Teleperformance

Business Description

Founded in 1978 by Daniel Julien, Teleperformance is a global leader in digital business services. It is the preferred partner of market leading multinationals undergoing rapid expansion, as well as government agencies for the implementation of digital strategies to optimize and transform their customer experience and business processes. To fulfil its mission, the Group focuses on the two pillars of its value-enhancing business model: a human touch and technology (high-touch, high-tech). The Group offers companies around the world its know-how in human resource management, management of dedicated customer experience infrastructures, and high-performance technology.

Teleperformance has undertaken a mission to reduce friction and strengthen the relationship (i) between companies and their customers as well as (ii) between government agencies and citizens through the efficient management of their daily interactions.

Given how much Teleperformance depends on keeping its human capital and ensuring employee satisfaction, the company's 2023 recognition as one of the World's 25 Best Workplaces™ for a third consecutive year is extremely valuable.

Customers

Teleperformance works with a huge variety of very well-known customers, including governments, consumer goods, tech, hospitality, retail, energy, social media, healthcare and telecommunications companies, as well as banks. To name a few: Apple, Google, Amazon, BNP Paribas, Barclays, Allianz, HP, Dell, Signa, Humana, UnitedHealthcare.

TEP has nearly 1400 clients, providing them with services in approximately 300 languages across 170 markets. The following graph gives you a very good idea of how well diversified their customer base really is.

Segments

Core Services & D.I.B.S. (Digital Integrated Business Services):

‣ customer care and technical support (voice and non-voice);

‣ content moderation and related services (Trust & Safety);

‣ customer acquisition and customer loyalty management;

‣ digital marketing;

‣ integrated complex back/middle/front-office services;

‣ operations consulting for business processes, digital expertise and cloud integration

Specialized Services:

‣ online interpreting services (LanguageLine Solutions);

‣ visa processing services (TLScontact);

‣ accounts receivable management (AllianceOne);

‣ online healthcare navigation and support (Health Advocate);

‣ recruitment process outsourcing (PSG Global Solutions).

Segment size by revenue and operating income for FY2023

Core Services & D.I.B.S is clearly the bigger segment by both revenue and operating income bringing in a total of €6.982B in sales and €741M in OP in 2023. In comparison Specialized services brought in €1.363B in sales and €313M in OP.

Management

Daniel Julien has been the CEO of Teleperformance since 1978 when he founded the company. Considering the massive growth and expansion the company has been through it is safe to say DJ has done and continues doing a rather impressive job. Given his decades of expertise in the industry and his intimate knowledge of Teleperformance as a founding father, he is perhaps the best qualified individual to lead the company.

Something else that is rather rare to find is the long track record other executives have of being with the company:

·         CFO and Deputy CEO - Olivier Rigaudy – since 2010

·         COO - Agustin Grisanti – since 2004

·         Chief Innovation and Digital office - Joao Cardoso – since 2003

·         Group Chief Client Officer - Miranda Collard – since 1999

Executive renumeration

The company is being rather frugal when it comes to executive bonuses

On average each executive received around €50 000 (section 4.2 on FY23 annual report)

Daniel Julien’s renumeration and bonus figures are quite a bit larger* but arguably well deserved:

$19.717M in 2022 from which $5M is renumeration and $15M is in stock

$10.796M in 2023 from which 4M in renumeration and $6.814M in stock

***Tables in section 4.2.2 on FY23 annual report

Capital deployment for FY2024

Dividend

Teleperformance has been paying a dividend for a long time and the current 3.8% yield represents only 16% of the company’s FCF which ultimately means that is should be at no risk of getting cut or dropped completely

Share buybacks

Management recently cancelled 1.42% of the company’s outstanding shares on 12th December 2024 and seem to be eager to continue repurchasing shares with the remaining €80M left in the 2023 share buyback programme (section 2.6.2 on HY24 report). Considering how undervalued their stock currently seems I would like to see a greater commitment by the team by allocating more capital to share repurchases.

