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Teleperformance: Is It a Hidden Gem in Service Solutions?

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Teleperformance is a global leader in digital business solutions and has been in operation for over 45 years. However, with the introduction of AI, there is uncertainty about the future need for Teleperformance's services to the same extent. Is it possible to scoop up shares at a cheap valuation and benefit from long-term growth, or should you stay away and find better opportunities elsewhere? This is what I am going to investigate in this analysis.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.7

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Teleperformance. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Teleperformance either. Thus, I have no personal stake in Teleperformance. If you want to purchase shares (or fractional shares) of Teleperformance, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.

Teleperformance is a global leader in digital business services. It was founded in 1976 and is headquartered in Paris, France. Teleperformance provides customer consultancy services globally. The company operates in two segments: Core Services and Digital Integrated Business Services, as well as Specialized Services. The company offers customer relationship operations, technical support, technical assistance, customer acquisition services, management of business processes, back office and digital platform services, consulting, data analysis services, online interpretation, visa application management, health management services, accounts receivable credit management services, and recruitment process outsourcing services. It also offers digital customer experience (CX), trust and safety, artificial intelligence, video CX, metaverse, CX management, advanced analytics, business transformation consulting, technology as a service, collection services, interpretation and translation, and healthcare support services. The company serves industries such as automotive, energy and utilities, insurance, government, technology, travel and hospitality, banking and financial services, healthcare, media, retail and e-commerce, cargo, telecom, and video games. The company is present in nearly 100 countries. Teleperformance manages programs in about 300 languages and dialects in 170 markets through a global and flexible model. Many of Teleperformance's largest customers have been with them for more than 20 years, which not only indicates their trust in the company but also makes it unlikely that they will switch to a competitor. Another competitive advantage of Teleperformance is its ability to provide customized solutions for companies worldwide, regardless of their location. Thus, I believe that Teleperformance has built a moat over the years by establishing long-term relationships with customers and maintaining a global presence.

Teleperformance currently has two co-CEOs, Daniel Julian and Bhupender Singh. The reason Teleperformance has two co-CEOs is that Daniel Julian held both positions of CEO and Chairman of the Board. Due to shareholder demand, Teleperformance decided to separate the roles of Chairman and CEO. Hence, Bhupender Singh will become the sole CEO in 2026, while Daniel Julian will continue as the Chairman of the Board. Teleperformance aims to ensure a smooth, methodical, and flawless succession by appointing two co-CEOs to operate until the end of 2025. Daniel Julian founded Teleperformance in 1978 at the age of 25, after graduating from the University of Paris-Nanterre, where he majored in Economics. Starting with just 10 telephone lines in an office in Paris, he succeeded in growing Teleperformance to the number one position in the French market in 1985, then to the number one position in the European market in 1995, eventually achieving the number one position worldwide. Bhupender Singh was the Chief Executive Officer of Intelenet Global Services, which was acquired by Teleperformance in 2018. He became part of Intelenet in 2007 through the acquisition of Travelport India Service Operations, where he also served as Chief Executive Officer. Prior to that, he has worked at prominent consulting firms, including McKinsey and Booz Allen Hamilton. Bhupender Singh has an MBA from IIM Ahmedabad and a B.Tech from IIT Delhi. He was awarded the Institute Gold Medal at IIM and the Institute Silver Medal at IIT for his academic achievements. Throughout his 24-year career, Bhupender Singh has led critical assignments focused on business turnaround and transformation, growth strategies, and mergers and acquisitions. I believe that Daniel Julian has done a remarkable job, and I appreciate that he will continue as Chairman once the succession is complete. I appreciate that management has listened to shareholders and decided to split the roles of Chairman and CEO. It is commendable that Teleperformance will take the necessary time to ensure that the succession process is smooth, methodical, and flawless. I believe that Bhupender Singh has the credentials and experience to be a successful CEO, especially with Daniel Julian serving as Chairman. Thus, I'm comfortable with management.

I have determined that Teleperformance has a moat. And I feel rather confident about management as well. Now, let us analyze the numbers to determine if Teleperformance meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.

