TD reduced target priceImpact: MIXED
Investing for growth. Although we believed that the Street would be concerned with the lower-than-expected EBITDA margin guidance, management noted that it is continuing to ramp growth investments to support anticipated organic growth acceleration next year. TI is planning to grow its team at a similar pace to last year, when it grew the team by 23% to over 62k. Some of the EBITDA margin guidance is also a result of wage inflation; however, we remain confident that the company's industry-leading per-employee metrics demonstrate that it will be able to offset some of these headwinds with scale, revenue, and project mix, and potentially expand margins when the labour market normalizes.
Confident with its position at its largest customer. TI's largest customer posted results last week that came in below expectations. Management believes that TI's strong performance relative to competitors and the strategic engagements it has with this customer reduces the risk that TI would be subject to any cost-cutting initiatives. Management also noted that it counts this customer's competitors as top clients so that any shift in users to other platforms could be neutral to TI. Should this customer need to scale back its content moderation needs, we believe TI could be a beneficiary of any partner-consolidation efforts. We will watch this customer's user-engagement metrics as a read on their content-moderation needs.
Looking to advance the M&A strategy. TI generated $29mm of FCF to end the quarter with $115mm of gross cash and $1,033mm of net debt. The company now has a net debt/EBITDA ratio of 2.1x, within its target of 2.0x-3.0x, and down from 2.2x q/q. Management sounded eager to execute on its M&A strategy, which we believe is possible, given the solid balance sheet and lower market valuations.
TD Investment Conclusion We are maintaining our BUY rating and reducing our target price to US$38.00. Our lower target price is purely driven by lower peer multiples in the space. We remain positive on TI's growth outlook and industry-leading margin profile.