. We seek to deepen existing client relationships by providing our clients with more of our existing services, as well as developing new adjacent services to address their evolving digital enablement and customer experience needs. We believe we have a significant opportunity to grow within our existing client base by deploying more of our existing solutions, such as AI advisory, digital product engineering, cloud migration and content moderation. We have successfully expanded the number of services we offer our top ten clients and plan to similarly expand with the balance of our portfolio. For example, all of our top ten clients use multiple TELUS International services.
Furthermore, we believe that we have visibility into areas of fast-growing and high-value adjacent service offerings that are relevant to our clients by virtue of several factors, including our domain expertise, our strength in customer experience, technology transformation, digital product engineering, AI data-annotation services and our ability to understand and anticipate our clients’ challenges. We seek to continue to leverage these strengths to identify new opportunities and capitalize on emerging trends to deliver greater value and to further grow within our client base. Additionally, our ability to hire, onboard and manage a large community of qualified annotators, and further develop our proprietary crowdsourcing platform and tools, positions us to expand our existing relationships with technology and large enterprise clients.
Establish Relationships with New Clients. We believe there are significant untapped opportunities to win new clients across all of our targeted industry verticals. We target potential clients that value customer experience as a brand differentiator. Within these opportunities, we focus on potential clients that are experiencing significant growth and require a partner capable of evolving with them. We have historically won new clients based upon the strength of our position in the marketplace and, based on the quality of the services we have provided, references from existing clients.
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The capabilities and solutions we have developed can be adapted and, we believe, easily used to meet the needs of clients in additional industry verticals and sub-sectors that are increasingly pressured to transform. We will continue to leverage current processes, services and solutions to design and build new offerings to address new clients’ needs for better customer experience management.
Leverage Technology and Process to Drive Continuous Improvement. We strive to continuously iterate and improve upon our operations to optimize the overall efficiency of our organization, enhance operating leverage and margins and better serve our clients. For example, in 2023, we continued to review our operations and implemented a number of cost optimization and efficiency efforts, including a global restructuring program to address lower service volumes from certain clients.
Our organization has over 5,600 “Six Sigma” trained and over 3,600 certified team members that help us better leverage our technologies, processes, policies and practices to improve operational excellence and drive productivity at scale. These capabilities create the opportunity to reinvest in key initiatives and implement best-in-class technologies across functional areas, which we believe will further expand our competitive and operational advantages.
Our approach to innovation includes applying methodologies and technologies internally, including AI, to evaluate viability and scalability before deploying our solutions to clients. We aim to continue growing both organically and inorganically, and we believe that the returns generated by our focus on technology-enabled efficiency across the organization will increase.
In 2023, we implemented a focused review of our sales organization and strategy, with support from TELUS to align with their established best-practices. The review focused on a number of key strategic and operational improvements, including aligning our organizational structure and skill sets with our go-to-market strategy, looking for opportunities to improve client diversification, implementing sales process improvements and augmenting them through the use of technology and AI and implementing practices to better leverage our customer relationships and cross-selling opportunities.
Enhance Core Capabilities with Strategic Acquisitions. We intend to continue to enhance our core capabilities and solutions through acquisitions that support our strategy to design, build and deliver exceptional customer experiences for our clients. We explore acquisition opportunities that expand the breadth of our service offerings, enhance the depth of our IT capabilities and accelerate our presence in attractive client industry verticals. We seek to acquire companies that have the potential to enhance our capabilities and which we believe will contribute positively to our financial profile and that are culturally aligned with our values.
Our Market Opportunity
Our solutions and services are relevant across multiple markets including IT services for Digital Transformation (DX) and Digital Customer Experience Management (DCXM):
DX. Companies are increasingly partnering with third-party providers to implement AI, meet their digital transformation challenges, which include designing solutions that facilitate an omnichannel experience, building scalable infrastructure and delivering new digital channels. To keep systems scalable, an increasing number of companies are opting for cloud-based solutions and seeking to automate processes where possible.
DCXM. DCXM represents the next evolution of customer experience management. We believe that digital customer experience has become increasingly important to companies, as highly engaged users dictate the nature and frequency of interactions. Customers ascribe value to seamless interactions and are willing to reward positive experiences with loyalty and repeat business. As customers have shifted toward digital channels, leveraging next-generation technologies to deliver a unified and satisfying customer experience has become paramount.
We believe we are well-positioned to serve these markets and, as a result, we have a significant market opportunity due to the overall industry growth rate, low penetration to date and strong exposure to the comparatively higher-growth DCXM sector of the market.
New Economy Services. To complement our DCXM capabilities, we provide several adjacent new economy services such as content moderation and data annotation. Content moderation includes review and compliance services of user-generated content on social media and other platforms. The necessity of moderating content on digital platforms has prompted enterprises to seek specialized services to accommodate changes in the uncertain, highly regulated environment. GenAI is expected to accelerate content creation, increasing demand for these services. To support our clients’ development of AI-powered solutions, we offer fully-managed data annotation services that include collection, annotation and validation of training data to support a
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broad range of use cases, ranging from computer vision and data categorization to search relevance for advanced AI applications such as facial recognition, autonomous vehicles, medical imaging and more. We anticipate continued growth in these services in the future. AI data solutions is another market we serve that we have seen experiencing high demand, especially with increased investments in foundational model development requiring supervised fine tuning (SFT) and reinforcement learning via human feedback (RLHF) solutions.
GenAI. In October 2023, we announced the launch of Fuel iX, our solution incorporating GenAI to deliver end-to-end CX innovation and AI-fueled intelligent experiences (iX). With Fuel iX, we are providing a comprehensive suite of services, combining digital consulting, data services and analytics, web and mobile application development, and an AI-fueled platform. The solution enables companies to overcome disjointed data and organization silos, and embeds AI in day-to-day CX operations and workflows.
Dependencies
Our Company is not heavily dependent on patents or licenses, industrial, commercial or new manufacturing processes.
However, we have derived and believe that, in the near term, we will continue to derive a significant portion of our revenue from a limited number of large clients. Three clients (TELUS, Google, and a leading social media company) account for a significant portion of our revenue and loss of or reduction in business from, or consolidation of, these or any other major clients could have a material adverse effect on our business, financial condition, financial performance and prospects.
Our largest client, based on our revenues earned from them, is TELUS, our controlling shareholder. We provide services to TELUS under the master services agreement (TELUS MSA), which expires in January 2031. The TELUS MSA provides for a minimum annual spend of $200 million, subject to adjustment in accordance with its terms, although TELUS has the ability to delay or terminate specific services for certain specified reasons with limited notice. See “Item 7B—Related Party Transactions—Our Relationship with TELUS—Master Services Agreement”. In addition, the master services agreements (MSAs) with all other clients do not have minimum annual spend and the terms of these master service agreements permit our clients to delay, postpone or even terminate contracted services at their discretion and with limited notice to us.
