TaskUs, Inc. (TASK) Earnings Call Transcript & Summary

Good afternoon. My name is Puneet Jain. I am a payment processing and IT services analyst at JPMorgan. Glad to have here with us TaskUs. First time as a public company. Congrats. We -- from TaskUs, we have Mr. Bryce Maddock, who is co-founder and CEO; Balaji Sekar, who is CFO; and Alan Katz, who's VP of Investor Relations for the company. Welcome, all of you.

So Bryce, obviously, I was on the road with you. I love hearing you talk about the story of TaskUs, how you set up that company out of college. For a broader set of investors, can you quickly recap how you founded the company, graduating from college in 2008, setting up TaskUs soon after that?

Yes. Thank you for that, Puneet. I'll jump in. And it is so good to be back. Puneet and I were in New York on Monday and then Boston on Tuesday. And just getting to meet together with people face to face has been fantastic. So we started TaskUs in 2008. My business partner is my best friend from high school, Jaspar Weir. And we graduated from college in the middle of a pretty significant recession and came up with an idea to essentially help busy professionals in the U.S. outsource tasks to people working from home in places like India, the Philippines, Pakistan. We hired people at one point in Kenya and Ghana and Colombia and Mexico. And that business model really struggled to get off the ground. But what we ended up with at the end of our first year in business was a small office in the Philippines of 5 full-time employees and a number of people who are our friends who are building start-up companies, technology businesses. And they all had a similar challenge, which was they themselves were struggling to hire and staff skilled customer support and back office teams. So really more out of desperation than anything, we pivoted our business model and decided to focus on supporting our friends' companies to scale their operations. And we kind of, in 2008, '09 and '10, almost assembled like a venture-like portfolio of clients who are hiring 1 or 2 full-time people at TaskUs offices in the Philippines to do their customer support and other back office operations. A number of those companies scaled very quickly. And we really were the beneficiaries of that growth. We helped to scale out the operational infrastructure for lots of the companies that have become household names in the last 10 years, like Uber is kind of one of the first early examples of success that we've had. So that's the founding story. We bootstrapped the company for the first 7 years. We were primarily in the Philippines at that point. And obviously, since then, have gone global, have added lots of new specialized services but always have had a real maniacal focus on supporting high-growth technology businesses.

All right. Excellent. So this year, you are growing at significantly faster rates of 50% to 60% and I must say, on not-so-easy comps. So what's driving this upside in growth rates this year? And talk about generally how does COVID-19 impact your business last year and this year. What has been the pandemic's impact on your business or benefit to your business?

Yes. I mean -- and 2021 has been a tremendous year of growth for TaskUs. What we saw on March 16, 2020, I was awoken at 4:00 in the morning to a phone call that the Philippines was going to be essentially shutting down. And we have, as of the last -- end of last quarter, 35,600 employees around the globe. Over 20,000 of those employees are in the Philippines. So this was a really big problem. By shutting down, it was like people are not going to be able to come back into the office. And so we quickly made the decision to mobilize a work-from-home strategy, which was not super elegant. Everybody who is in the office got a box. They put their computers and their monitors and they took it home. And over the next few days, people who weren't in the office, we worked hard to coordinate the delivery of computers to their houses. In the Philippines, in particular, we faced a challenge of a lack of broadband penetration into the residential areas. So we had to buy nearly 15,000 mobile broadband cards to get our teammates back online. That was the most stressful experience we had in any country. But even here in the U.S., where we've got somewhere between 4,000 and 5,000 full-time employees, we had a real challenge making the decision to mobilize our work-from-home infrastructure. At the same time, we saw early in the pandemic a number of our clients essentially go to zero. So we were working with some of the micro-mobility companies in the scooter space. We had an app that did event ticketing, an app that did movie ticketing. And basically, anyone who had a large presence in the real world called us and said, the hundreds of people you're staffing for us, we don't need any of them starting tomorrow. So that put some headwinds on our revenues in 2020. What we saw in the back half of 2020, and this has certainly accelerated into 2021, is there were a number of really big beneficiaries from the pandemic. Really for us, the largest example of this we saw was in the food delivery space. So we have a number of clients who are in the food delivery space. And they had tremendous tailwinds as a result of the shift in buying behaviors. We also have a lot of number of clients in e-commerce space. And that space totally took off in the place of physical retail. And that growth has accelerated us into 2021. The other thing that happened at the end of 2020 and beginning of 2021 is we saw an acceleration in growth in fintech customers. We won a couple of large fintech clients in the challenger bank space, in the stock trading app space, in the cryptocurrency space. And so the offering that we have brought to market was really resonating with them, both to support their customers and scale out their customer support operations and to do things like anti-money laundering, know-your-customer and financial crimes work. And so that really accelerated growth into 2021. So yes, this year has been a really remarkable year, but I think it's representative of our focus on high-growth technology clients. So we've seen high-growth technology clients grow like crazy themselves in 2021. And we're the beneficiaries of that growth.

