TaskUs, Inc. (NASDAQ:TASK) Q4 2023 Earnings Call Transcript

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TaskUs, Inc. (NASDAQ:TASK) Q4 2023 Earnings Call Transcript February 28, 2024

TaskUs, Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.31. TaskUs, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the TaskUs Fourth Quarter and Full Year 2023 Earnings Call. My name is Liz, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to introduce Trent Thrash, Senior Vice President of Corporate Development and Investor Relations. Trent, you may begin.

Trent Thrash: Good afternoon, and thank you for joining us for the TaskUs fourth quarter and full year 2023 earnings call. Joining me on today's call are Bryce Maddock, our Co-Founder and Chief Executive Officer, and Balaji Sekar, our Chief Financial Officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the Investor Relations section of the website at ir.taskus.com. We have also posted supplemental information on our website, including an investor presentation and an Excel-based financial metrics file. Please note this call is being simultaneously webcast on the Investor Relations section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements regarding our future financial results and management's expectations and plans for the business.

These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from these forward-looking statements can be found in our annual report on form 10-K, which was filed with the SEC on March 6, 2023. This filing is accessible on the SEC's website and our website at ir.taskus.com and may be supplemented with subsequent periodic reports we file with the SEC. We expect our 2023 10-K to be filed with the SEC no later than March 15, 2024. Any forward-looking statements made on today's conference call, including responses to questions, are based on current expectations as of today, and TaskUs assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law.

The following discussion contains non-GAAP financial measures. For a reconciliation of these non GAAP financial measures to the most directly comparable GAAP metric, please see our earnings press release, which is available in the IR section of our website. Now, I will turn the call over to Bryce Maddock, our Co-Founder and Chief Executive Officer. Bryce?

Bryce Maddock: Thank you, Trent. Good afternoon, everyone, and thank you for joining us. I want to start by expressing my deep gratitude for our TaskUs teammates around the globe who have worked tirelessly over the holidays and into the New Year to deliver for our clients and our shareholders. As a result of their efforts, we outperformed the top end of our revenue and adjusted EBITDA guidance for the fourth quarter. We delivered $234.3 million in revenue compared to guidance of between $225 million and $227 million. In terms of profitability, we delivered $59 million in adjusted EBITDA for an adjusted EBITDA margin of 25.2%, 270 basis points above our guidance of 22.5%. For the calendar year 2023, we delivered $924.4 million in revenue and $220.8 million in adjusted EBITDA, representing an adjusted EBITDA margin of 23.9% compared to guidance of 23.3%.

Finally, we delivered $131 million in free cash flow in 2023, excluding acquisition-related payments, well above our guidance of more than $115 million. While I'm pleased with our team's efforts and results, we are not satisfied. 2023 was a challenging year and we did not deliver anywhere near the top line growth rates that we have historically. In 2024, we're determined to do better and to return to consistent year-over-year revenue growth. While it is still early in the year, 2024 is off to a solid start. Despite a macro backdrop that remains challenging, we've continued making investments in technology, sales, and marketing. We're pleased with the dividends that those investments are producing and have seen increasingly strong demand over the first quarter of the year.

I'll recap some of the highlights from our Q4 and full year 2023 performance before discussing our 2024 outlook. Balaji will then walk through our financials and 2024 guidance in greater detail. Q4 revenues were $234.3 million, a 3.3% decline on a year-over-year basis, consistent with Q3's rate of decline and ahead of our expectations. On a sequential basis, Q4 revenue increased by 3.8%, largely as a result of seasonal volumes. As anticipated, revenue from our top 20 clients declined 10% year-over-year in Q4 as a result of certain clients' cost optimization and offshore migration efforts, including those by our largest client. These top 20 revenue headwinds were partially offset by growth from new and existing clients that moved into our top 20 for 2023.

Year-over-year revenue growth from customers outside the top 20 accelerated to 13% in Q4 versus 8% in Q3. We expect to continue to grow clients outside of our top 20 at a faster rate than our largest clients in 2024, as we continue to diversify our client base and expand our business in new areas like healthcare and banking and financial services. In terms of delivery geographies, on a year over year basis, revenues from U.S. delivery declined 35% in Q4, while revenue from all other geographies grew by 5%, demonstrating the strength of our global delivery model. Q4 again saw rapid growth in Latin America. Revenue from the region grew approximately 78% year-over-year. At the end of 2023, approximately 96% of our total headcount was outside the United States.