The volume of work performed for specific clients or the revenue we generate can vary from year to year. This variation may arise as a result of the current macroeconomic environment, where clients are delaying or even foregoing our services or consolidating their services providers, requesting price reductions or moving work in-house, or the continued consolidation activity in the marketplace, which may result in our clients moving to other service providers or providing the services we offer in house. As a result of the foregoing, a major client in one year may not provide the same level of revenue in any subsequent year, which could result in reduced revenue for us.
Competition
The market sectors in which we compete are global, fragmented, and rapidly evolving. We face competition primarily from:
•in-house technology and customer experience management teams;
•digital transformation services providers such as Endava PLC, EPAM Systems, Inc. and Globant S.A.;
•globally diversified IT and business processing outsourcing service providers such as Accenture plc, Cognizant Technology Solutions Ltd., Genpact LLC and WNS Limited;
•customer experience providers such as Concentrix Corp., TaskUs, Inc., Teleperformance S.A., and TTEC Holdings, Inc.;
•providers with a primary focus on data annotation such as Appen Limited and ScaleAI, Inc.; and
•software solutions such as conversational AI platforms, where the competition is emerging.
We believe that the main competitive factors in our business include digital capabilities, comprehensiveness of offerings, vertical and process expertise, global delivery capabilities, team member engagement and retention, reputation, track record and financial stability. We believe that we are well-positioned to compete effectively with respect to each of these factors.
Regulatory Context
We are subject to a number of national, state, provincial and local laws and regulations in Canada, the United States and in each of the countries where we provide our services and where we operate our delivery locations. These laws and regulations cover a
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wide range of areas including anti-corruption, internal and disclosure control obligations, data privacy and protection, wage and-hour standards, employment and labor relations, trade protections and restrictions, import and export control, tariffs, taxation, sanctions, data and transaction processing security, payment card industry data security standards, collections, records management, user-generated content hosted on websites we operate, privacy practices, data residency, corporate governance, anti-trust and competition, team member and third-party complaints, telemarketing regulations, telephone consumer regulations, government affairs and other regulatory requirements affecting trade and investment. Further, we are seeing an increasing number of countries adopting content moderation and AI-related regulations, including in particular in the European Union and Canada. Some of the laws and regulations to which we are subject, and the interpretations of those laws and regulations, are still evolving and being tested in courts and could be applied or interpreted in unanticipated ways that could harm our business. See “Item 3D—Risk Factors— Business & Operational Risks —We and our clients are subject to laws and regulations globally, which increases the difficulty of compliance and may involve significant costs and risks. Any failure to comply with applicable legal and regulatory requirements could have a material adverse effect on our business, financial performance, financial condition and cash flows”.
The terms of our service contracts typically require that we comply with applicable laws and regulations in the jurisdictions in which we provide the services or in the jurisdictions where our clients are located. In certain cases, we are contractually required to comply with laws and regulations that apply to our clients, but not to us, and sometimes our clients require us to take specific steps intended to make it easier for them to comply with their applicable laws. In certain of our service contracts, our clients undertake to inform us about laws and regulations that may apply to us in jurisdictions in which they are located.
Labor and Employment. We are subject to laws and regulations governing our relationships with our team members in all countries where our team members reside. These laws and regulations include wage and hour requirements, work and safety conditions, benefits, citizenship requirements, work permits and travel restrictions, human and civil rights legislation and privacy laws.
Data Protection. We are typically required to process, and sometimes collect and/or store sensitive data of our clients and their customers, including, but not limited to, personal data regulated by the GDPR in the European Union, The Personal Information Protection and Electronic Documents Act and equivalent provincial statutes in Canada, the California Consumer Privacy Act and the California Invasion of Privacy Act in California, the Personal Data Protection Bill of 2018 in India, the Data Privacy Act of 2012 in the Philippines, and similar laws and regulations in each of the countries in which we operate and where we provide services. This data may include personally identifiable information such as names, addresses, social security numbers, personal health information, credit card account numbers, checking and savings account numbers and payment history records, such as account closures and returned checks. In addition, we collect and store data regarding our team members. The laws and regulations we are subject to impose various data protection requirements and other industry-specific regulations. The GDPR, for example, imposes privacy and data security compliance obligations and penalties for noncompliance. In particular, the GDPR has introduced numerous privacy-related changes for companies operating within and outside the European Union, including greater control for, and rights granted to, data subjects, increased data portability for European Union consumers, data breach notification requirements, restrictions on automated decision-making and increased fines. Additionally, foreign governments outside of the European Union are also taking steps to fortify their data privacy laws and regulations. For example, Brazil, China, India, the Philippines, certain countries in Central America and Asia and certain U.S. states where we operate and in some of the other countries where our client’s customers reside have implemented or are considering GDPR-like data protection laws which could impact our engagements with clients (existing and potential), vendors and team members in those countries. We actively monitor data and privacy regulations in the countries in which we operate and in the countries where our clients’ customers reside to develop policies and processes responsive to new regulations. See “Item 3D— Risks Factors—Business & Operational Risks—The unauthorized disclosure of sensitive or confidential client and customer data could expose us to protracted and costly litigation, damage our reputation and cause us to lose clients”.
Consumer Protection. As many of the services we provide involve our team engaging directly with the customers of our clients in a wide variety of interactions, we are subject to consumer protection laws and regulations related to these interactions in Canada, the United States and in the other countries in which we operate, including those related to telemarketing services, debt collection, credit reporting, healthcare-related data and in some cases the removal of prescribed content from social media sites.
