• 4Q22 results were in line with expectations. FY22 revenue/PATMI was at 100%/97% of our FY22e forecasts. Earnings were hurt by S$6mn FX loss on cash and receivables.
• 14% YoY revenue growth driven by double-digit growth in the digital advertising vertical, overall net revenue retention rate of 117%.
• EBITDA margin declined 8% due to over-hiring and continued investments to support business growth. Soft FY23e revenue guidance of 3-8% YoY growth.
• We cut FY23e revenue/EBITDA estimates by 8%/16% to reflect ongoing macro challenges with clients reducing headcount, and a contraction in margins due to continued expenses to support business expansion. TDCX’s ability to generate healthy cash flows is intact – net cash from operations grew 59% in FY22. Long-term tailwinds in the expanding BPO market should also benefit TDCX. We maintain an ACCUMULATE recommendation with a reduced DCF (WACC 10.4%, g 3%) target price of US$12.10 (prev. US$14.80).

The Positives

+ Revenue growth driven by digital advertising vertical. TDCX’s 4Q22 revenue grew 14% YoY, driven by a double-digit growth from clients in the digital advertising and media vertical – 54% of total revenue. The company’s second largest vertical – travel & hospitality, also saw strong 26% YoY growth with travel rebounding globally. TDCX’s net revenue retention rate was at 117%, demonstrating a healthy incremental revenue pipeline from existing clients.

+ Expansion over last 2 years starting to bear fruit, reduction in revenue concentration risk. TDCX’s expansion into 7 new geographies over the last 2 years is starting to pay off, with clients added from this expansion contributing ~10% of revenue growth in FY22e. For 4Q22, TDCX added 10 new clients, and also launched 12 new client campaigns, increasing its total client campaign count by 62% YoY. In addition, these new clients aided in reducing the overall revenue concentration risk of the company, with its top-2 clients as a percentage of total revenue down 700bps to 52%.

The Negatives

– Soft FY23e guidance due to limited visibility. Macro uncertainty continues to impact client headcount requirements in the near term, with the digital advertising vertical affected the most severely. As a result, expected volume flattening from clients in this vertical (58% of total revenue) dragged down FY23e revenue guidance.

– Margins declined due to combination of over-hiring and continued investments to support business growth. 4Q22 adj. EBITDA margins contracted 830bps from 4Q21 to 26.5% as a result of over-hiring in anticipation of volume growth that did not materialise, and increased costs to support continued business growth.