And some of those clients like are expected to continue to grow like that into next year.

Yes.

So as you think about from this year to next year, what will drive that incremental growth? Like on your last earnings call, you talked about 25%-plus growth continuing into next year. So what will drive that incremental growth from '21 to '22?

Yes. Yes. So I mean, to be clear on this, this is part of the fun of being a public company CEO. So obviously, we haven't provided formal guidance for 2021 -- sorry, for 2022 yet. We provided guidance on the last call as far as Q4 of 2021. And we'll provide 2022 full year guidance on our annual earnings call early next year. But what we have said, and we said this in our IPO roadshow and the testing the waters that we did almost a year ago now, we are very confident in our ability to grow revenue every year at or above 25%. And so we pointed to that to essentially give investors confidence that we are going to continue to grow. 2021 was a remarkably strong year of growth. So I think we want to temper expectations somewhat as we head into next year. But yes, it's probably all I'm legally allowed to say about that.

Got you. And let's take a step back. Like -- and when we think about like the TAM for your clients and how fast it is growing at some of the digital customers, themselves growing at high rate, how do you see Task's role evolve from being like a provider of digital customer care to provider of a broader set of services to some of those clients?

Yes. So I think this is really -- there's sort of 3 key things that we have to do as a business to take the next step in our growth. And this is one of them, becoming the specialized service provider for high-growth technology businesses is key. So when we think about specialized services, in many cases, the way that door is opened in our clients is with basic customer support. It's the easiest thing to outsource, Tier 1 interactions. But what ends up happening with TaskUs customers very often is as they're scaling and getting more comparable with outsourced services and realizing that a provider like a TaskUs can do as good or, in some cases, a better job than they can do in-house, they turn to us for more sophisticated services. And they've got a demand for additional specialized services. So that can look like white-glove customer interactions, Tier 2 and Tier 3 customer interactions, advanced technical support in the customer experience space. It can also look like our content security work, where we're moderating advertisements. We're reviewing political ads. We're looking at user-generated content, live streams, podcasts and removing offensive or even, in some cases, misleading content in our AI operations business, annotating large sets of data to fuel machine learning efforts. And then we haven't broken out this area of our business yet but we will, the financial crimes work that we're doing. So when I think about the next 5 years for TaskUs, it's all about discovering the specialized scaling customers are going to need and delivering them faster and more effectively than anyone else. So that really, to me, is one part of a 3-part strategy for us to take the next step in our growth as a business.

And then why is like TaskUs well positioned to benefit from this demand trend? Like why can't like a large competitor copy your model or what you have done and service some of those clients? Like what's the secret sauce? Like what are the entry barriers for some of other names that makes it difficult to replicate this model?