I feel like management need a pat on the shoulder for cancelling 6.1% of the total share capital of the company in 2024 considering how cheap their stock price was.

·         23rd May 2024 the board cancelled 3M shares representing 4.7% of the share capital

·         12th December 2024 the board cancelled another 864 458 shares 1.42% of share capital.

Bear in mind that cancelling the shares does not mean they were all purchased in 2024. Looking at the latest Q3 report, they have still repurchased a considerable amount of their share capital since January 2024

FY25 Forecast

Not available at this time.

FY24 annual report will be released on 28th February when we will find out if the company will share their FY25 outlook.

2024 Q3 report suggests 2-4% growth for the near future.

RIsk Factors

1. The biggest risk factor that has driven the price of BPO companies as of recently is the massive improvements in AI and the fear that it will ultimately replace the need for TEP’s services.

2. It comes as no surprise that the company is a serial acquirer, and this is how it grows its business. I do not feel like I should be too critical of this way of expanding, as I do believe this is the right and most cost-effective way of penetrating new markets and expanding the existing portfolio. This risk is not unique to Teleperformance, as all competitors in the sector utilize this growth strategy.

3. IT and cyberattacks, data breaches, and leaks—a common risk shared by most companies these days. This risk is greatly increased because of the nature of TEP's operations. TEP may be a more significant and desirable target for cybercriminals because it handles and has access to sensitive customer data. Any potential breaches will cost the company dearly and might cripple it for the rest of its business life-span.

4. Regulations: The BPO market is subject to a complex web of regulations that vary depending on the services offered. Any additional scrutiny by governments around the world might result in squeezed margins and can potentially deteriorate competitive advantages certain companies possess.

5. Customers unable to pay their bills. Some related data can be found in the “Payment schedule of accounts receivable” under section 5.1 in the FY23 report. These numbers will massively increase in a global recession. This in turn will severely impact revenues and will spill all the way down the income statement to the bottom line.

6. Reputation: providing business services to external clients is a tough business, and trust is delicate. Bad reputation with one client can spread and impact relationships with other clients, which in turn can result in unrenewed or even prematurely terminated contracts and eventually loss of revenue.

7. Portfolio concentration: It appears that the "Customer care" category, which essentially consists of offering call center services to customers, accounts for 53% of total revenue. Due to recent advancements in AI, this industry is the one that faces the greatest risk of becoming extinct.

8. The duration of contracts in the inbound calls business, which accounts for most of the group’s revenue, generally varies between two and five years.

9. Foreign exchange risk will always be a concern with companies operating worldwide. Since TEP operates in 100 countries, currency exchange rates will inevitably affect its profits in case the US dollar or the EURO go up in value.

10. An economic downturn (recession) will be especially deadly since clients will look into cutting marketing and extra external costs, which will in turn have an immediate negative effect on the revenues of TEP or any of its competitors, for that matter.

11.  Interest rate: exposed on its financial liabilities and cash holdings

12.  Credit rating: getting downgraded will lead to higher interest rates on loans and line of credit

13.  Liquidity: if company’s cash flows crash and the company cannot afford to pay its creditors

Performance metrics

Competition

Management have been kind enough to share their competitors as part of their most recent 10K:

Foundever

Foundever is a privately owned customer experience technology company headquartered in Luxembourg City. It provides outsourced sales, technical support, customer service, and other business processes for large companies. The company has 170,001 employees and $4 billion in revenue.

Atento

Atento is no longer publicly traded on the New York Stock Exchange (NYSE). The company was delisted in July 2023. Before its delisting the company had a declining revenue

Alorica

It is privately owned and could not find a lot of easily accessible information on the company.

Performance metrics comparison

The following metrics are accurate as of 19th Feb 2025.

It can be clearly seen that Teleperformance is performing much better than its competitors.

Something to bear in mind is that Concentrix, one of TEP’s biggest competitors, has only been a public company for four years. It IPO’ed in December 2020, when it was spun off from SYNNEX Corporation. It has had decent growth achieved through massive acquisitions, which has led to it having a much bigger debt compared to what TEP has on its balance sheet and a bigger net debt to FCF ratio.

