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

Thanks. We'll go ahead and get started. We'll start about -- I said this earlier, we start 15 seconds early, we can end early.

Beautiful.

It would be good. Get moving on our day. So thanks, everybody, for joining us today here to talk with the senior management of TaskUs. I'm James Faucette, Senior Research analyst at Morgan Stanley. I lead the IT services research effort at Morgan Stanley. I'm joined today, directly to my left, by Bryce Maddock, CEO of TaskUs; as well as Balaji Sekar. Is that close?

Balaji Sekar.

Sekar. All right. Thank you very much for joining us, Balaji and Bryce. Before I get started, I do have a quick disclosure. For any pertinent disclosures, please be sure to see morganstanley.com/researchdisclosures. If you have any questions about those disclosures, reach out to your Morgan Stanley representative.

So look, Bryce, let's start with the obvious. Well, let me start with the first question that we've just been asking everybody really kind of a perfunctory question. Any exposure to Russia or Ukraine, Belarus, that region, either in delivery or customers?

No. Currently, we don't have any delivery in either location, no employees or customers. We have had at least one customer whose operations in Ukraine were impacted, and they've actually shifted some work to TaskUs. So never a reason we want to be winning work, but we've seen a little bit of that.

Got it. Got it. So speaking of -- so let's start at the top, demand. Demand, demand has kind of been off the charts for really across the industry for a while. We're very optimistic that it will continue, et cetera. But looking at you and TaskUs specifically, you've outlined a revenue growth for target of around 25% annually. And this year, your outlook contemplates more like 30% growth at the midpoint. How are you thinking about the demand drivers here in each of your segments? And in particular, what could allow for further upside?

Yes. So we've been very fortunate in growing well above the market since we started the business. And our current forecast is for just over 30% revenue growth at the midpoint this year. It's fueled by the fact that our customers themselves are growing at these rates. I mean, just the revenue growth amongst our high-growth technology clients continues to be double digits, even triple digits in some cases. And increasingly, there -- these clients are looking to outsource more services. So I've talked before a lot about the growth. We've seen in fintech, we almost tripled the revenue from our fintech customers in 2021. There, we started with our fintech customers doing digital customer experience for. But we've expanded. The demand for that service line hasn't abated. It's growing, if not in line with their revenues, close to them. But as the industry had become more mature and increasingly subject to regulations, we're seeing an embrace of Financial Crime work, Anti-Money Laundering, Know-Your-Customer. So actually adding additional specialized services on top of that base. The other big growth lever for us is geographic expansion. So in the past, we said the #1 reason we lose opportunities is because of the lack of a global footprint. Until 2016, our entire business was in the Philippines. We've added many countries since then, but we're going deep into places like Europe and Southeast Asia to be able to cover languages from our customers in all of those areas. And then increasingly, Europe is actually a place that's generating demand. So we've added salespeople in Europe, client services people in Europe. And we've been winning some really exciting high-growth logos in that region as well.

So when you look across all of those elements, are those all potential upside drivers as you think about this year's outlook and then rolling into next year and kind of your medium term. And if so, how -- any way that you could kind of rank order what's probabilistically could contribute the most surprise?

Yes. I think -- so I mean some of that is obviously baked into the forefront that we're providing. But I think what we're seeing is significant demand amongst some of our largest customers. We talked on our Q4 earnings call last week about the fact that our largest customer, we're not forecasting any growth from in 2022. And the reason we're able to continue to grow at over 30% at the midpoint is because we're seeing so much growth from the next 4 largest customers, all of which will grow at double or triple-digit percentages next year. So I think that's probably the biggest room we have to overachieve our growth forecast is as we continue to see an uptick in demand amongst that set of customers.

Got it. And so let's talk about your largest customer you mentioned. What are the components there? What's happening with that customer? So basically, how does that impact your revenue growth and profit growth, et cetera?