So there is an increasingly competitive landscape when it comes to high-growth tech customers. So if you look at the early days of TaskUs, really, the way that 2 kids with $20,000 and a dream created a business like this is because the big business service providers were ignoring these small start-ups. If you called Accenture in 2008 or '09 and said, "Hey, I've got 2 people that I need to hire for customer support," they wouldn't have returned your call, but we did. That has changed now. I think what's happened in the last decade is the large service providers realize that they missed out on what are the fastest growing and in many cases, the most profitable customers in the industry. And so the competitive landscape is definitely intensifying. When we talk to our customers and then say, "Why do you choose TaskUs versus one of the more traditional large global players?" we hear 3 things. One, our cultures are aligned. So this means that if I'm a buyer at one of these fast-growing Internet companies and I come to TaskUs' offices in the Philippines or India or Colombia or Mexico, I feel like I'm at my office in San Francisco, both in terms of the physical environment, which is designed to look and feel like a start-up, but also in terms of the way that we built our business. I mean these are young, educated, engaged professionals who are excited to be working on technology companies. A lot of the -- I think a lot of the legacy baggage that large business service providers have is the fact that they service mostly really boring customers. I joke sometimes that if you're a millennial in the Philippines or India and your choice is to get yelled at by an angry AT&T customer or work for Instagram, it's a very obvious choice. And TaskUs is the beneficiary of having clients like that, that our employees can work for. So culture is a big piece. Culture also enables us to attract and retain talent better than the competition. So we publicly reported last year that we had a 15% attrition rate. In 2019, it was 26%, but we're well, well below that this year. We're slightly up from 2020 but closer to 2020 than 2019 in terms of 2021 attrition. If you look on Glassdoor, as of the end of Q3, we had a 4.7 star rating on Glassdoor. No one in our space comes even close to that. You have to look at some of our competitors. That matters a lot in an environment where there is increasing competition for talent, increasing wage pressure. We have been able to hire upwards of 12,000 net new positions in the first 3 quarters of this year. And we have done that with a 99% on-time hiring SLA. So all those things make us, I think, the employer of choice for our customers. The second thing is speed. So that 99% on-time hiring SLA, like it's not as if our customers have short hiring time lines. The average time in 2020 from a contract being signed with a customer to us having teammates in a classroom training for that customer was just over 15 days, which is at least 3x as fast as the competition. The competition, because of its legacy infrastructure and versus us being 100% cloud-based and just need to connect via API into our client systems, because of bureaucracy inside some of these larger companies, because they don't have a large pool of prescreened talent, because they're not as popular of a place to work as TaskUs is, it generally takes our competitors months, not weeks to launch programs. And when you're talking about high-growth companies, they don't have that much time to wait to launch. That's the second thing. The final thing is focus. Like we focus obsessively on working with high-growth technology businesses. We go to market and -- not just our sales team but our client services team and our sort of industry specialists go to market in markets like ridesharing, food delivery, fintech, health tech, media streaming, versus most of the large players that bucket all of those things into one mega tech bucket. I mean I'm sitting here and saying to myself, should we split fintech into fintech for the challenger banks and stock trading apps and then a separate vertical for crypto to really go after all of the innovation that's happening in cryptocurrency and nonfungible tokens. I don't think those are conversations that are happening at the larger service providers.

And looking at competition from the other side, like how are you keeping the next TaskUs like a smaller, nimble provider that can sign those 5 FTE contracts, how are you keeping those companies at bay? Can you talk to us about you -- on the last earnings call, you talked -- you mentioned Launch by TaskUs. Talk to us about the strategy behind that initiative and how that helps you.

Yes. So I mean I'm kind of on 2 minds on this one because I've seen a lot of young entrepreneurs build companies that are looking to feel a lot like TaskUs did in 2008. And I'm very competitive, so I want to dominate that space. But I also -- it's hard for me not to root for other entrepreneurs. But in general, we can't leave our flank exposed. And so we -- like we have to continue to service the Series A customer who needs 4 or 5 people. Launch by TaskUs is custom-built to service those needs. So if you need as few as 4 full-time employees to do content moderation or to do customer support or to do AI operations or to do even know-your-customer work, we've got a platform that can hire and staff those full-time teammates dedicated to your company. And I think while there's -- as demonstrated by our ability to start this business with $20,000, there's fairly low barriers to entry. The barriers to scale in this industry are getting higher and higher every single day, building out a true global footprint, building out a robust technical and secure infrastructure. And then increasingly, like we're making very large investments in our own technology, technology that sits on top of our clients' core infrastructure that makes our teammates more efficient and more accurate at their jobs. And so while there's a part of me that's sort of rooting for the kids who are building the next TaskUs, I think building that company today is going to be a little bit more difficult than it was when we started the business.