Taxation. Several of our facilities, primarily located in the Philippines and India, benefit from tax incentives designed to encourage foreign investment. In the Philippines, these incentives are administered by the Philippine Economic Zone Authority (PEZA) and initially provide a four-year tax exemption for each PEZA registered location, followed by a preferential tax rate of 5% of gross profit. The CREATE Act, signed into law in the Philippines in March 2021, grandfathers existing incentives but limits the 5% tax on gross profit period to 10 years. CREATE established a new incentive program with similar benefits including an income tax exemption period followed by either the 5% preferential tax on gross profit or the proposed
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regular corporate tax rate of 25% but with enhanced tax deductions. Certain of our delivery locations in India, which were established in Special Economic Zones, are eligible for tax incentives that are expected to be phased out commencing 2024 through 2034. These delivery locations were eligible for a 100% income tax exemption for the first five years of operation and a 50% exemption for a period of up to 10 years thereafter if certain conditions are met. Additionally, there were new delivery locations established during the fiscal year ended December 31, 2019, which are eligible for tax incentives until 2034. See “Item 3D Risk Factors—Business & Operational Risks —Our financial condition could be negatively affected if countries reduce or withdraw tax benefits and other incentives currently provided to companies within our industry or if we are no longer eligible for these benefits”, “Item 3D—Risk Factors—Risks Related to Our Business—Our business may not develop in ways that we currently anticipate and demand for our services may be reduced due to negative reaction to offshore / nearshore outsourcing or automation, such as through the use of artificial intelligence”, “Item 3D—Risk Factors—Risks Related to Our Business—Tax legislation and the results of actions by taxing authorities may have an adverse effect on our operations and our overall tax rate”, “Item 3D—Risk Factors—Business & Operational Risks—Certain income of our non-Canadian subsidiaries may be taxable in Canada, and if the Canadian tax authorities were to successfully dispute the quantum of such income, our tax expense and tax liability may increase”, “Item 3D—Risk Factors—Risks Related to Our Subordinate Voting Shares—There could be adverse tax consequence for our shareholders in the United States if we are a passive foreign investment company”.
The jurisdictions where we operate, as well as our contracts, require us to comply with or facilitate our clients’ compliance with numerous, complex and sometimes conflicting legal regimes, both domestically and internationally. These laws and regulations relate to a number of aspects of our business, including anti-corruption, internal and disclosure control obligations, data privacy and protection, wage-and-hour standards, employment and labor relations, trade protections and restrictions, import and export control, tariffs, taxation, sanctions, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, privacy practices, data residency, corporate governance, anti-trust and competition, team member and third-party complaints, telemarketing regulations, telephone consumer regulations, government affairs and other regulatory requirements affecting trade and investment.
Our clients are located around the world, and the laws and regulations that apply to them include, among others, U.S. federal laws and regulations such as the Fair Credit Reporting Act, Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act (HIPAA), the Health Information Technology for Economic and Clinical Health Act, Telephone Consumer Protection Act, Telemarketing Sales Rule, state laws on third-party administration services, utilization review services, data privacy and protection telemarketing services or state laws on debt collection in the U.S., collectively enforced by numerous federal and state government agencies and attorneys general, as well as similar consumer protection laws in other countries in which our clients’ customers are based. Failure to perform our services in a manner that complies with any such requirements could result in breaches of contracts with our clients. The application of these laws and regulations to our clients is often unclear and may at times conflict. The global nature of our operations increases the difficulty of compliance. For example, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by regulations applicable to us or our clients, including Canada’s Corruption of Foreign Public Officials Act and the United States Foreign Corrupt Practices Act. We cannot provide assurance that our clients will not take actions in violation of our internal policies or Canadian or United States laws. Further, payment card industry and HIPAA guidance is evolving in light of the increase in remote-working conditions globally, and thus there exists uncertainty over the additional cost and ability to comply with such evolving standards. Compliance with these laws and regulations may involve significant costs, consume significant time and resources or require changes in our business practices that result in reduced revenue and profitability.
In addition, we are required under various laws to obtain and maintain accreditations, permits and/or licenses for the conduct of our business in all jurisdictions in which we have operations and, in some cases, where our clients receive our services, including the United States, Canada and Europe.
C.Organizational Structure
TELUS is our controlling shareholder. See “Item 7A—Major Shareholders”. As at December 31, 2023, we have the following “significant subsidiaries”, as such term is defined in Rule 1-02 of Regulation S-X under the Securities Act, all of which are directly or indirectly wholly-owned by TELUS International:
•TELUS International Philippines, Inc. (Philippines)
•TELUS International Services Limited (Ireland)
•TELUS International AI Inc. (Delaware)
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D.Property, Plant And Equipment
At December 31, 2023, we had 68 delivery locations and global operations in 32 countries. We also have two corporate offices located in Toronto and Vancouver. All of our facilities are leased, with a total leased area of approximately 417,553 square meters (approximately 4,494,503 square feet).
ITEM 4A UNRESOLVED STAFF COMMENTS
None.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A.Operating Results
Overview
We are a leading digital customer experience (CX) innovator that designs, builds and delivers next-generation solutions, including AI and content moderation, for global and disruptive brands. Our services support the full lifecycle of our clients’ AI-fueled technology transformation journeys and enable them to more quickly embrace next-generation digital technologies to deliver better business outcomes. We work with our clients to shape their digital vision and strategies, design scalable processes and identify opportunities for innovation and growth. We bring to bear expertise in advanced technologies and processes, as well as a deep understanding of the challenges faced by all of our clients, including some of the largest global brands, when engaging with their customers. Over the last 19 years, we have built comprehensive, end-to-end capabilities with a mix of industry and digital technology expertise to support our clients in their customer experience and digital enablement transformations.
TELUS International was born out of an intense focus on customer service excellence, continuous improvement and a values-driven culture under the ownership of TELUS Corporation, a leading communications and information technology company in Canada. Since our founding, we have made a number of significant organic investments and acquisitions, with the goal of better serving our growing portfolio of global clients. We have expanded our agile delivery model to access highly qualified talent in multiple geographies, including Asia-Pacific, Central America, Europe, North America and Africa, and developed a broader set of complex, digital-centric capabilities.
We believe our ability to help clients realize better business outcomes begins with the talented team members we dedicate to supporting our clients because customer experience delivered by empathetic, highly skilled and engaged teams is key to providing a high-quality brand experience. We have a unique and differentiated culture that places people and a shared set of values at the forefront of everything we do. Over the past decade, we have made a series of investments in our people predicated upon the core philosophy that our “caring culture” drives sustainable team member engagement, retention and customer satisfaction.
We have expanded our focus across multiple industry verticals, targeting clients who believe exceptional customer experience is critical to their success. We believe we have a category-defining value proposition with a unique approach to combining both digital transformation and CX capabilities. We have built comprehensive, end-to-end capabilities with a mix of industry and digital technology expertise to support our clients in their customer experience and digital transformation journeys. Our services support the full scope of our clients’ digital transformations and enable clients to more quickly embrace next-generation digital technologies to deliver better business outcomes. We provide AI advisory, technology transformation, digital product engineering, AI data-annotation, and CX process and delivery solutions to fuel our clients’ growth. Our highly skilled and empathetic team members together with our deep expertise in customer experience processes, next-generation technologies and expertise within our industry verticals are core to our success. We combine these with our ability to discover, analyze and innovate with new digital technologies in our centres of excellence to continuously evolve and expand our solutions and services.
