Telus International (TIXT)

• The Bottom Line: Telus International is the essential, behind-the-scenes operational crew for many of the world's biggest tech companies, offering a potentially undervalued opportunity for investors who can look past short-term headwinds to see a business with sticky customer relationships.
• Key Takeaways:
• What it is: TIXT designs, builds, and delivers digital customer experience (CX) and IT services. Think content moderation for social media giants, support for video games, and AI data annotation for tech innovators.
• Why it matters: Its business is built on deep integration with clients, creating high switching costs. However, it faces significant risks from customer_concentration and the long-term threat of AI automation.
• How to use it: Analyze TIXT not as a flashy tech stock, but as a B2B services company whose value lies in its long-term contracts, free_cash_flow generation, and current depressed valuation.

Imagine a blockbuster Hollywood movie. You see the famous actors on screen—the Googles, Metas, and Airbnbs of the world. But you don't see the hundreds of people behind the camera: the lighting technicians, the sound engineers, the special effects artists. Without this expert crew, the movie would be a disaster. Telus International (TIXT) is that expert, behind-the-scenes crew for the digital world. It's a company in the “Business Process Outsourcing” (BPO) industry, but that's just jargon. In simple terms, large corporations hire TIXT to handle complex and crucial parts of their operations that they don't want to manage themselves. This includes:

• Digital Customer Experience (CX): When you have a problem with a food delivery app or need help in a video game, you might be interacting with a TIXT employee. They manage everything from chat support to complex technical assistance, ensuring the client's customers are happy.
• Content Moderation: TIXT is one of the companies on the front lines of the internet, employing thousands of people to review and remove harmful or inappropriate content from major social media platforms, protecting both users and the platform's brand.
• AI Data Annotation: Artificial Intelligence needs to be taught. TIXT's teams “label” or “annotate” images, text, and videos (e.g., identifying all the “stop signs” in a million pictures) to train the AI algorithms that power everything from self-driving cars to search engines.

TIXT was spun out of TELUS Corporation, a major Canadian telecommunications company, which remains its largest shareholder and a key client. This relationship provides a stable foundation, but the bulk of its business comes from serving fast-growing global giants in tech, gaming, e-commerce, and fintech. TIXT doesn't sell a physical product; it sells a highly integrated, skilled service that becomes deeply embedded in its clients' day-to-day operations.

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” - Benjamin Graham

This quote from the father of value investing is the perfect lens through which to view a company like TIXT. It's not a “get rich quick” stock. It's an operation whose potential requires thorough analysis to determine if today's price offers both a promise of return and, crucially, a margin_of_safety.

For a value investor, a company like TIXT is interesting for several reasons that go far beyond its daily stock price fluctuations. It’s a classic case study in weighing a potentially durable business model against significant, visible risks. 1. The “Fallen Angel” Opportunity: TIXT's stock has performed very poorly since its Initial Public Offering (IPO). The market is worried about slowing growth, its exposure to cost-cutting tech clients, and the long-term threat of AI. For a value investor, this is a signal to start digging, not to run away. When the market's sentiment is overwhelmingly negative, it can often push a stock's price well below its intrinsic_value. The key task is to determine if the market's fears are an overreaction or a correct assessment of permanent business erosion. 2. A Potential Economic Moat: The most attractive feature of TIXT's business is high switching costs. When a client like Google integrates TIXT into its core customer support and AI development processes, it's not a simple plug-and-play service. It involves months of training, co-developing workflows, and building trusted relationships. Tearing out TIXT and replacing it with a competitor would be immensely costly, risky, and disruptive. This “stickiness” leads to recurring revenue and gives TIXT a degree of pricing power. 3. Focus on Cash Flow, Not Just Earnings: As a services business, TIXT doesn't require massive factories or inventory. Its primary assets are its people and its processes. This can translate into a business model that generates strong and predictable free_cash_flow. For a value investor, free cash flow is the lifeblood of a business—the actual cash left over that can be used to pay down debt, reinvest in the business, or return to shareholders. A company trading at a low multiple of its free cash flow can be a bargain. 4. A Test of Your Circle of Competence: TIXT forces an investor to confront one of the most significant technological shifts of our time: Artificial Intelligence. Is AI a tailwind (more demand for data annotation) or a headwind (automating the customer service jobs TIXT provides)? The honest answer is both. Analyzing TIXT requires an investor to think critically about this dual impact and decide whether the company is positioned to adapt and thrive or to be slowly rendered obsolete. This makes it a fantastic exercise in expanding one's circle_of_competence.

Analyzing a company like TIXT doesn't require a Ph.D. in finance. It requires a structured approach focused on the business fundamentals. A value investor should act like a detective, looking for clues in four key areas.

This is where you think like a business owner. The single most important risk in TIXT's model is customer concentration. A very large percentage of its revenue comes from a small number of giant tech clients. You must investigate this:

• Check their annual report (Form 10-K) for the percentage of revenue from their top clients. If their biggest client, say “Client A,” accounts for 20% of revenue, you must ask: “What would happen to TIXT's business if it lost Client A?”
• The strength of the moat directly counters this risk. The stickier the relationship, the less likely a client is to leave.

Think of the balance sheet as a company's financial physical. You're looking for signs of strength or weakness. The key metric here is debt.

• The Method: Look for “Total Debt” and “Shareholders' Equity” on the balance sheet. Calculate the Debt-to-Equity Ratio (Total Debt / Shareholders' Equity). Also, find a metric like Net Debt to EBITDA ¹⁾

Every investment has a bull case (the reasons to buy) and a bear case (the reasons to stay away). A rational investor weighs both before making a decision.

• Sticky, High-Value Relationships: TIXT's services are deeply embedded, creating high switching costs and a resilient revenue base from its core clients.
• Secular Tailwinds: The world is becoming more digital. This means more data to be annotated for AI, more online customer interactions to manage, and more complex digital systems to support.
• Depressed Valuation: Due to market pessimism, the stock may be trading at a significant discount to its intrinsic value, providing a substantial margin_of_safety.
• Parental Support: The backing of TELUS Corporation provides a degree of stability and a large, dependable anchor client.

• Extreme Customer Concentration: The loss of one or two of its largest clients would be a catastrophic blow to revenue and profitability. This is the single biggest risk.
• The AI Double-Edged Sword: While TIXT benefits from providing AI data, generative AI could also automate many of the customer service roles it currently staffs, eroding a core part of its business over the long term.
• Cyclical Exposure: TIXT's clients are in fast-moving industries like tech. During an economic downturn, these companies are quick to cut costs, and outsourcing budgets are often an early target.
• Fierce Competition: The BPO industry is highly competitive. TIXT must constantly innovate and prove its value to avoid becoming a commoditized, low-margin provider.

• economic_moat
• margin_of_safety
• intrinsic_value
• free_cash_flow
• circle_of_competence
• customer_concentration
• b2b_business_model