TDCX
TDCX is a new economy BPO company that is a proxy to the broader growth of the ASEAN internet economy. It is growing revenues ~20% annually, cash flow generative with ~30% EBITDA margins and currently trades at ~6x fwd EBITDA multiple. It is a leading new economy focused outsourced CX (customer experience) solutions provider serving the likes of Facebook, Airbnb and regional ASEAN internet companies. At current stock price of ~US$8/share, TDCX can generate >25% IRR over the next 3 years.
Business Overview
TDCX is a new economy focused outsourced CX solutions provider based in Singapore. Its 3 main business segments are:
- Omnichannel CX Solution (62% of revenue): Provides customer support to new economy companies. Examples include TDCX agents helping Airbnb foreign tourists communicate with their ASEAN hosts in the local language in a timely manner or TDCX agents helping fintech companies conduct user KYCs and resolves trading queries
- Sales & Digital Marketing (21% of revenue): Provides outsourced sales & marketing support to internet companies. Examples include TDCX’s agents helping SME merchant in ASEAN optimally use Facebook or Google’s digital ad tools
- Content Monitoring & Moderation (17% of revenue): Provide content moderators to social media platforms in local languages
TDCX currently has ~12k agents across offices in Singapore, Thailand, Malaysia, Philippines, Japan and China. These agents are hired, trained and managed by TDCX to deliver these services to customers. ASEAN delivery location comprises 91% of total revenue.
Why Do Internet Companies Outsource CX?
Internet companies experience high growth, thus outsourcing CX or S&M provides agility to scale faster. Through TDCX, high growth companies can outsource the logistical and HR headaches of hiring hundreds of new employees in a short span of time. This allows customers to focus on their core competencies which is product development and not HR management.
Outsourcing is also a cheaper option than hiring an equivalent employee within the organization. Tech companies generally have generous employee benefits and prime office locations. Offshoring and outsourcing allow tech companies to reduce direct employee costs.
For a sense of how prevalent outsourcing is, 100% of Facebook’s global sales & digital marketing function is outsourced and 95% of Airbnb global CX team is outsourced. Airbnb keeps a token inhouse CX team for benchmarking purposes and piloting new initiatives.
Using Airbnb as an example, in 2011, a well-publicized incident of a guest thrashing his host’s apartment prompted Airbnb to introduce CX functions to support its users. They decided to outsource CX as they can scale it faster. Overtime, Airbnb begun outsourcing more functions including Sales, L2 CX (more complicated customer support requiring timeliness, on the spot judgment or critical thinking from the agent), Trust and Safety and Payments enquiry & disputes.
Growth Runway
The ASEAN CX market is US$11bn / S$15bn in 2021 with US$2.6bn / S$3.5bn in the new economy. The new economy segment has grown 21% CAGR in the last 4 years while TDCX has grown 48% CAGR, increasing its market share from 7% to 16%. Frost & Sullivan expects new economy CX to grow 14% CAGR to $4.3bn / S$5.8bn in 2025 while old economy CX to grow 4% CAGR.
Another path to assessing TDCX’s growth runway is looking at the growth of new economy companies in ASEAN given the demonstrable value proposition of outsourcing. The Temasek, Bain & Google ASEAN internet economy report anticipates 20% GMV growth for ASEAN internet economy excluding fintech. TDCX is a growth proxy to the digital economy in the region given its new economy focus through two folds a) growth of broader digital economy and b) increasing penetration of outsource CX. Recently, they have onboarded new clients in the region including an online food delivery company, a crypto fintech firm and a regional gaming company. Shopee (the largest e-commerce player in ASEAN) is also an existing client. A new capital markets regime where cost of capital has risen will also push tech companies to outsource more to save costs, driving increasing penetration of outsourced CX.
With continued market share gain driven by its competitive advantages, I believe TDCX can grow revenues at 19% CAGR until FY25.
TDCX’s Competitive Advantage: Focus, Culture and Execution Ability
A long growth runway is meaningless if the incremental value is not accrued to the company’s shareholders. A company can only accrue value if it has a product that drives value creation and possess competitive advantages that retains that value to shareholders i.e. value is not competed away by competitors.
TDCX first competitive advantage is its focus on the new economy vertical. Although founder Laurent Junique started TDCX in Singapore in 1995 as a traditional outsourced BPO company, he has pivoted TDCX to focus on high growth, new economy customers. Today >90% of revenue comes from new economy verticals.
The majority of TDCX’s BPO competitors are old economy legacy players. Top competitors in ASEAN are Teleperformance (largest competitor), Concentrix, Alorica, TTEC and Telus where majority of their revenue mix is from old economy verticals offering lower value add services, for e.g. customer call centers for a utilities or telco company. Outsourced new economy CX functions are higher value add, requiring more complex agent training. For example, a TDCX agent helping an Airbnb guest who is locked out of the property at night with a host who doesn’t speak the guests’ language requires responsiveness, bilingual capabilities and agent judgment. Another example is a TDCX agent educating a SME merchant how to use Facebook or Google’s digital ad tool to create a create an effective digital marketing campaign.