We have built an agile delivery model with global scale to support next-generation, digitally-led customer experiences. Substantially all of our delivery locations are connected through a carrier-grade infrastructure backed by cloud technologies, enabling globally distributed and virtualized teams. The interconnectedness of our teams and ability to seamlessly shift interactions between physical and digital channels enables us to tailor our delivery strategy to clients’ evolving needs. As at December 31, 2023, we have over 75,000 team members in 68 delivery locations and global operations across 32 countries.
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Our delivery locations are strategically selected based on a number of factors, including access to diverse, skilled talent, proximity to clients and ability to deliver our services over multiple time zones and in multiple languages. We have established a presence in key global markets, which supply us with qualified, cutting-edge technology talent and have been recognized as an employer of choice in many of these markets. In addition, TELUS International AI Data Solutions utilizes the services of crowdsourced contractors that are geographically dispersed across the globe.
Today, our clients include companies across multiple verticals, including Tech and Games, Communications and Media, eCommerce and FinTech, Healthcare, and Banking, Financial Services and Insurance, among others. Our relationship with TELUS Corporation, our largest client and controlling shareholder, has been instrumental to our success. TELUS Corporation provides access to revenue visibility, stability and growth, as well as strategic partnership for co-innovation within our Communications and Media and Healthcare industry verticals. Our master services agreement with TELUS Corporation (TELUS MSA) provides for a term of ten years beginning in January 2021 and a minimum annual spend of $200 million, subject to adjustment in accordance with its terms. For more information, see “Item 7B—Related Party Transactions—Our Relationship with TELUS—Master Services Agreement”.
Business Acquisitions
We enhance our service offerings and delivery platform through both organic growth and strategic acquisitions that support our strategy to design, build and deliver customized solutions for our clients. Our results are impacted by the effects of the initial purchase accounting, as required by IFRS-IASB, which typically includes the recognition of significant intangible assets which result in higher amortization expense in future periods. Our results are also impacted by additional interest expense when an acquisition is financed with incremental borrowings. As a result of our acquisitions, our year-over-year financial results may not be comparable.
On July 2, 2021, we completed the acquisition of Playment, a Bangalore, India-based leader in computer vision tools and services specialized in 2D and 3D image, video and LiDAR (light detection and ranging). The acquisition builds upon our existing domain expertise and experience in data annotation, positioning us to support technology and large enterprise clients developing AI-powered solutions across a variety of markets. In 2021, we rebranded the Lionbridge AI business to TELUS International AI Data Solutions and added the capabilities of Playment. TIAI is one of only two globally-scaled, managed AI training data and data annotation services and platform providers in the world. The purchase consideration for this acquisition was immaterial.
On January 3, 2023, we acquired 86% of the equity interest of WillowTree, a full-service digital product provider focused on end user experiences, such as native mobile applications and unified web interfaces. The total purchase consideration for WillowTree was $1,175 million, net of assumed debt of WillowTree, comprising of $856 million in cash, $125 million of our subordinate voting shares, and $194 million in provisions for the written put options (see Note 14(c)—Intangible assets and goodwill—Business acquisitions to the audited consolidated financial statements as at and for the year ended December 31, 2023, included in this Annual Report for additional details).
In connection with the WillowTree acquisition, we amended and expanded our existing credit facility to an aggregate $2 billion credit facility, consisting of an $800 million revolving credit facility and an amortizing $1.2 billion in term loan maturing in five years (see Note 16(b)—Long-term debt—Credit facility to the audited consolidated financial statements as at and for the year ended December 31, 2023, included in this Annual Report for additional details).
On March 31, 2023, we acquired 100% of Intersect-HP, a South African CX provider that delivers a hybrid “work from anywhere” model utilizing behavioral intelligence and intelligent technology. The purchase consideration for this acquisition was immaterial.
On May 2, 2023, we acquired 100% of Humania BPO, a Canadian-based company specializing in international customer service management and outsourcing with offices in North America, Europe and Africa, offering expertise by leveraging its French, English, Spanish and German speaking customer experience consultants. The purchase consideration for this acquisition was immaterial.
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Results of Operations
| Years Ended December 31 | |||||||||||||||||
(millions, except per share amounts and percentages) | 2023 | 2022 | 2021 | ||||||||||||||
| Revenue | $ | 2,708 | $ | 2,468 | $ | 2,194 | |||||||||||
| Operating Expenses | |||||||||||||||||
| Salaries and benefits | 1,664 | 1,393 | 1,222 | ||||||||||||||
| Goods and services purchased | 461 | 468 | 432 | ||||||||||||||
| Share-based compensation | 21 | 25 | 75 | ||||||||||||||
| Acquisition, integration and other | 55 | 40 | 23 | ||||||||||||||
| Depreciation | 141 | 124 | 115 | ||||||||||||||
| Amortization of intangible assets | 183 | 134 | 142 | ||||||||||||||
| 2,525 | 2,184 | 2,009 | |||||||||||||||
| Operating Income | 183 | 284 | 185 | ||||||||||||||
| Changes in business combination-related provisions | (20) | — | — | ||||||||||||||
| Interest expense | 144 | 41 | 44 | ||||||||||||||
| Foreign exchange | — | (7) | (1) | ||||||||||||||
| Income before Income Taxes | 59 | 250 | 142 | ||||||||||||||
| Income taxes | 5 | 67 | 64 | ||||||||||||||
| Net Income | $ | 54 | $ | 183 | $ | 78 | |||||||||||
| Earnings per Share | |||||||||||||||||
| Basic Earnings per Share | $ | 0.20 | $ | 0.69 | $ | 0.30 | |||||||||||
| Diluted Earnings per Share | $ | 0.18 | $ | 0.68 | $ | 0.29 | |||||||||||
| Other financial information | |||||||||||||||||
| Net Income Margin | 2.0 | % | 7.4 | % | 3.6 | % | |||||||||||
Adjusted Net Income(1) | $ | 252 | $ | 332 | $ | 267 | |||||||||||
Adjusted Basic Earnings per Share(1) | $ | 0.92 | $ | 1.25 | $ | 1.01 | |||||||||||
Adjusted Diluted Earnings per Share(1) | $ | 0.91 | $ | 1.23 | $ | 1.00 | |||||||||||
Adjusted EBITDA(1) | $ | 583 | $ | 607 | $ | 540 | |||||||||||
Adjusted EBITDA Margin(1) | 21.5 | % | 24.6 | % | 24.6 | % | |||||||||||
Cash provided by operating activities | $ | 498 | $ | 437 | $ | 311 | |||||||||||
Free Cash Flow(1) | $ | 405 | $ | 333 | $ | 210 | |||||||||||
Gross Profit(1) | $ | 674 | $ | 716 | $ | 634 | |||||||||||
Gross Profit Margin(1) | 24.9 | % | 29.0 | % | 28.9 | % | |||||||||||
Adjusted Gross Profit(1) | $ | 998 | $ | 974 | $ | 891 | |||||||||||
Adjusted Gross Profit Margin (%)(1) | 36.9 | % | 39.5 | % | 40.6 | % | |||||||||||
_________________________________________________
(1)Adjusted Net Income, Gross Profit, Adjusted Gross Profit, Adjusted EBITDA, and Free Cash Flow are non-GAAP financial measures. Adjusted Basic Earnings per Share, Adjusted Diluted Earnings per Share, Adjusted EBITDA Margin, Gross Profit Margin and Adjusted Gross Profit Margin are non-GAAP ratios. These non-GAAP financial measures and ratios do not have a standardized meaning under IFRS-IASB and are therefore unlikely to be comparable to similar measures presented by other issuers. See “—Non-GAAP Financial Measures and Non-GAAP Ratios” for a reconciliation to the most directly comparable GAAP measure.