Agree, agree. And you mentioned speed, but speed is not, let's say, in terms of being able to hire, but also in being able to pivot towards that next growth area, especially if you service digital disruptor clients. But that next area could be very different from what it was 2, 3 years ago, right? So what are you doing today to position yourself to benefit from that next wave of growth, whatever you think that next phase will drive?

Yes. So this really comes down to having hiring experts in each of the service areas that we provide. So a couple of examples of this. Phil Tomlinson runs our content security practice. He came out of Twitter originally. And he's built a team of policy product and psychological health experts. And our policy and product and psychological health experts partner with our clients, partner with fast-growing companies in the ecosystem to exchange notes. We partner on research of the -- on the impact of content moderation work on our employees. We partner on how to distribute policy papers. And in that, I think, being seen as a subject matter expert company in the ecosystem, both attracts new clients to TaskUs but also makes sure that we're able to identify the next emerging trend. So in this case, recently on the earnings call, I announced this, we have 2 sort of disparate teams that have come together to launch a pretty unique product. Our content security team that I already described and then our fintech team, which is a vertical team, and the fintech team has been doing a lot of work on crypto of late and became very, very interested in the nonfungible token space. And so for those who don't know, nonfungible tokens or NFTs, are essentially digital rights to something. And there's all sorts of different examples of this, but the easiest way to think about it is you could buy digital art. So artists will make something and that you can own that digital art. There are marketplaces being launched. There's already a number of them that have scaled and are really, really successful where users can create their own NFTs, buy, sell, trade those NFTs. Well, all that content is user generated just like the images, videos, live streams that we're moderating on social networks. And you better believe that we are months probably away from some user backlash based on offensive NFTs. So we launched what we think is the world's first content security service for nonfungible tokens and have actually successfully signed our first customer on that product this quarter, this quarter being the fourth quarter. So we're really, really excited about things like that. That's an example of trying to stay one step ahead of the trend. What are these trends that are emerging? And how do we develop the services to support them?

Staying on the content moderation theme, there has been a lot of news recently. How do you see that business evolve? Like -- you talked about NFTs, content moderation for NFTs, like content moderation for metaverse, right? So how do you see like that space evolve? Like not just like -- again, like the question is for both the traditional content moderation, like of the posts, of the pictures, of the videos as well as these new formats or new form factors that might require some moderation services? Or new types of clients like -- you talked about, I think, e-commerce clients. So some of those companies might need some content moderation. Gaming clients might need content moderation services. So talk to us about how you see the service evolve for TaskUs over the next 3 to 5 years.

So what we're seeing is the number of clients who are interested in content security services has increased a lot. We've added job boards, multiple dating applications, e-commerce marketplaces where people are buying and selling things. On some of these, there was like QAnon stuff being sold but they didn't want to sell. So we were in there to remove that. There are sometimes fake goods that we can help police. Similarly, on travel marketplaces, we see a similar demand for content security services. One example actually I'd really like to give, because they're not a TaskUs customer but they should be, is Peloton. In Peloton, it's like, well, why would you need content security for Peloton? Turns out people were weaponizing their user names. There was all sorts of hateful memes that were showing up in user names. And so they had to moderate user names. So really, I mean, that shows you the extent that pretty much anywhere where user-generated content is being created and shared publicly, there's going to be a need for content security services. The interesting thing right now is like despite this growing long tail of demand, still the majority of the spend is in 3 large social media companies: Facebook -- well, sorry, Meta, excuse me, TikTok and YouTube. And so they're the biggest drivers of demand today in the content security space. As I think about 3 to 5 years from now, clearly, the experience we are all having is going to change. I think you'll see applications of augmented reality, perhaps virtual reality. And all of those applications and spaces where particularly users are able to create and share content are going to require content security services. And so this is why we've been focused on this space for over a decade with a focus on becoming one of the largest providers of content security services in the world.