Sector Findings

The business process outsourcing sector is estimated at $280B in 2023 and is projected to grow at a CAGR of 9-10% through 2030. It is driven by factors such as increasing demand for cost savings, improved efficiency, and access to specialized expertise and know-how, as well as analytics and insights.

The main competitors in the BPO industry are also engaged in a lot of merger and acquisition (M&A) activity, which allows them to grow into unexplored markets and improve their service offerings.

The customer services segment dominated the market with a revenue share of 22.7% in 2023. The segment is anticipated to retain its dominance with a significant CAGR from 2024 to 2030.

It is anticipated that the training and development sector will expand significantly between 2024 and 2030. The nature of labour in BPO operations has changed with the introduction of new technologies like data analytics, robotic process automation (RPA), machine learning (ML), and artificial intelligence (AI). In order to improve productivity and service quality, staff must be upskilled to use these technologies successfully, which requires training and development services.

Unsurprisingly, North America accounted for over 36.0% of the revenue share in 2023 and is expected to retain its dominance from 2024 to 2030 due to the rising demand for BPO services from several tech giants in the region.

Valuation

Since there are quite a few risks, which to be fair have already beaten down the price significantly, we are going to be on the conservative side during our valuation process.

Here is how we are going to estimate our 2024 free cash flow:

In their Q3 2024 report, management confirmed that their FY24 revenue will experience a 2%-4% growth so we are going to take FY23 Revenue of €8.345B and add 3%. This gives an estimate of FY24 revenue of €8.595B.

Also in their 2024 Q3 report, it was confirmed a “sustained growth in net free cash flow” in their 2024 outlook section so we are going to be conservative again and use FY23’s FCF margin, which was 10.27% (€8.345B divided by €812M FCF).

The above calculations give us a FY24 estimated FCF of €882M.

In terms of growth rate, we are going to use our use our usual three-case scenario from a rather conservative point of view. In the worse case that the whole sector is going to be in quite a bit of chaos and will decline by around 5% per year. In the normal case we going to assume the sector is going to grow at TEP’s current average growth rate of 3%. The best case is still going to use growth figures below what is currently forecasted.

Worse case: -5% decline for first 5 years and then -6% decline

Normal case: 3% growth for the first 5 years and then 2% growth

Best case: 5% growth for the first 5 years and then 4% growth

We are going to give the normal case the highest weight of 40% with best and worse case having equal weight of 30% each.

For our margin of safety number, we are going to be exceedingly conservative and seek for a 40% discount on the current stock price. The uncertainty surrounding the global economy and the threat posed by recent advancements in AI and the possible disruptions they could generate in the BPO industry are the only reasons for this. 

Fair value price

Using the extremely conservative assumptions above, I believe TEP’s stock fair value to be €106 which is still above its current price of €99.06.

The Verdict

Artificial intelligence and rivals capturing a portion of Teleperformance's share of the BPO industry's income are two major obstacles the company must contend with. Furthermore, it can be expected that the company's operations will be significantly impacted by a period of global economic slump. People are afraid of the recession for good cause, especially since there are two ongoing wars and the world economy is still determining whether it has avoided the recession. Nevertheless, the business also has a lot of advantages that undoubtedly offset those difficulties. Teleperformance is already making use of AI advancements to provide new services and broaden its present portfolio. They have a strong capacity to retain talent and have been named one of the top 25 employers in the world for three years running. With a synergistic array of product offerings and diversified geographical and sector operations, the company is the largest player in the industry. It has a fantastic management team that allocates capital well and is well compensated. It has excellent financial performance indicators and is highly lucrative. Finally, even with a huge 40% margin of safety, its discounted price is still well below my estimate of its fair worth.

Catalysts

Near term:

·         Positive/Negative FY25 forecast released on 27th February 2025

·         A rise in the capital allocated to the share repurchase program

Long term:

·         Confirmed sector growth estimates

·         Margin improvements

·         Additional acquisitions at reasonable price