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Revenue
We earn revenue pursuant to contracts with our clients that generally take the form of a master services agreement (MSA), or other service contracts. MSAs, which are framework agreements with terms generally ranging from three to five years, with the vast majority having a term of three years, are supplemented by statements of work (SOWs) that identify the specific services to be provided and the related pricing for each service. There are a number of factors that impact the pricing of the services identified in each SOW or service contract, including, but not limited to, the nature and scope of services being provided, service levels and, under certain of our MSAs, our ability to share, to a certain extent, our higher costs of services and foreign exchange risk arising from currency fluctuations. The majority of our revenue is earned based on a time and materials billing model.
Most of our contracts, other than with TELUS Corporation, do not commit our clients to a minimum annual spend or to specific volume of services. Although the contracts we enter into with our clients provide for terms that range from three to five years, the arrangements may be terminated by our clients for convenience with limited notice and without payment of a penalty or termination fee. Additionally, our clients may also delay, postpone, cancel or reduce the volume of certain of the services we provide without canceling the whole contract. Many of our contracts contain provisions that would require us to pay penalties to our clients and/or provide our clients with the right to terminate the contract if we do not meet pre-agreed service level requirements.
From period to period, the fluctuation in our revenue is primarily a function of changes to existing SOWs, new SOWs with existing clients, MSAs signed with new clients, and the impact of foreign exchange on non-U.S. dollar-denominated contracts. While we provide a discussion and analysis of our results of operations below, we are unable to quantify the effects of changes in price or volume in relation to our revenue growth. We do not track standard measures of a per-unit rate or volume, since our measures of price and volume are extremely complex. Each of our customers is unique, with varying needs and requirements that span our diverse services offerings, which is reflected in a customized services contract and pricing model that does not fit into standard comparability measurements. Revenue for our services is a function of the nature of each specific service to be provided as specified by each client, the geographical region where the service is to be performed, the skills required and/or the outcome sought, estimated costs to perform, contract terms and other factors.
Comparison of Years Ended December 31, 2023 and 2022. Our revenue increased $240 million, or 10%, to $2,708 million for the year ended December 31, 2023, of which $186 million was from WillowTree, and excluding WillowTree, our revenue was $2,522 million, an increase of $54 million, or 2%. The increase was due to growth in services provided to existing clients, including TELUS Corporation and Google, as well as new clients added since the same period in the prior year, which was partially offset by lower revenues from one of our largest clients, a leading social media company, as well as a global financial institution client. During the year ended December 31, 2023, revenue growth included a favorable foreign currency impact of less than 1%, due to the higher average EUR:USD exchange rate associated with the weakening U.S. dollar against the European euro, as compared to the same period in the prior year. Revenue from our top 10 clients for the year ended December 31, 2023, was 63%, compared to 65% for the year ended December 31, 2022.
Comparison of Years Ended December 31, 2022 and 2021. Our revenue increased $274 million, or 12%, to $2,468 million for the year ended December 31, 2022, driven by growth in services provided to existing clients as well as new clients added since the prior year. Revenue growth included an unfavorable foreign currency impact of approximately 4% due to the lower average EUR:USD exchange rate associated with the strengthening U.S. dollar against the European euro, as compared to the average rate in 2022. Revenue from our top 10 clients for the year ended December 31, 2022, was 65%, compared to 61% for the year ended December 31, 2021.
For the years ended December 31, 2023, 2022 and 2021, three clients each accounted for more than 10% of our revenues. TELUS Corporation, our controlling shareholder and largest client for the year ended December 31, 2023, accounted for approximately 20.6%, 17.3% and 16.1% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively. Our second largest client for the year ended December 31, 2023, Google, accounted for approximately 13.1%, 11.9% and 11.0% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively. Our third largest client for the year ended December 31, 2023, a leading social media company, accounted for 11.2%, 15.8% and 17.7% of our revenue for the years ended December 31, 2023, 2022 and 2021, respectively.
We deliver tailored solutions to a diverse set of clients active in various verticals from our delivery locations around the world. However, these services are marketed, sold and delivered to clients in an integrated manner in order to provide a unified, seamless sales and delivery experience. Our chief operating decision maker reviews financial information presented on a consolidated basis for the purposes of evaluating financial performance and making resource allocation decisions. Accordingly, we report our results and manage our business as a single operating and reporting segment.