We ended the year with approximately 48,200 global teammates, an increase of approximately 1,200 teammates quarter-over-quarter. As noted in Q3, we continue to make progress on our strategy of cross selling our specialized services. In Q4, we saw a 30% year-over-year increase in clients utilizing more than one of our service lines. We also continued expanding our presence in new markets, including adding notable use cases for enterprise clients in the healthcare and banking and financial services spaces as well as fast growing technology clients in the autonomous vehicle and generative AI markets. In addition to supporting clients in the generative AI space on the development and support of their technology, we are integrating generative AI into our core service offerings.

In 2023, we launched TaskGPT, our Gen AI platform with multiple clients. We continue to believe that these tools will yield the greatest returns when you're trained on client specific data and utilized by talented teammates to ensure efficient, consistent, and secure results. In line with this, we're excited to announce AssistAI, our knowledge assistant built on the TaskGPT platform. AssistAI is custom trained on our clients' knowledge bases, training materials, and historical customer interactions. Our teammates chat with AssistAI to answer customer questions more efficiently and accurately in our digital CX business or to ensure they're utilizing the latest policy when taking action on a piece of content in our trust and safety business. We are offering AssistAI to all TaskUs clients as an integrated part of our service offering.

Going forward, we will deliver a well-trained combination of technology and talent to support our clients, protect their brands, and deliver for their customers. During 2023, we also made continued progress on our internal cost efficiency programs in order to maintain our strong margin and free cash flow performance in the face of our clients' own cost optimization efforts. We remain vigilant on cost in the business, not as a onetime optimization program, but as an ongoing fundamental discipline to ensure we remain competitive. Shifting to sales, 2023 was characterized by slower decision making and an intensified focus on cost reduction compared to prior years. Despite this, our sales team delivered. We added 47 new clients, the most in any year since 2018.

Partially as a result of this success, we have further improved our client concentration. In Q4, clients outside the top 20 drove 34% of our revenue versus 29% in Q4 2022. We ended 2023 with 97 clients who we billed $1 million or more for services up from 86 in 2022. In Q4, sales were again driven largely by bookings from existing clients, which accounted for approximately 70% of total new business signings. We ended the year with a strong pipeline of opportunities with both new and existing clients. We're encouraged by the size, quality, and depth of pipeline opportunities across our service lines at the end of 2023 and we continue to see improved sales momentum in 2024. Turning to our service lines. In Q4, digital customer experience revenue declined by 4.4% compared with Q4 of 2022.

Consistent with prior quarters, expansion with existing clients and new client signings was offset by the decline in revenues from our largest client as well as cost optimization and volume declines in other clients. On a sequential basis, our DCX revenues were up by 4.1% inclusive of seasonal revenues. In Q4, we saw strong signings activity from existing DCX clients in the technology and on demand travel and transportation spaces as well as with non-crypto Fintech and Enterprise Financial Services clients. We also continue to be encouraged by the increase in opportunities we're seeing to provide sales and customer acquisition services to clients across multiple vertical markets. We signed a DCX contract leveraging the capabilities of our heloo team to support a European based financial services client.

We also won a competitive bid process to provide support from our U.S. operations for a leading credit union. This win is a direct result of the 2023 investments we made in banking and financial services expertise in order to provide balance to our core fast growing technology clients. This type of work in regulated industries is a great example of U.S. based delivery services that we believe are likely to remain onshore regardless of the economic environment. We also see the U. S. continuing to be a key geography for delivering specialized services to healthcare clients. Our trust and safety service line continued to perform well in Q4. Trust and safety growth further accelerated in the quarter growing 23.5% year-over-year and 7.3% quarter over quarter.

Q4's growth was largely driven by the continued growth in our large on demand travel and transportation clients as well as certain clients in the social media, Technology and Fintech verticals. This growth again more than offset the volume declines we saw from our largest equity trading client, which will cease to provide difficult year-over-year growth comparisons after Q2 2024. Our trust and safety service line includes both our content moderation offerings and the work of our risk and response teams, which deliver financial compliance, risk, and fraud detection services. While we don't separately report this offering, we're pleased that our Q4 risk and response revenue growth was again accretive to the overall growth rate of the trust and safety service line.

