• 3Q23 revenue was in line with expectations. Earnings were better-than-expected, helped by lower employee expenses, lower taxes, and higher interest income. PATMI increased 2% YoY as a result. 9M23 revenue/PATMI were at 75%/91% of our FY23e forecasts.
• Revenue decline of 21% YoY from the top 2 clients was a drag, offset by strong growth from smaller clients across verticals like travel, gaming, FMCG, and e-commerce.
• We increased FY23e EBITDA by 11% to reflect lower costs, while reducing FY24e revenue/EBITDA by 4%/2%, respectively, on muted contribution from TDCX’s top clients. We also reduce our growth rate to 1% (prev. 3%) on limited growth visibility. We maintain BUY with a reduced DCF target price of US$8.60 (prev. US$10.40). TDCX continues to generate positive cash flows, with around 45% of its market capitalisation in cash (S$434mn).

The Positives

+ Revenue growth excluding top-5 clients still healthy. Revenue contribution excluding TDCX’s top 5 clients continued to grow (29% in 3Q23 vs 18% in 3Q22), while growing 52% YoY as newer campaigns in verticals like travel, gaming, FMCG, and e-commerce start to expand. New client campaigns for 3Q23 include: 1) global mobile messaging app; 2) leading global airline based in Asia.

+ Net margin improved on lower costs and higher interest income. Net margins expanded 150bps YoY as a result of: 1) 4% YoY reduction in employee expenses; 2) lowered tax expense due to a re-instatement of a tax incentive in PH; 3) ~2.5x increase in interest income on its S$434mn cash balance. PATMI improved 2% YoY.

The Negatives

– Lower seat volume from its top-2 clients was a big drag on growth. Revenue from its top 2 clients (47% of total revenue) declined -21% YoY on reduced seat volumes, even as these companies recorded very upbeat 3Q23 earnings. Near-term outlook also remains cloudy, with uncertainty around when these clients will begin to contribute meaningfully again to overall revenue growth. We reduce our FY24e revenue forecasts by ~4% as a result. Revenue excluding TDCX’s top-2 clients grew 14% YoY.