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We earn revenue pursuant to contracts with our clients, who operate in various industry verticals. The following table presents our earned revenue disaggregation for our five largest and other industry verticals:
| Years Ended December 31 | |||||||||||||||||
(millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Revenue by Industry Vertical | |||||||||||||||||
| Tech and Games | $ | 1,181 | $ | 1,148 | $ | 999 | |||||||||||
| Communications and Media | 645 | 580 | 537 | ||||||||||||||
| eCommerce and FinTech | 286 | 292 | 259 | ||||||||||||||
Healthcare | 159 | 58 | 47 | ||||||||||||||
| Banking, Financial Services and Insurance | 150 | 159 | 97 | ||||||||||||||
| All others | 287 | 231 | 255 | ||||||||||||||
| Total | $ | 2,708 | $ | 2,468 | $ | 2,194 | |||||||||||
Our consolidated revenue has grown from 2021 to 2023. During the year ended December 31, 2023, compared to the year ended December 31, 2022, revenue for our Tech and Games, Communications and Media, and Healthcare industry verticals increased 3%, 11%, and 174%, respectively, while our eCommerce and FinTech and Banking, Financial Services and Insurance industry verticals decreased 2% and 6%, respectively. During the year ended December 31, 2022, compared to the year ended December 31, 2021, revenue for our Tech and Games, Communications and Media, eCommerce and FinTech, Healthcare, and Banking, Financial Services and Insurance industry verticals increased 15%, 8%, 13%, 23%, and 64%, respectively. The revenue growth from our Tech and Games industry vertical during 2023, compared to 2022, was driven by continued growth experienced with a number of our technology clients and the addition of new clients, which was partially offset by lower revenue from one of our largest clients, a leading social media company, while in 2022, compared to 2021, the increase was driven by continued growth within our existing clients and the addition of new clients through organic channels. Revenue growth in the Communications and Media industry vertical was predominantly driven by higher revenue from TELUS Corporation. Revenue in our eCommerce and FinTech industry vertical declined slightly in 2023, compared to 2022, due to a decline in service volumes from our FinTech clients partially offset by higher service volumes in our eCommerce clients, while in 2022, compared to 2021, the revenue growth was primarily attributable to new clients and growth within our existing client base. Revenue growth in the Healthcare industry vertical was primarily due to additional services provided to the healthcare business unit of TELUS Corporation. The revenue decline in our Banking, Financial Services and Insurance industry vertical during 2023, compared to 2022, was primarily due to lower service volumes from a global financial institution client, partially offset by the addition of new clients from our acquisition of WillowTree, while in 2022, compared to 2021, the revenue growth was due to growing service volumes from the same global financial institution client. Across all of our verticals, during the year ended December 31, 2023, as compared to the year ended December 31, 2022, the reported revenue growth rates were not materially impacted by foreign currency movements, while during the year ended December 31, 2022, compared to the year ended December 31, 2021, the reported revenue growth rates were negatively impacted by unfavorable EUR:USD currency movements.
We serve our clients, who are primarily domiciled in North America and Europe, from multiple delivery locations across various geographic regions. In addition, our TIAI clients are largely supported by crowdsourced contractors that are globally dispersed and not limited to the physical locations of our delivery centres. In general, revenue growth in each geographic region, excluding Europe, corresponds with the overall growth of the business and our consolidated revenue. The decline in revenue earned in Europe during the year ended December 31, 2023, compared to the prior comparative year, was primarily due to lower service volumes from our technology clients serviced from this region, while the decline during the year ended December 31, 2022, compared to the prior comparative year, was primarily due to the unfavorable foreign currency of the lower average EUR:USD exchange rate associated with the strengthening U.S. dollar against the European euro. The table below presents the revenue generated in each geographic region, based on the location of our delivery centres or where the services were provided from, for the periods presented.
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| Years Ended December 31 | |||||||||||||||||
(millions) | 2023 | 2022 | 2021 | ||||||||||||||
| Revenue by Geographic Region | |||||||||||||||||
| Europe | $ | 821 | $ | 880 | $ | 921 | |||||||||||
| North America | 793 | 621 | 502 | ||||||||||||||
| Asia-Pacific | 631 | 591 | 455 | ||||||||||||||
Central America and others(1) | 463 | 376 | 316 | ||||||||||||||
| Total | $ | 2,708 | $ | 2,468 | $ | 2,194 | |||||||||||
_________________________________________________
(1)Others includes South America and Africa geographic regions.
The number of team members by geographic region is as follows:
| As at December 31 | ||||||||||||||||||||
| Team Members by Geographic Region | 2023 | 2022 | 2021 | |||||||||||||||||
Asia-Pacific(1) | 33,119 | 32,405 | 24,812 | |||||||||||||||||
Central America and others(2) | 20,158 | 16,563 | 14,124 | |||||||||||||||||
Europe(3) | 17,822 | 19,796 | 19,311 | |||||||||||||||||
North America(4) | 4,248 | 4,378 | 3,894 | |||||||||||||||||
| Total | 75,347 | 73,142 | 62,141 | |||||||||||||||||
_________________________________________________
(1)Comprises China, India, Japan, Philippines, Singapore, and South Korea.
(2)Comprises Costa Rica, El Salvador and Guatemala, as well as Brazil, Morocco and South Africa.
(3)Comprises Austria, Bulgaria, Bosnia and Herzegovina, Czechia, Denmark, Finland, France, Germany, Ireland, Latvia, Poland, Portugal, Romania, Slovakia, Spain, Switzerland, Türkiye and United Kingdom.
(4)Comprises Canada and the United States.
Salaries and benefits
The principal components of salaries and benefits expense include all compensation and benefits paid to our front-line and administrative employees, excluding share-based compensation and severance payments associated with cost efficiency programs, which are included in Share-based compensation and Acquisition, integration and other, respectively, in our consolidated statements of income and comprehensive income.
Comparison of Years Ended December 31, 2023 and 2022. Salaries and benefits increased $271 million, or 19%, to $1,664 million for the year ended December 31, 2023. The increase was due to investments in our team members through increased average employee salaries and wages and higher team member count, including additional team members from our acquisition of WillowTree, as well as temporarily disproportionate higher costs in certain regions, which had a more significant effect beginning in the second quarter of 2023 and principally in Europe, due in part to the longer lead time necessary to implement ramp-down and other cost rationalization activities resulting from the reduction in service volume demands from some of our larger technology clients. These increases were partially offset by the positive impacts of our cost efficiency efforts initiated in the second quarter of 2023, including aligning our team member count with service demand, and adjustments to variable compensation accruals based on operating performance metrics. Salaries and benefits as a percentage of revenue increased to 61% for the year ended December 31, 2023, compared to 56% for the year ended December 31, 2022. Total team member count was 75,347 at December 31, 2023, compared to 73,142 at December 31, 2022.
Comparison of Years Ended December 31, 2022 and 2021. Salaries and benefits increased $171 million, or 14%, to $1,393 million for the year ended December 31, 2022, due to higher team member count to support business growth and higher average employee salaries and wages, partially offset by the lower average exchange rates across a variety of currencies relative to the U.S. dollar. Salaries and benefits as a percentage of revenue remained steady at 56% for both the years ended
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December 31, 2022 and 2021. Total team member count was 73,142 at December 31, 2022, compared to 62,141 at December 31, 2021.
Goods and services purchased
Goods and services purchased include items such as software licensing costs that are required to support our operations, contracted labor costs, sales and marketing expenses associated with promoting and selling our services, compliance expenses such as legal and audit fees and business taxes, other IT expenditures, bad debt expenses and facility expenses.