Got you. And near term, like as we think about like your growth rates, right? So this 50% to 60%, and it's great, absolutely great. But what are the gating factors to your growth right now? It doesn't look like it's the demand, like the client demand. Supply, also, you said like you are able to hire people, at least better than a lot of your peers. Many firms are seeing very high attrition rates. That's also not that much of a challenge. Then what are the gating factors to your growth rates right now? Why is growth not ATM -- again, like 50% to 60% is absolutely very strong?

Yes. Why not 300% or 1,000%, right?

Exactly.

I think that while our team has done a tremendous job of meeting these on-time hiring SLAs for our customers and training and upskilling into -- on the jobs of tomorrow, still the majority of the revenue in our business is human revenue, right? It's driven by people doing jobs. And so there's a limit around growth. Now what that limiter is, I couldn't tell you exactly. But to do this with quality does require us to regulate growth somewhat. We are selective about the customers that we will engage with. Obviously, we want to engage with customers that are doing work that we find interesting and compelling, that we know that our teammates are going to be really excited about doing. We have very good margins. And so we're not going to take the base dollar prices, where we would see our margins decline. And so I think being selective about the work that we do has served us well. Ultimately, what I'm focused on is building the world's largest tech-enabled business service provider. And that's not something that's going to happen next year or even in 5 years. It is a decade-long journey to get there. And so we're trying to grow in a smart and sustainable manner. And sometimes, that means being selective about the work that we take on.

And how should we think about wage inflations and its impact on gross margins -- or EBITDA margins for this year, next year? Which regions you are seeing wage pressure, if at all?

Yes. So we're seeing the most wage pressure in the U.S. And I think this is not surprising to anybody who's listened to the news in the last 3 months. We are seeing an inflationary environment. It doesn't feel super transitory to me. I've spent a lot of time down in San Antonio with our teammates over the last couple of months, talking to them about this. We're lucky in that we pay what we think are above-market wages for the work that we're doing today. But the market wages are shifting on us literally every single month. So we have to be aware that we will see wages go up next year. We have the ability to pass on some, but not all of that to our customers. The majority of our contracts on an account basis have cost-of-living adjustments baked into them, where we can increase customers' rates commensurate with the wage increase that we're going to give to our employees. But some of our largest contracts, which are signed for 2-year or 3-year terms, have fixed pricing. And so in some cases, we'll see a gross margin impact as a result of that. We believe that this wage environment will lead to an increased appetite amongst our customers for offshore outsourcing solutions, particularly in the Philippines and India. And in our business, we drive much higher gross margins in those geographies. So that will offset some of the pressure. We're seeing wage pressures in India and wage pressures in the Philippines as well. That is -- tends to happen every single year. And while this year is a little bit more pressure than normal, our ability to absorb those without a significant impact on our gross margins are just better than they are in the U.S. So as far as margins go and what we said publicly is this year, I think we're guiding to 24% to 24.2% for the full year. In terms of EBITDA margins next year, we've said we'll see that decline slightly somewhere in the 23% adjusted EBITDA range. Medium term, we're very confident in our ability to get to 25%-plus EBITDA margins every single year. And we do that by better G&A leverage, by integrating more and more technology into the services that we're delivering, increasing our gross margins that way. And next year, there are reasons why the margins would come down by about 1 percentage point. But one of them is that we're investing as much as we can in sales, as much as we can in building our own technology, to fuel growth over the medium and long term.

We have 30 seconds. Actually, less than 30 seconds. Let me ask M&A strategy, M&A criteria.

Yes, super simple. We focus on high-growth technology customers. We want to add geographies, add specialized services. If we can find a brilliant company in Eastern Europe or Latin America or Southeast Asia, if we can find a provider of anti-money laundering services or even some basic software development services, we would buy those, all of those companies in a heartbeat.

Great. Thanks a lot. Thanks for your time.

Thank you so much, Puneet.

Okay. Appreciate it. Bye.