Speaking of our risk and response team, I'm proud to announce that we were named a leader in Everest Group's Financial Crime and Compliance Operations Services peak matrix for 2024. Demand for all of our trust and safety services continues to grow. In Q4, we saw a notable win with a decacorn startup in the graphic design space. We now provide multilingual content moderation to this client. We also began supporting a provider of consumer credit building and financial education solutions with both our DCX and risk and response service line. This is another clear demonstration of our success in cross selling highly specialized services to both new and existing clients. AI service revenues declined 26.5% in Q4, compared with Q4 of 2022, driven primarily by a mid-2023 decision to offer certain U.S. based work by our largest autonomous vehicle client and a reduction in U.S. based delivery at our largest client.

As discussed in Q3, the health of these two large client relationships remains very strong. In fact, we won exciting new projects at both clients in Q4 and early Q1 that will ramp in 2024. We anticipate existing AI services revenues from these clients to stabilize on sequential basis in 2024 and the difficult year-over-year comparisons within our AI service line to lapse by year-end. Despite the revenue decline, we're selling our AI services to a greater number of clients. The number of clients using our AI services grew by a double digit percentage year-over-year in 2023. In line with this, we're seeing growing demand for AI services from large language model and multimodal generative AI providers. Here, our teams are performing expert response writing, ranking and scoring, prompt review, adversarial testing, and trust and safety evaluations.

We expect these clients and new opportunities to become an increasingly larger portion of our AI services revenue over the course of 2024. Speaking of 2024, let's move to our Q1 full year 2024 revenue outlook and growth strategy. In Q1, we expect to deliver revenues between $222.5 million and $224.5 million, a decline of approximately 5% year-over-year and quarter-over-quarter. The year-over-year decline is primarily driven by U.S.-based projects that concluded at the end of Q1 2023 for our largest client and other client cost optimization decisions made throughout 2023 while the quarter-over-quarter decline is primarily driven by Q4 seasonal revenues. We expect to deliver full year 2024 revenue of approximately $925 million at the midpoint of our guidance range of between $900 million and $950 million in revenue.

A data engineer working intently on a computer, processing complex algorithms.
A data engineer working intently on a computer, processing complex algorithms.

The improved momentum we saw in Q4 and early Q1 gives us confidence that we can return to year-over-year growth in the back half of 2024. Delivering revenues that are roughly flat to 2023 for the full year and accelerating growth rates as we exit 2024. We now believe that the material revenue headwinds created by 2022 and 2023's onshore to offshore ships are largely behind us. As noted last year, we work closely with our clients as part of their annual budgeting processes. As a result of these conversations, our strong Q4 results and the progress made in early Q1 across sales, hiring and new program ramps, we are cautiously optimistic. While revenue declined in 2023 at a few of our largest clients, we expect revenues at these same clients to be flat to slightly up year-over-year in 2024.

However, clients continue to look for ways to reduce costs by leveraging automation technologies and global delivery models. We believe this will continue in 2024, but that for a variety of reasons, including regulatory and privacy concerns and the complexity of certain work, approximately 10% of our revenue will be derived from the U.S. for the long-term. As a frame of reference, we delivered approximately 14% of our revenue from U.S. delivery in Q4 of 2023, down from 21% in Q4 of 2022. As our U.S. revenues stabilize, we believe that our international footprint will continue to be a driver of future revenue growth. For 2024, we're focused on four initiatives to accelerate revenue growth. First, we will take share from our competitors. Whether it's an existing or new client, we continue to see meaningful opportunities where we are under penetrated from a wallet share perspective.

This includes an increased focus on some of the biggest technology companies in the world as well as traditional enterprise clients. Many of these clients and prospects who have annual outsourcing budgets in the hundreds of millions of dollars are only spending a few million dollars with TaskUs today. Recent large scale industry consolidation has created opportunities for TaskUs to capture incremental share to help clients better diversify their partner networks. So, we are doubling down on our investments in sales and client services to grow these relationships. Our solid performance in the second half of 2023 in the face of significant challenges gives us confidence that our team can compete with anyone and win. Next, we will continue to focus on diversifying our client base by landing enterprise clients in the banking and financial services and healthcare spaces.

These clients' more consistent spending patterns will create a stable ballast of revenues, while our continued leadership in servicing high growth technology clients will enable rapid growth in the years to come. We built teams of experts in both enterprise verticals and have seen solid early progress. Third, we will continue to successfully cross sell our specialized services for our client base, whether it's a trust and safety client utilizing our AI services to help develop their latest generated AI tool or a risk and response client bringing in our instructional designers to overhaul their training curriculum, we will continue to expand our client relationships by selling more of our specialized services to our existing clients. And finally, we aim to lead the industry on the deployment of generative AI tools to support the delivery of services to our clients and their customers.