Comparison of Years Ended December 31, 2023 and 2022. Goods and services purchased decreased $7 million, or 1%, to $461 million for the year ended December 31, 2023, due to lower dependency on external contractors in our digital solutions business, in favor of continued development and investment in internal capabilities, and the reduction of certain sales tax reserves based on our recent collection experience, which were partially offset by additional goods and services purchased in relation to WillowTree.
Comparison of Years Ended December 31, 2022 and 2021. Goods and services purchased increased $36 million, or 8%, to $468 million for the year ended December 31, 2022, driven by business growth, including higher crowdsourced contractor costs from the expansion in our TIAI business, partially offset by the lower average exchange rates across a variety of currencies relative to the U.S. dollar.
Share-based compensation
Share-based compensation
Share-based compensation relates to restricted share unit awards and share option awards granted to employees, as well as performance-based share-based compensation awards granted in relation to our acquisitions. These awards include both liability-accounted awards, which requires a mark-to-market revaluation against our share price, and equity-accounted awards.
Comparison of Years Ended December 31, 2023 and 2022. Share-based compensation decreased $4 million to
$21 million for the year ended December 31, 2023. The decrease was due to lower expense associated with share-based compensation awards granted in relation to our acquisitions and a downward revision on the estimated performance achievement on certain non-market performance conditions, which were partially offset by the prior year benefiting from a downward mark-to-market adjustment on liability-accounted awards, resulting from the decrease in our share price. Share-based compensation expense during the year ended December 31, 2023, was primarily attributable to equity-settled awards, which unlike liability-accounted awards, are not subject to mark-to-market adjustments based on changes in our share price.
$21 million for the year ended December 31, 2023. The decrease was due to lower expense associated with share-based compensation awards granted in relation to our acquisitions and a downward revision on the estimated performance achievement on certain non-market performance conditions, which were partially offset by the prior year benefiting from a downward mark-to-market adjustment on liability-accounted awards, resulting from the decrease in our share price. Share-based compensation expense during the year ended December 31, 2023, was primarily attributable to equity-settled awards, which unlike liability-accounted awards, are not subject to mark-to-market adjustments based on changes in our share price.
Comparison of Years Ended December 31, 2022 and 2021. Share-based compensation decreased $50 million to
$25 million for the year ended December 31, 2022. The decrease was primarily due to the decrease in our share price during the year, which resulted in lower expense on our liability-accounted awards, as compared to the increase in our share price in the comparative year ended December 31, 2021, following our IPO. The decrease was partially offset by higher expense associated with equity-accounted awards granted in 2022.
$25 million for the year ended December 31, 2022. The decrease was primarily due to the decrease in our share price during the year, which resulted in lower expense on our liability-accounted awards, as compared to the increase in our share price in the comparative year ended December 31, 2021, following our IPO. The decrease was partially offset by higher expense associated with equity-accounted awards granted in 2022.
Acquisition, integration and other
Acquisition, integration and other is comprised primarily of costs related to our business acquisitions, including transaction costs and integration activities, which could vary from year to year depending on the volume, nature and complexity of the transactions completed in each fiscal year. We also, from time to time, incur costs associated with streamlining our operations, including ongoing and incremental efficiency initiatives, which may include personnel-related costs and operating costs related to rationalization of real estate. Other costs may also include external costs that are unusual in their nature or significance, such as adverse litigation judgments or regulatory decisions, and other costs that do not contribute normally to the earning of revenues.
Comparison of Years Ended December 31, 2023 and 2022. Acquisition, integration and other increased $15 million to $55 million for the year ended December 31, 2023. The increase was primarily due to expenses associated with cost efficiency efforts, principally in Europe, which included staff reductions to address lower service volumes from our technology clients, and acquisition and integration costs incurred in connection with our recent acquisitions.
Comparison of Years Ended December 31, 2022 and 2021. Acquisition, integration and other increased $17 million to $40 million for the year ended December 31, 2022. The increase was primarily due to transaction costs incurred in connection with our acquisition of WillowTree.
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Depreciation and amortization
Depreciation and amortization includes depreciation of property, plant and equipment and right-of-use leased assets as well as amortization expense for software and intangible assets recognized primarily in connection with acquisitions.
Comparison of Years Ended December 31, 2023 and 2022. Depreciation and amortization expense increased by $66 million to $324 million for the year ended December 31, 2023, primarily due to capital and intangible assets arising from our acquisition of WillowTree, as well as additional organic investments in capital and intangible assets.
Comparison of Years Ended December 31, 2022 and 2021. Depreciation and amortization expense was $258 million for the year ended December 31, 2022, steady compared to $257 million for the year ended December 31, 2021. The higher depreciation and amortization associated with our organic investments in capital and intangible assets were offset by the lower average EUR:USD exchange rate on assets held in our subsidiaries which have a European euro functional currency.
Changes in business combination-related provisions
Changes in business combination-related provisions reflects gains or losses recognized on the revaluation of provisions arising from our acquisitions, which includes our provisions for written put options recognized in connection with our acquisition of WillowTree.
Comparison of Years Ended December 31, 2023 and 2022. Changes in business combination-related provisions was a gain of $20 million for the year ended December 31, 2023, which was due to a downward revision to our estimates of certain performance-based criteria tied to the WillowTree business and a reduction of our provisions for written put options.
Comparison of Years Ended December 31, 2022 and 2021. There were no business combination-related provisions in these periods.
Interest expense
Interest expense includes interest expense on short-term and long-term borrowings and on our lease liabilities, and interest accretion on our provisions for written put options.
Comparison of Years Ended December 31, 2023 and 2022. Interest expense increased $103 million, or 251%, to
$144 million for the year ended December 31, 2023. The increase was primarily due to higher average debt levels on our credit facility, higher average interest rates, and interest accretion recognized on the provision for written put options arising from our acquisition of WillowTree.
$144 million for the year ended December 31, 2023. The increase was primarily due to higher average debt levels on our credit facility, higher average interest rates, and interest accretion recognized on the provision for written put options arising from our acquisition of WillowTree.
Comparison of Years Ended December 31, 2022 and 2021. Interest expense decreased $3 million, or 7%, to
$41 million for the year ended December 31, 2022. The decrease was primarily due to lower average debt levels on our credit facility, partially offset by higher average interest rates.
$41 million for the year ended December 31, 2022. The decrease was primarily due to lower average debt levels on our credit facility, partially offset by higher average interest rates.
Foreign exchange
Foreign exchange is comprised of gains and losses recognized on certain derivatives, as well as foreign exchange gains and losses recognized on the revaluation and settlement of foreign currency transactions. See “Item 11—Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Risk” for a discussion of our hedging programs.
