The initial public offering of Canadian digital customer experience company, Telus International (TSX: TIXT, NYSE: TIXT), was completed on 3 February. Canada’s largest ever IPO, was also a dual listing, with the company going public on both the Toronto Stock Exchange and the New York Stock Exchange. The public was offered 37 million subordinate voting shares at $25.00 per share, but the demand for the stock was so great that the IPO opened at $33.10, achieved a high of $33.60 and closed at $30.40 on its first day on the markets. Telus’ F-1/A form highlights the fact that the company steadily raised its target price so that the penultimate offer was for a total of 33.33 million shares, broken up into 21.93 million shares of the company, as well as 11.4 million shares from shareholders Telus Corporation and Baring Private Equity, at a price range of $23 to $25 dollars per share. The company raised $925 million on its IPO, earning a valuation of $6.8 billion.

Telus has attracted an impressive clientele, among them, Telus Corporation, its parent company and owner of 65% of the business as well as being its biggest client; Airbnb; Alphabet; Dish Network; Fitbit; and Zynga.

A Massive Addressable Market

Telus International is a spin-off of Canadian multinational publicly traded holding company and conglomerate, Telus Corporation. It provides its clients with digital transformation solutions that enable them to craft high quality customer experiences. According to the International Data Corporation (IDC), Telus’ major addressable market was worth $147 billion in 2019. The IDC estimates that the market will grow at a compound annual growth rate (CAGR) of 21% from 2019 to 2023.

The company styles itself as a digital experience company and serves a global clientele of over 600 firms. Its clients utilise the company’s technology as part of a campaign to move away from legacy applications and onto those solutions that enable them to tailor-make customer experiences according to their customers’ individual needs.

Part of the company’s activities are in the digital customer experience management (DCXM) market, estimated by Everest Global to be worth $6 billion as of 2018, and to grow from 2018 to 2021 at a CAGR of between 20% and 25%.

The digital transformation of the global economy is driving growth in Telus’ addressable market. As part of this digital transformation, communities are increasingly organizing around social media and exchanging information as well as engaging in social commerce. This has given the individual customer an enormous power which was once entirely lacking. Under conditions in which one person can reach a global audience through social media, negatives have a disproportionate power and can have a huge impact in damaging a brand’s reputation. A single negative customer review can hurt a brand, often, far more than a good review can help a brand. In a world such as this, companies are on the defensive and are forced to work to raise their average performance to an extremely high and customized level. Average is as good as terrible. Customers do not experience conditions-on-average, they only experience their engagement with the company. So it does not help a company, like a local veterinarian, to be fantastic with 99 customers if one customer walks away disgusted. If that disgusted customer takes to social media to articulate their experience, it can have a massive impact on the brand. Consequently, company’s use solutions provided by firms such as Telus, to customize each client’s experience so that each client feels their needs met to the highest possible standard. Customers who experience an individualized treatment reward businesses with loyalty and repeat transactions. Companies are aware of this and aware too of the market share they could lose if they do not follow their rivals in utilizing customer experience solutions. This basic logic is the heart of growth in the addressable market. In this market, Telus, alongside rivals such as 24-7 Intouch, Accenture, Appen, Cognizant, Endava, Epam, Genpact, Globant, TaskUs, Teleperformance SE, Webhelp, and WNS, fights to provide its clients with solutions that will elevate customer experience.

A Conservative Capital Allocation Process

Capital allocation is the most important job of anyone in charge of a pool of capital. The manager must have a disciplined and conservative capital allocation policy in order to grow economic value for shareholders. The most important job for the manager, at least in terms of shareholders, is finding opportunities to grow shareholder value, or, that failing, having the discipline to do nothing and wait, or, return cash to shareholders in the form of dividends or share repurchases. Decisions such as whether to buy land investments, or to put money in one business unit or another, are extremely important for the company’s long-term economic health.

Lionbridge AI was acquired for C$1.2 billion in November 2020. It builds, tests and improves machine learning models. Through this acquisition, 2,100 customers were added to Telus’ portfolio, along with $260 million in added annual revenue, with EBITDA margins of 20 to 25%. The Competence Call Center was bought in 2019 for C$1.3 billion and is a real leader in its field. The Competence Call Centre develops high-value customer relationship management and content moderation solutions and helps Telus International grow its offering in the digital customer experience space.

The proof is in the pudding and Telus’ financial results are impressive. In the 2017 to 2019 period, revenues grew from $573.2 million to over $1 billion, at a CAGR of 21.6%. Revenues have come with profits. In 2017, profits stood at $43.4 million, and grew to $69 million in 2019. A real test of what is driving this profitability is operating income, and that is impressive, swelling to $114 million in 2019. For the first nine  months of the year, operating income was $79.6 million, with revenues for that period being $1.139 billion.

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