Our view: While TIXT beat adj. EPS, revenues were light of our estimate, which we attribute to weakness in Europe along with weakness among certain clients, especially its tech & games and ecommerce & fintech verticals. Management reiterated its FY23 revenue expectations and expressed confidence that the areas of weakness have begun to stabilize.
Key points:
1Q23 results. TIXT reported $686M/$0.28 in revenue/adj. EPS compared to RBCe of $688M/$0.25 and the Street at $691M/$0.25. Revenue growth was 14.5% y/y and 16% constant-currency, vs. 5%/9% the previous quarter; organic growth, excluding WillowTree was 5% on a reported basis and 7% constant currency. Adj. EBITDA totaled $155M, below RBCe of $157M but in line with Street, or a margin of 22.6% vs 23.7% last year. WillowTree contributed $57M with y/y growth at a high 20% rate.
FY23 guidance reiterated. FY23 guidance calls for revenue of $2.97B– $3.03B, adj. EBITDA of $705M–$725M (23.7%–23.9% margin) and adj. EPS of $1.20–$1.25. This guidance assumes an average exchange rate of one EUR to $1.08 USD for FY23, we note management’s prior commentary that ~1/3rd of estimated revenues are denominated in Euros. The revenue guidance implies y/y growth of 20.3%–22.8%, or 10%–12% excluding WillowTree. Management reiterated its expectations for WillowTree to contribute $255M–$260M of revenue, or ~30%+ y/y growth, with an adjusted EBITDA margin of ~20%.
Revenue growth reflects continued macro pressure. Inclusive of WillowTree, total revenues increased $87M to $686M, or 14.5% y/y or 5% organically on a reported basis or +16%/+7% on a constant currency basis, respectively; 4Q22 reported revenue growth was 5% and 9% constant currency. This revenue growth, despite the macro environment was driven by sharp growth in the Healthcare vertical and overall solid demand, except for some softness among fintech clients and an (18%) y/y, or (14%) constant currency, decline in revenue from TIXT’s 2nd largest client as it shifts more work offshore. Revenue from this client was, however, roughly flat on a q/ q basis.
Maintaining estimates, lowering price target, while reiterating Outperform rating. Incorporating the quarter's results and FY23 guidance, we are maintaining our FY23 revenue, adjusted EBITDA and adjusted EPS estimates $2.97B/$705M/$1.21 and FY24 at $3.29B/$804M/$1.40. Incorporating lower valuations among the peer group, we are reducing our price target to $24 from $29, which is 12x our CY23 EV/EBITDA and in line with similar IT services peers.