• 2Q23 results were in line with expectations. Earnings were helped by >6x YoY increase in interest income. 1H23 revenue/PATMI were at 48%/52% of our FY23e forecasts.
• TDCX continues to diversify its client base, adding an established global e-commerce platform in 2Q23. Client count grew 52% YoY.
• One of its key digital advertising clients cut volumes, while the expected growth in Travel & Hospitality did not materialise. FY23e revenue guidance was reduced to 2-4% YoY.
• We cut FY23e revenue/PATMI by 6%/11% respectively, due to the expected weakness for 2H23e. We maintain BUY with a reduced DCF (WACC 10.4%, g 3%) target price of US$10.40 (prev. US$12.10). TDCX continues to generate healthy cash flows, and is sitting on a large cash position that could be used for increasing share buybacks.

The Positives

+ Increasing revenue diversification. TDCX grew its client count 52% YoY, with client revenue mix excluding its top 5 contributors increasing to 27% (2Q22: 17%, 1Q23: 24%). In addition, its 1H23 expansion into Indonesia and Brazil have been a success, with Brazil amassing >100 pax headcount and receiving increasing inquiries from potential clients. Brazil is geographically important as it allows TDCX to cover the 2 most common languages in Latin America – Portuguese and Spanish, enabling the company to serve a wider range of cross-border international clients. TDCX also expanded into a new vertical – HealthTech, and added an established global e-commerce platform as well.

The Negatives

– Key digital advertising client cut volumes. One of TDCX’s key clients in the digital advertising vertical cut seats for the rest of FY23e as part of ongoing cost-cutting measures. This is expected to negatively impact revenue for TDCX’s Omnichannel CX and Content, Trust & Safety segments.

– Travel & Hospitality vertical disappointed. The expected growth from travel & hospitality – one of TDCX’s largest verticals, did not materialise due to continued weakness in China outbound travel. The outlook for this vertical was weak, with no expectations of significant improvement in 2H23e.

– Reduced FY23 revenue and margin guidance. TDCX reduced its FY23e revenue growth outlook to 2-4% in constant currency, from its prior guidance of 3-8%. This downward revision was led by a lengthening sales cycle, delays in deals closing, and cautious spending by clients. In addition, positive earnings results from some of its key clients have not translated immediately into seats volume. On the margin side, TDCX reduced the top end of its adj. EBITDA margin guidance to 25-27% (from 25-29%), citing clearer visibility on expenses related to new initiatives as the main reason for the revision.

Outlook

Guidance: TDCX reduced its FY23e revenue growth range to 2-4% in constant currency, down from its prior guidance of 3-8%, citing longer sales cycles, a slower-than-anticipated velocity on closing, and continued cautious spending by clients as the reasons for the revision in guidance. Recovering profitability in some of TDCX’s key clients have also not translated immediately into seats volume, with uncertainty surrounding when these clients would start to increase their spending again. However, TDCX also said that is starting see more complex inquiries coming in from clients, indicating that there are some early signs of a potential rebound in FY24.

On the margin side, TDCX reduced the top end of its adj. EBITDA margin guidance to 25-27% (from 25-29%), citing clearer visibility on expenses related to new initiatives as the main reason for the revision. We view the company’s strategic expansion to be significant as it provides: 1) greater linguistic capabilities for more efficient cross-border services; 2) faster ramp-up in campaigns for clients wanting to expand geographically.