For tech companies, outsourced CX is likely the only customer touchpoint with a person from the company while for legacy end customers like telcos or utilities, that is not the case. Therefore, tech companies prioritize users’ UX when interacting with the company’s outsourced CX service. The bar for quality outsourced CX is higher and is more critical. This is evident in TDCX’s superior EBITDA margins and agent productivity vs legacy BPO competitors.
Close alignment of organizational culture to its internet company clients is another competitive advantage. TDCX operates like a fast-growing tech company. It is young, nimble, agile and flat. Its office environment is like a tech company than a legacy BPO call center’s rows of cubicles. This is important for their customers as TDCX agents’ work closely and embeds into the client’s organization. Cultural alignment equates to more seamless working experience between agents and customers. Cultural alignment also shows in their lower employee churn rate of 25% vs industry average of 30–35%. Higher agent churn drives more onboarding work which can impede performance.
TDCX’s superior execution and management team is cited by customers as another key competitive advantage. Channel checks with their top 2 clients (Facebook 43% of revenue and Airbnb 19% of revenue) reveals TDCX is a top 3 Asia Pacific S&DM vendor for Facebook and owns 60% Asia CX vendor wallet share for Airbnb. TDCX’s ability to scale quickly to meet client demand, proactivity beyond contract scope, “always say yes” approach and agile decision making are cited as reasons for hiring TDCX over competitors.
Founder/CEO Laurent Junique started TDCX in 1995 and still owns 87% of TDCX today. He is highly incentivized and driven. Customers have mentioned that Laurent himself attends customer meetings and is sometimes intimately involved in projects.
In Facebook, vendors were achieving their KPI targets despite users still having poor satisfaction level. TDCX was the few vendor that proactively identified the problem and presented a solution to Facebook. Legacy BPO players are large, bureaucratic enterprises that do not operate with the same pace and agility as their tech company customers. It takes time and effort to change organizational culture and behavior, leaving nimbler players like TDCX to gain market share.
Competitive advantages like culture and execution ability may sound trivial or less tangible compared to economic moats like economies of scale or network effects. However operational excellence or what we public investors like to call “execution” is just as important. While it harder to assess compared to other more economically tangible competitive advantages, operational excellence is no less important. The best companies differentiate themselves by making small incremental improvements to their business everyday and compound that over long periods of time to build an advantage over competitors.
As a result, this allows TDCX to earn 30% ROIC, significantly higher than its competitors.
Margin Of Safety
I believe TDCX can compound at >25% IRR over the next 3 years. TDCX generates S$555m revenue in FY21 with a 32% EBITDA margin. It will grow its revenue at a 19% CAGR until FY25, implying an ASEAN new economy CX market share gain from 16% on 2021 to 20% in 2025. I believe this is achievable given the underlying growth of the ASEAN digital economy, outsourced CX’s value proposition and TDCX’s superior competitive advantages allowing it to capture disproportionate value in the marketplace. EBITDA margins will compress to 28% as they implement share-based compensation and grow into new markets/verticals driving EBITDA CAGR of 15%.
Valuing TDCX at a conservative exit EBITDA multiple of 11x, yields a ~S$5bn market cap in 3 years. 11x exit EBITDA multiple is conservative as this is a discount to historical peers’ range of 12–13x, due to Facebook and Airbnb revenue concentration (62% of revenue). If TDCX can diversify significantly away from Facebook and Airbnb by then, they should be trading at a premium to peer multiples given higher growth intensity and superior business quality.
Why Does The Mispricing Exist?
Investors have thrown the baby out of the bathwater in this instance. TDCX have been treated negatively by the market in tandem with unprofitable growth stocks since Nov 2021. Despite being profitable, TDCX’s stock performance have been in line with the GS Unprofitable Tech Index due to its perceived tech exposure.
I believe the market is mistaken. TDCX is a growing, profitable company with demonstrable competitive advantages to maintain its competitive positioning. TDCX continues to be cash generative and able to reinvest those cash flows into incremental high ROIC growth. I believe the market will recognize this and re-rate the stock up to its fair valuation.
TDCX is an undiscovered name. It IPO-ed with little publicity in Sep 2021, only covered by 2 bulge bracket sell-side analysts (GS and CS) and trades ~$4m ADTV. This creates technical barriers to investing for most institutional investors in current market environment resulting in the mispricing but it is an opportunity for others who are not encumbered by such constraints.
Lastly, the market is concerned with near term macro uncertainty as spending and hiring from tech companies slow down. This will impact TDCX in the near term but they will still continue to grow as new customers acquired over the last 2 years ramps up. With cash at 35% of market cap and at current valuation, I believe TDCX is positioned well to navigate a downturn and still offers compelling risk reward over the next 3 years.