The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. The return on invested capital (ROIC) is a bit underwhelming as Teleperformance has only managed to achieve a ROIC above 10% in two out of the past ten years. One encouraging sign is that the ROIC was above 10% in both 2021 and 2022. However, the ROIC decreased to below 10% in 2023. In 2023, many companies faced challenges due to macroeconomic factors, which also impacted Teleperformance. Teleperformance also acquired Majorel in 2023, which also impacted the Return on Invested Capital (ROIC). Overall, the Return on Invested Capital (ROIC) appears underwhelming, partly due to the presence of debt. Later in the analysis, I will share the return on equity, which does not factor in debt, and you will see higher numbers than the ROIC. Nonetheless, I would like to see Teleperformance consistently deliver a Return on Invested Capital (ROIC) above 10% in the future.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 as Finbox only provides data for the past ten years. Teleperformance has managed to increase its equity every year in the past ten years, except for 2020, which was affected by the pandemic. I find these numbers very encouraging, especially considering that Teleperformance has consistently increased its equity by more than 10% each year over the past six years, with the exception of the pandemic year in 2020.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Teleperformance has managed to deliver a positive free cash flow every year for the past ten years, which is encouraging. Another encouraging sign is that Teleperformance has increased its free cash flow year over year in nine out of the past ten years. Levered free cash flow margin has also grown over the years and reached its peak in 2023, which is a positive sign for the future. The free cash flow yield is now significantly higher than the ten-year average, indicating that Teleperformance is trading at a cheap valuation. However, this is something we will revisit later in the analysis.

Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Upon analyzing Teleperformance's financials, I have determined that the company has 6,2 years of earnings in debt. It is significantly higher than the three-year limit. However, there is an explanation for the high debt, which is the acquisition of Majorel. Management has mentioned that they are absolutely convinced that they will continue to control debt. Debt affects the ROIC, which has been underwhelming in most years. Below, I have shared Teleperformance's Return on Equity (ROE) over the past ten years, which provides an indication of how Return on Invested Capital (ROIC) would be without the high debt.

Based on my findings so far, I believe that Teleperformance is an intriguing company. However, no investment is without risk, and Teleperformance also has its fair share of risks. Macroeconomics. Teleperformance is affected by macroeconomics. During more stable periods characterized by high GDP growth rates, low cost of capital, and moderate inflation, Teleperformance's clients seek growth opportunities. They are expanding into new products, markets, and geographies. This high volume of activities in the industry also results in less pricing competition. Unfortunately, the opposite is true. During challenging times, companies often scale back to conserve cash. This results in a lower volume of activities and, consequently, more pricing pressure. The forecasts indicate that GDP growth in developing economies is not as robust as it was in the previous five years. In 2024, growth is expected to be only 1,4% in the advanced economy. So, less growth than in 2023. And then it does pick up afterwards, starting in 2025 as forecasted, but it still does not reach the levels of 2022 and 2021. Thus, the next 2 to 3 years are expected to be challenging for Teleperformance. Artificial intelligence. The rapid expansion of artificial intelligence into digital platforms and applications has streamlined many business processes, including customer service. Technological innovation utilizing artificial intelligence will continue to advance, sparking uncertainty about the future demand for Teleperformance's services. According to Nuance Communications, artificial intelligence will disrupt people's expectations for customer service. They mention that consumers are eager for automated systems that are available 24/7. As artificial intelligence continues to advance, businesses are increasingly able to offer customer service through virtual assistants. Consequently, companies may choose cost-effective automated systems like virtual assistants over Teleperformance for some or all of their customer service needs. Competition. Teleperformance's competitive environment is expanding and now includes other market operators such as global leaders in consulting, IT services, and digital transformation. Furthermore, in each country where Teleperformance operates, it faces extensive competition from international and domestic players, as well as from companies specializing in contact center management. Teleperformance is competing with these companies in both retaining existing clients and acquiring new ones. The expansion and increasing complexity of the competitive environment may compel Teleperformance to lower its prices, potentially negatively affecting its revenue and earnings. Competition is an ongoing risk due to the varying durations of contracts in the inbound calls business, which constitutes the majority of Teleperformance's revenue. These contracts typically range from two to five years.