Comparison of Years Ended December 31, 2023 and 2022. Foreign exchange was $nil for the year ended December 31, 2023, compared to a gain of $7 million in the comparative prior year. The change reflects the impact of net changes in foreign exchange rates on our working capital balances in the currencies in which we transact.
Comparison of Years Ended December 31, 2022 and 2021. Foreign exchange gain of $7 million for the year ended December 31, 2022, compared to a gain of $1 million in the comparative prior year. These reflect the impact of net changes in foreign exchange rates on our working capital balances in the currencies in which we transact.
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Income tax expense
| Years Ended December 31 | |||||||||||||||||
(millions, except percentages) | 2023 | 2022 | 2021 | ||||||||||||||
| Income tax expense | $ | 5 | $ | 67 | $ | 64 | |||||||||||
| Income taxes computed at applicable statutory rates | 7.8 | % | 22.7 | % | 22.6 | % | |||||||||||
Effective tax rate (%)(1) | 8.5 | % | 26.8 | % | 45.1 | % | |||||||||||
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(1)Effective tax rate is calculated by dividing income tax expense by income before income taxes.
Comparison of Years Ended December 31, 2023 and 2022. Income tax expense decreased $62 million for the year ended December 31, 2023, and the effective tax rate decreased from 26.8% to 8.5%. The decrease in the effective tax rate is primarily due to a change in income mix whereby proportionately less income was earned in higher tax jurisdictions and a reduction in adjustments recognized in the current period for income tax of prior periods related to a favorable income tax settlement, partially offset by an increase in withholding taxes as a proportion of net income before taxes.
Comparison of Years Ended December 31, 2022 and 2021. Income tax expense increased $3 million for the year ended December 31, 2022, and the effective tax rate decreased from 45.1% to 26.8%. The decrease in the effective tax rate was primarily due to a change in the foreign tax differential and a decrease in non-deductible items. A portion of the non-deductible items incurred in the year ended December 31, 2021 were a result of our IPO and non-recurring.
Net income
Comparison of Years Ended December 31, 2023 and 2022. Net income decreased $129 million, or 70%, to $54 million for the year ended December 31, 2023, which was primarily due to higher operating expenses and higher interest expense, which outpaced revenue growth, lower income taxes, and gain on changes in business combination-related provisions. Net income margin, calculated by dividing net income by revenue for the year, decreased to 2.0% for the year ended December 31, 2023, compared to 7.4% in the comparative prior year.
Comparison of Years Ended December 31, 2022 and 2021. Net income increased $105 million, or 135%, to $183 million for the year ended December 31, 2022. The increase was primarily due to higher revenues, lower share-based compensation expense, and a foreign exchange gain in the year, partially offset by higher operating costs to support business growth and higher income tax expense. Net income margin increased to 7.4% for the year ended December 31, 2022, compared to 3.6% in the comparative prior year.
Non-GAAP Financial Measures and Non-GAAP Ratios
We regularly review the non-GAAP financial measures and non-GAAP ratios presented below to evaluate our operating performance and analyze underlying business results and trends. We use these non-GAAP financial measures and non-GAAP ratios to manage our business by establishing budgets and operational goals against these measures. We also use these non-GAAP financial measures to monitor compliance with debt covenants, which are based on the same or similar financial metrics, and manage our capital structure. We believe these non-GAAP financial measures and non-GAAP ratios provide investors with a consistent basis on which to evaluate our operating performance with our comparative period results, and additionally provide supplemental information to the financial measures and ratios that are calculated and presented in accordance with GAAP. A reconciliation for each non-GAAP financial measure to the nearest GAAP measure is provided below. These non-GAAP financial measures or non-GAAP ratios do not have any standardized meaning as prescribed by the IFRS-IASB and therefore may not be comparable to GAAP measures or ratios and may not be comparable to similarly titled non-GAAP financial measures or non-GAAP ratios reported by other companies, including those within our industry and TELUS Corporation, our controlling shareholder. Consequently, our non-GAAP measures and ratios should not be evaluated in isolation, but rather, should be considered together with the most directly comparable GAAP measure or ratio and our consolidated financial statements for the periods presented. The non-GAAP financial measures and non-GAAP ratios we present in this discussion should not be considered a substitute for, or superior to, financial measures or ratios determined or calculated in accordance with GAAP.
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Note that beginning in the first quarter of 2024, the Company will no longer exclude share-based compensation expense, changes in business combination-related provisions, and the tax effects of these items, as applicable, in our presentation of Adjusted Net Income, Adjusted Basic and Diluted EPS, and Adjusted EBITDA. We believe this presentation is more indicative of underlying business performance, and better aligns the presentation of these non-GAAP financial measures and ratios with comparable measures and ratios of TELUS Corporation, our parent company.
Adjusted Net Income, Adjusted Basic Earnings per Share and Adjusted Diluted Earnings per Share.
Adjusted Net Income is a non-GAAP financial measure, and Adjusted Basic Earnings per Share and Adjusted Diluted Earnings per Share (EPS) are non-GAAP ratios. We regularly monitor Adjusted Net Income, Adjusted Basic EPS and Adjusted Diluted EPS as they provide a consistent measure for management and investors to evaluate our period-over-period operating performance, to better understand our ability to manage operating costs and to generate profits. The following items are excluded from Adjusted Net Income, including changes in business combination-related provisions, acquisition, integration and other, share-based compensation, interest accretion on written put options, real estate rationalization-related impairments, foreign exchange gains or losses, amortization of purchased intangible assets, and the related tax effect of these adjustments. Adjusted Basic EPS is calculated by dividing Adjusted Net Income by the basic total weighted average number of equity shares outstanding during the period. Adjusted Diluted EPS is calculated by dividing Adjusted Net Income by the weighted average number of diluted equity shares outstanding during the period, excluding the potential dilutive effect of the written put options related to the acquisition of WillowTree (up to 70% of which may be settled in shares in three tranches beginning in 2026), which is a non-GAAP financial measure. Adjusted Basic EPS and Adjusted Diluted EPS are non-GAAP ratios used by management to assess the profitability of our business operations on a per share basis.
| Years Ended December 31 | |||||||||||||||||
(millions, except per share amounts) | 2023 | 2022 | 2021 | ||||||||||||||
| Net income | $ | 54 | $ | 183 | $ | 78 | |||||||||||
| Add back (deduct): | |||||||||||||||||
Share-based compensation(1) | 21 | 25 | 75 | ||||||||||||||
Acquisition, integration and other(2) | 55 | 40 | |||||||||||||||