Yes. So I think -- I mean, the first thing to highlight is that we continue to have an incredibly strong relationship with our largest customer. We came together at the start of the year and looked for opportunities to drive additional efficiency into our operation. We have historically done a lot of work in the U.S. that we've also done in the Philippines and India. And so we've begun a process of transitioning hundreds of roles to the Philippines and India, growing our presence with them in that geography. Because we make less revenue per employee in the Philippines and India versus the U.S., that will mean that we're not going to see revenue growth from this customer within the calendar year. But it's important to note that since we put this plan in place, we've been awarded additional opportunities to the tune of hundreds of incremental roles in the Philippines and India. We'll end up with significantly more people supporting the client at the end of 2022 than we had at the start of 2022. Our gross margins are higher in the Philippines and India than they are in the U.S. So there's going to be -- it will be margin accretive at a percentage level. Yes.

So when we look at that, so a couple of things then. So once you kind of transition geographies for this customer, would you expect then that you resume kind of revenue growth, profit growth with them? You're just changing the base essentially.

Yes. Since 2019, this customer has continued to grow revenue year-over-year and quarter-over-quarter. But the percentage of revenue that we derive from the customer has actually declined from 35% down to 27%. And that's because the rest of the business is growing faster. As we look at 2023, we think we can get back to revenue growth with our largest customer, but it's not going to be at the same rate as the rest of the business. The revenue concentration from them will continue to improve.

So then if you're talking about like the next 4 or 5 customers below them being significant growth drivers, et cetera, is there -- or when is there a point at which you reach a similar stage where you're like, okay, now we're at a point of maturation that we can start to move a lot more offshore. Like how impactful could that be on that other group?

Interestingly, there's a -- in most of those cases, they're pretty mature in terms of their onshore to offshore presence. They're -- so I don't think we're going to see the same thing as we've seen happen with our largest customer in the next 4 customers. The work that can be moved offshore has been moved. There's a lot of work in some of those customers that are in the fintech space that for regulatory reasons needs to stay onshore in the U.S. And yes, I mean, I would say like, we've seen this happen a number of times, probably a dozen-plus times since we launched our operations in the U.S. since 2017, where we started with a client who is scaling their outsourced services in the U.S. and then look to achieve efficiencies at scale by building operations in the Philippines and India. So we've got a playbook that we follow and execute against them. It's actually, I mean, it's part of the business. The exposure from it -- happening to our largest client is significant, and we wanted to talk about that openly. But it happens within other customers pretty frequently but doesn't determine our growth rate or our margin.

Right, right. So if that's the demand side, if we start to look at the supply and hiring, it seems like as we've gone on through the earnings reporting periods, et cetera, that the commentary around wage pressure and attrition hasn't gotten dramatically worse. But it's incrementally sounded like it's probably a little bit more than we thought, et cetera. So how are you feeling right now about issues like attrition and wage pressure? And is that continuing to evolve more than maybe you thought initially? Or is it kind of tracking where you would have thought? How is that evolving?

Yes. So I'll talk about attrition and maybe let Balaji talk a little bit about wage pressure. Our attrition rate in 2021 was 15.3% when we measure for employees who have been with us for 180 days or more. That was up, I think, 0.4% from 2020. So we feel pretty good about where we tracked in 2021 despite some of the pressures that we saw in the market. Q1 tends to have higher attrition than the rest of the year just because you -- people get their bonuses. And in the Philippines, people get 13th month pay and then tend to move on at the start of the year. So we've seen a slight uptick. It's been a strange quarter. I mean, there's huge demand, and we're hiring as many people, if not more people than we did in Q4, which is our biggest hiring quarter in our company's history. But there have been some challenges because of the Omicron impact in January. We saw a significant uptick in absenteeism on our earnings call. Balaji talked about a $2 million impact to revenue because of that. And that's impacted somewhat our ability to recruit just because you've got candidates that are out with Omicron. A portion of our recruitment team was out, but we still think we'll get to those numbers. Maybe you want to talk a little bit about wage pressure?

Yes. So James, you are right, we are seeing wage pressure globally. And I would probably say the impact of that is more in the U.S. than other countries. And wage inflation is kind of -- I think, couple of factors that impact wage inflation. One is the geography in which we are. Every geography has a different percentage. And then the performance and then tenure of the employees. So those are a couple of factors that kind of goes into modeling that number. And that's something that has been factored into the forecast that we provided -- the estimates that we provided last week. One thing I'd like to call out is that, we are not doing a catch-up to the market. We feel like we are at market. So there is not a catch up which is a good thing. But some of the items that you're looking at from an offset perspective is offshore, we have a natural hedge because the currency, especially in India and the Philippines, are depreciating. So which is going to be beneficial from a P&L perspective. Second is Bryce spoke about the change in the geography mix, moving more work offshore, which is going to be margin accretive. That's going to be helping. The impact and the last is, we do have cost of living adjustments, in majority of our contracts in terms of number of contracts that we have. So that is something that we are planning to enforce this year, which is again going to be offsetting some of these costs to the P&L.