We are very excited to offer our AssistAI tool to all TaskUs clients. This tool improves the accuracy and efficiency of our teammates across digital customer experience, trust and safety, and risk and response workflows. We believe the future of this industry will require companies to deliver well trained teammates and technologies to solve client challenges and with the launch of AssistAI, we're making strong progress towards this vision. By executing on these initiatives, I believe that we will achieve our 2024 goals and return to accelerating year-over-year growth in the back half of the year while maintaining industry leading adjusted EBITDA margins and free cash flow generation. With that, I'll hand it over to Balaji to go through the Q4 financials and our 2024 guidance in more detail.

Balaji Sekar: Thank you, Bryce, and good afternoon, everyone. I'm going to focus my remarks primarily on our fourth quarter, but will reference a few key full year metrics. Please note that some of these items are non-GAAP measures and the relevant reconciliations are attached to the press release we issued earlier today. The fourth quarter was another quarter of both top-line and bottom-line performance that exceeded expectations, while revenue declined by 3.3% year-over-year to $234.3 million became in higher than the midpoint of our guidance of $226 million. Adjusted EBITDA of $59 million and adjusted EBITDA margin of 25.2% came in higher than our guidance of 22.5%, primarily due to better than forecasted revenues, as well as lower than expected seasonal costs.

Adjusted EBITDA margins improved by 130 basis points compared to Q4 of the previous year. For full year 2023, revenue declined by 3.8% to $924.4 million, but came in above the top end of our guidance range of $917 million. We achieved adjusted EBITDA of $220.8 million for an adjusted EBITDA margin of 23.9%, again above our guidance of 23.3%. The strong revenue performance in the fourth quarter compared with guidance was driven primarily by volume risks that we expected not materializing along with strong seasonal revenues that we discussed in our Q3 call. The stronger than expected results also reflected our ability to ramp and consistently deliver on key metrics for our clients. Moving on to our service offerings. In the fourth quarter, our digital customer experience offering generated $151.9 million for a decline of 4.4%.

Our trust and safety business grew 23.5% to $52.2 million and AI Services declined 26.5% to $30.1 million. In Q4, we continue to see the diversification of our revenue base. Our revenue concentration with our largest client was 19% consistent with Q3, but down from 22% in Q4 of 2022. Our top 10 and top 20 clients accounted for 55% and 66% of our revenue, respectively, compared to 58% and 71% in the prior year as our consistent March towards a more diversified revenue base continues. In the Q4, we generated 56% of our revenues in the Philippines, 14% of our revenues in the United States, and 12% of our revenues from India and 18% of our revenues from the rest of the world, mainly driven by our operations in Latin America and Europe. Cost of service as a percentage of revenue was 58.6% in the fourth quarter compared to 57.5% in the prior year.

The year-over-year increase was driven by depreciation of the U.S. dollar against some of the currencies in our major delivery geographies, wage inflation and expenses associated with our return to the office, which was partially offset by the geographic mix of revenues and operational efficiency gains. In the Q4, SG&A expenses were $48.9 million or 20.9% of revenue compared to $64.5 million or 26.6% of revenues in the prior year. This decrease was driven by our disciplined cost efficiency program as well as the $4.8 million reduction in our earnout expense associated with the heloo acquisition and a decrease in stock compensation expense from $13.3 million in Q4 of 2022 to $9,800,000 in Q4 of 2023. We earned adjusted EBITDA of $59 million and a 25.2% margin in Q4 compared to $57.9 million and 23.9% margins in the Q4 of last year.

The reduction in revenue and increased cost of service was more than offset by savings in SG&A. For the full year, we achieved $220.8 in adjusted EBITDA and an adjusted EBITDA margin of 23.9%, above our guidance range. Adjusted net income for the quarter was $32.2 million and adjusted EPS was $0.35. For the full-year adjusted net income $136 million and adjusted EPS was $1.32. This compares to adjusted net income of $33.3 million and adjusted EPS of $0.33 for the fourth quarter of 2022 and $142.8 million in adjusted net income and $1.39 of adjusted EPS for full year 2022. Adjusted EPS in 2023 benefited from a lower number of weighted average shares outstanding as a result of our share repurchases. Now moving on to our cash flow and balance sheet.