There are also numerous reasons to invest in Teleperformance. One reason is artificial intelligence. I identified artificial intelligence as a risk for Teleperformance, but it could also serve as a growth catalyst. Management has mentioned that they see artificial intelligence as an enhancer for the business. They believe that artificial intelligence provides them with greater accuracy, increased productivity, and the ability to manage more complex end-to-end solutions. Management has mentioned that they have been using artificial intelligence (AI) to enhance the operational outcomes for their clients. To reduce costs, increase efficiencies by 15% to 30%, and improve outcomes. The outcomes could include quality improvement, accuracy enhancement, and increased sales conversions. And wherever Teleperformance has deployed it, they have seen a 10% to 25% improvement. They have also been deploying AI to improve operational support functions such as operational supervision, workforce management, and quality assurance (QA), which has resulted in an improvement of 10% to 25% in quality and a 15% to 30% reduction in costs. The Majorel acquisition. Teleperformance acquired Majorel in 2023. Management said that there are two simple reasons why they acquired Majorel. During difficult times, large clients are consolidating their number of vendors. Having the number one position in the global market, as Teleperformance does, provides a clear competitive advantage. The second reason was that Teleperformance was a small player in the German and French markets, which are the third and fourth largest markets in terms of outsourcing, while Majorel was a major player in both markets. Furthermore, the Majorel acquisition doubles Teleperformance's presence in Asia Pacific, the fastest-growing outsourcing market. One of the criticisms of the acquisition of Majorel is that it has lower margins than Teleperformance. However, management has mentioned that Majorel will reach the margins of Teleperformance in just two years. Outperforming the sector. Teleperformance has consistently outperformed its sector. There is an overall slowdown in the business services sector, and the guidance from almost all of Teleperformance's direct and indirect competitors indicates a slowdown in the near future. However, due to its diversified geographies, lines of businesses, verticals, and clients, Teleperformance is much more resilient and has forecasted growth in the near future. Management has mentioned that unlike Teleperformance, many mid and smaller-sized companies in their sector, which are exposed to specific verticals, clients, or geographies, are unable to achieve the same level of growth as Teleperformance. Management has mentioned that they are confident that Teleperformance will continue to grow faster than the sector in the future. 

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 10,18, which is from 2023. I have selected a projected future EPS growth rate of 10%. Finbox expects EPS to grow by 15,9% in the next five years, but I'm more conservative. Additionally, I have selected a projected future P/E ratio of 20, which is twice the growth rate. This decision is based on Teleperformance's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be 130,53. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Teleperformance at a price of 65,27 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.375, and capital expenditures were 233. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 163,1 in our calculations. The tax provision was 231. We have 60,83 outstanding shares. Hence, the calculation will be as follows: (1.375 – 163,1 + 231) / 60,83 x 10 = 237,20 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Teleperformance's Free Cash Flow Per Share at 18,77 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is 236,12.

I believe that Teleperformance is an intriguing company. I believe that the company has built a solid moat over the years, and I am confident in both the current management structure with two co-CEOs and when Bhupender Singh becomes the sole CEO in 2026. Teleperformance has historically delivered an underwhelming Return on Invested Capital (ROIC), but the ROIC did increase in the two years leading up to the Majorel acquisition. While ROIC is underwhelming, Teleperformance has consistently increased its free cash flow per share since 2018, which is encouraging. Teleperformance is facing some short-term headwinds due to macroeconomic factors, but macroeconomics will eventually improve. Competition is an ongoing risk for Teleperformance as contracts usually vary between two and five years. Artificial intelligence is a question mark for Teleperformance. Will AI become so advanced that it reduces the demand for Teleperformance's services? Management does not believe that contextualization, common sense, and decision-making in customer service can be provided by anything other than humans. Management has also mentioned that 8 of its top 10 long-term clients are large digital companies, either from Silicon Valley or China. This indicates that these companies, which are prominent leaders in AI promotion, do not believe that AI will replace Teleperformance. Instead, Teleperformance believes that AI can be beneficial for both them and their clients moving forward, as exemplified by the examples in this analysis. Nonetheless, the impact of AI will continue to be uncertain for years to come. The Majorel acquisition has received some criticism because of Majorel's lower margins. However, management believes that margins will reach the level of Teleperformance in two years, and the acquisition could be a growth catalyst for Teleperformance as it expands its presence in some of the larger markets. Teleperformance consistently outperforms the sector, suggesting that it is a high-quality company and potentially the top choice for investment in the sector. If you believe that AI will not reduce the need for Teleperformance's services in the future, I think that purchasing shares below the Payback Time price of €236 could be a good investment.

My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.

I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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