Got it. Got it. That's really helpful. So if we look at hiring, that's for at least for us and I think for a lot of companies has been the biggest differentiator. Who's built to hire and at what rate, et cetera. But historically, you guys have talked about your ability to get staff members not only hired but productive very quickly in a span of a couple of weeks. How are you able to do that? And I guess, in the demand environment, how is that impacting, if at all, your ability to win business like...

Yes. So what we said is, the time from contract signature to having teammates in a classroom, training for our customer in 2021 was 14 days. And we think that's significantly faster than the rest of the industry. We're able to do that because we've got a pool of candidates who want to work at TaskUs that we have vetted, put through the hiring process, understand the skill sets that they're going to be able to bring to bear. And they are waiting for a job offer from TaskUs. So that pool acts almost like an unpaid bench of sorts. Not all of them are going to accept the job offer, but it's been significant enough to be able to get them into training quickly. The other thing, frankly, is just being a company that is founder-led and built like a start-up, we're able to move a lot faster than some of our larger competitors. There's less sort of bureaucratic bloat, and our approval processes are very, very quick. We engage our project management organization that does all of our implementations at verbal instead of at contract signature. And that helps us to speed the implementation for our customers. And when you think about our customers, most of them are very high-growth technology businesses. Their planning cycles look like the next few weeks, not the next few years. And so we've just had to build a business that's responsive to that kind of demand.

Got it. Got it. And so once they go into training, how much -- how long then, so if it's 2 weeks from offer to training, how long until they become productive or get billable.

It depends on the client. So I mean, training can be as short as 2 weeks or as long as 12 weeks depending on the complexity of the process that we're delivering for customers. We wait for all new clients, and almost all ramps, we're billing for training. So they're in billing our customers from essentially that -- after that 2-week period. But in the case of backfill like attrition training, typically, that's unpaid.

Got it. Got it. So equally as important, though, to finding people to do a lot of the work that you're contracted to do is finding people to lead those teams of people. Like that, to me, it would seem even more daunting. How are you attracting that kind of that frontline leadership to the team? Do they come externally, laterally, internally? How do you build that?

Yes. Yes. So in 2021, we added 16,500 net new positions to TaskUs. And every quarter, we added more of those teammates. The biggest challenge has and will continue to be leadership hiring. We have not found frontline teammate hiring to be a limiter on our growth. But getting in team leaders and operations managers, people who can lead other people has been a challenge. So one of the things we've done in 2021 is we built a program called the Academy, which is essentially an internal leadership development program. Historically, about 40% of our openings have been filled from within. We want that number to get closer to 60%. We've had over 200 people -- sorry, 2,000 teammates enroll in the Academy, and some begin to graduate. And this will form a bench of teammates who are ready to be promoted into that next rank of leadership.

Got it. I want to take a breath to make sure I open up. If anybody has any questions, just raise your hand, we'll get you a mic. Right here is one. He's ready. It's going to be a hard one I can tell.

Can you talk about the longevity and durability of these contracts? And I mean, after 2, 3 years, once you're in the land-and-expand model, is there another RFP do you need to actually compete again? How do you make sure that clients are sticky?

Yes. So the majority of our contracts on an account basis are annual contracts with an automatic renewal provision every single year. And those contracts have the cost of living adjustment that Balaji talked about where, at the renewal, we're able to enforce an increase in price, which helps us offset some of the wage pressure. Our 2 largest customers have signed 2- and 3-year contracts, respectively. And so in those contracts, prices are fixed for that period of time, and then you have to sort of negotiate a renewal. Historically, we have been the first outsourced service provider for a lot of our high-growth technology clients. And so we start with 100% of wallet share. But as those clients mature, it does become somewhat more competitive. Typically, our clients have somewhere between 2 and 4 vendors. We try to focus on the premium side of their services. So the areas where you're going to see wage pressure and commoditization, we're willing to say no to that work and move up the value chain as they outsource more sophisticated areas of their business. And that's what allows us to continue to achieve the margins that we're achieving and the growth rates that we've achieved.