Free cash flow was $31.7 million in Q4. For the full year, free cash flow excluding payments for earnout consideration was $131 million exceeding our guidance of greater than $115 million. This represents a conversion rate of 59.3% of adjusted EBITDA for the full year. Cash and cash equivalents were $125.8 million as of December 31, 2023, compared with the September 30 balance of $114.6 million. Our capital expenditures increased in the fourth quarter to $8.1 million or 3.5% of revenue compared to $7.7 million or 3.2 percent of revenue in the prior year. For the full year, CapEx was $31 million or 3.4% of revenue compared with $43.8 million or 4.6 percent of revenue in 2022. This full year decrease was driven largely by optimizing CapEx spend and better utilization of existing investments We maintained our disciplined capital allocation program.

As you will remember, this year we allocated an additional $100 million towards our buyback program, bringing the total authorization to $200 million. In the quarter, we bought 2 million shares at an average cost of $9.66 per share for $19.2 million. For the year, we repurchased 10.1 million shares at an average cost of $11.02 per share for $111.8 million. Over the life of the program, we bought back 11.8 million shares and spent $142.7 million at an average cost of $12.10 per share. We will continue to allocate capital to our buyback program on a programmatic basis in accordance with our plan. We maintained low leverage, ending the year with 0.6x net debt to adjusted EBITDA leverage ratio. Our priority remains investing for growth. To this end, we are increasing our investments in sales and marketing.

Given the strength of our balance sheet, we have ample capacity for these growth investments, while preserving our ability to take action on any M&A opportunity that meets our investment criteria or to return capital in the form of share repurchases. In summary, we built more efficiency into our global operating model and leveraged automation and shared services, resulting in millions of dollars of savings, while letting us invest in strategic growth areas like sales, marketing and technology. As a result, in 2023, we delivered adjusted EBITDA margins and free cash flows that we believe are among the best in the industry. At this point, I will outline our financial outlook for the full year and first quarter of 2024. We anticipate full year 2024 total revenues to be in the range of $900 million to $950 million.

We expect to earn a full year 2024 adjusted EBITDA margin of approximately 22% to 23%, and we expect to achieve $120 million to $130 million in free cash flow for 2024. Our profitability guidance takes into account the impact of typical wage inflation that we see on an annual basis and the investments that we're making in strategic growth areas. As a result, in the first quarter of 2024, we anticipate revenues to be in the range of $222.5 million to $224.5 million and we expect to earn an adjusted EBITDA margin of approximately 22%. The adjusted EBITDA margin for Q1 will be impacted by lower revenues, the partial quarter impact of annual rate increases and our investments in sales, marketing and technology. This adjusted EBITDA margin guidance for the quarter and full year is based on current ForExrates.

So any change to currency rate would impact our margins. As a reminder, the majority of our revenue is billed and collected in U.S. dollars. So we do not see the impact of U.S. dollar fluctuation in our revenues. I will now hand it back to Bryce, before we take your questions. Thank you.

Bryce Maddock: Before we open for questions, I want to share another TaskUs teammate story. At the end of last year, TaskUs as senior leaders gathered in the Philippines for our 2024 strategy session. In addition to planning, it was critical to me to bring leaders together from across the globe so that everyone could experience the magic of our sites and the culture of our people in the Philippines. During one of our site visits, we met with Desiree Omiles. I know Desiree well because she started with TaskUs 12 years ago as a transcriptionist when we're still a very small operation. Back then, I still knew everyone's first name. Desiree originally trained to become a nurse. However, when she graduated, the Philippines job market for nurses was very tough, so she took a job with TaskUs instead.

Today, Desiree is a senior wellness and resiliency coach working directly with our content moderators. She received extensive training from TaskUs and now teaches teammates everything from the importance of positive self talk to the power of music, how to better regulate their emotions. Thanks, TaskUs, says Desiree. You've changed my life. I get to make a difference one wellness session at a time, end quote. Reconnecting with Desiree was a powerful reminder for me and our senior leaders of the positive impact TaskUs has on the lives of our teammates across the globe. With that, I'll ask the operator to open the line for our question and answer session. Operator?

Operator: [Operator Instructions] Our first question will come from the line of Puneet Jain with JPMorgan.

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