So can I follow up on that? So on this pricing and the COLA adjustments, how much -- how frequently are those revisited? Is there kind of a lag or friction there? And do you see that, those COLA-type adjustment agreements changing at all, especially as we're kind of in a new environment?

Do you want to talk about that?

Yes. So especially this year, where even customers are seeing the impact from a wage inflation perspective, we find -- we are seeing that it's going to be easier this year in terms of enforcing some of this COLA provision. But that's something that we will do in 2022. And what is going to be -- see there's going to be some lag in terms of when the wage inflation happens and then when the COLA provision is going to happen throughout the year. But that is where the currency positive impact, and the shift to offshore is going to be beneficial to the P&L to offset this cost.

So what is that -- like how frequently do you have revisit the COLA adjustments or how frequently? Is that every once a year?

Yes. It's upon the renewal of the contract. So basically, typical contract is an annual contract with an automatic renewal provision. And at the renewal, then you enforce the COLA.

So is that something that you need to revisit, do you think? Or is there a potential to do that so you could revisit it more frequently, if necessary?

We don't think it's necessary for us to revisit it more frequently. I mean, the -- in the offshore environment, you're seeing wage pressures in sort of the mid- to high single digits. But that's in peso terms or in Indian rupee terms. And then we're getting sort of low to mid-single-digit cost of living adjustments in dollar terms. And so that has offset some of that wage pressure.

And when you talk about like that wage pressure, like is that like-for-like? Or how much is just natural like seniority improvement, like you give raises to people as they spend time at the company?

It's a combination of both. But typically, those raises are being applied to people who have tenure.

Okay. Got it. Got it. And so when you talk about wage pressure, though, it's like-for-like? Or is it like function for like function kind of thing? This is what we were paying for this amount of experience in the past, and this is what we're paying for it now.

Yes.

That's right? Got it. Any other questions from the audience? Yes, we have one down in the corner.

So I would like to know how you think of competitive advantages in your business. So obviously, when I look at your financials, you seem to be up to something. But if I look 5 to 10 years from now, like how are you going to manage to basically keep them?

Yes, thank you for the question.

So much suspicion.

I think a lot of our success has come through client selection. We are very, very lucky to service some of the fastest-growing companies in history. And so these companies care a lot about their user experience. They care a lot about protecting their users. They're building advanced technologies using artificial intelligence. And all of that for us has been tailwinds to our growth and our profitability. When we ask our customers why they choose TaskUs, we typically get 3 responses. The first is that, we're fast. So these are clients that are moving quickly. Their demand is changing sometimes on a weekly or even daily basis. And so we're very responsive to those needs. We're focused. So we go to market in verticals like fintech, health tech, streaming media. And all of those verticals were -- we've got teams that are exclusively focused on them rather than grouping everybody, getting together in a technology vertical. And then I think this has been kind of the softest portion of our pitch but is more important now than ever. We've got an employee value proposition that is better than anybody else in the industry. We feel very confident in our attrition rates, our Glassdoor score. People want to work at TaskUs. And so our ability to attract and retain world-class talent allows us to deliver on time and to our customers' expectations. So as I look 5, 10 years out, clearly, we're going to need to add additional specialized services and go deeper in the delivery of that. We've got to build a global footprint and scale our culture globally. And then increasingly, we're making investments in technology as a way to differentiate our ability to deliver efficiently for our customers. Yes. I mean, so the majority of what we do today is services. We're increasingly becoming tech-enabled. But I think you're right, like the majority of what we're doing is attracting and retaining world-class talent for customers.

Right. Can you talk about -- so I mean, I like the way that you refer to world-class customers. But how is your engaged -- how do you approach those customers differently, do you think than the competitors, right? And like what -- how have you tried to build the business and the way that you engage with them? And then how does that carry over to more? So as you said, a lot of your customers are among some of the fastest growth companies in the world, and they're growing at rates that are really kind of unprecedented scale. It's unprecedented. But how does that then translate into more like longer lived companies that have been around for longer and potentially and as potential customers?

Yes. Well, I mean, I'll say our thesis is that, over time, the customers we've been supporting, the disruptors are going to become the new incumbents. And so in many ways, people ask these questions. Are you interested in going back and doing some of the more traditional services that the larger business service companies do today? And the answer is, no. We think we will get there by doubling down on the disruptors. And as those companies scale and become the new incumbents, we'll become a new incumbent as well. I think though this question is right. Like we have to look forward to how we continue to differentiate from the competition, our focus on their industry. We're hiring people who, in many cases, have worked at our clients' companies and understand the intricacies of content security, AI services, increasingly financial crimes work. I think that is a real differentiator rather than taking people who come from the telecom industry or traditional financial services, which is, frankly, most of the employees at our largest competitors.

So on that, from a strategic perspective, as you mature with your customers, and we know that your largest customers have continually asked you to do more, what's the potential to ultimately grow revenue per head? That ends up being a key metric that at least we pay attention to in the space. And you've potential -- have pointed to in the past that you're doing specialized services, but what's that potential? And can you make it accretive? Or how do you think about that?

Yes, it's a great question. So I mean, obviously, revenue per head has come down because we've increased our delivery from the Philippines and India. So today, the majority of the differentiation in what we're driving per employee is driven by geographic delivery location. We make less revenue per employee in the Philippines and India than we do in, say, the U.S. But increasingly, we're seeing differentiation within our service lines. Historically, the gross margins and revenue per head within the same geography have been broadly the same for AI services, content security and our Digital CX business. Learning Experience Solutions, which we're growing with some very large tech companies, our fin crime business and then some of the premium portions of our AI services business, all have higher revenue per employee within the same geography and higher gross margins. And so in the next year or so, we think that will be a big driver in our ability to continue to expand gross margin.

Got it. And then in the last few minutes, I want to touch on other areas of expansion, whether it be geographic, M&A, use of capital, et cetera. Core to our thesis at Morgan Stanley on IT services is the importance of acquisitions. And you've talked about that being a part of your growth strategy even though you haven't really done acquisitions in the past. What are you looking at in terms of targets, potential timing? And ultimately, what would you hope to accomplish with acquisitions?

Yes. I mean, we're looking to accelerate our growth in time to market. The -- in addition to just our embedded base of high-growth customers, the 2 biggest levers we have to pull are geographic expansion. So adding new delivery locations in Europe and Southeast Asia. And deepening the service line expertise that we've got. So AI services, financial crimes being very, very interesting acquisition targets for us. And we've hired an SVP of Corporate Development. He has brought tons of opportunities to us, and we're really excited about beginning to make some acquisitions to accelerate our growth in those areas.

And how should we think about the makeup, nature, size, location, et cetera?

Yes. Given that we haven't done an acquisition historically, it's really important that we're successful with our first acquisition. And so we're not going to do a transformative kind of bet the company type of thing to start. So yes, we're going to keep it kind of limited in size. We try to find a company that's accretive to growth, margin and culture. A company that looks and feels like us in a new geography is probably of most interest.

And what about geographic expansion? I mean, are you seeing demand in other geographies that you want to fill via acquisitions in new geographies? Or do you want to get into new geographies so that new opportunities open up? Like how -- like where are you going to go?

A combination of both. So I mean if we look at Europe, we have delivery today in Greece and Ireland. We're adding Poland and Romania this year. And we've got demand from our North American clients who need European language coverage. We've also started a go-to-market team in Europe that has been very successful in landing a number of very high growth, high-tech businesses in Europe. And we're supporting those companies from our European operations and from India and the Philippines to cover their English language operations. And so that will be a big growth lever for us, whether it's organic or inorganic.

So this year -- so look, I can't imagine trying to grow a company every year 30% roughly, 30%, 35% as fast as you guys have been growing and just compounding, compounding, compounding and just the amount of hiring that you need to do to support that and building out systems, et cetera. But what does that mean? Like what are the key to-dos for you this year, next year to make sure that, that continues? And how far are you projecting yourself into the future as it relates to facilities or capabilities et cetera?

Yes. I mean, I think probably 3 things that we're focused on. We've talked about geographic expansion. We talked a little bit about service line. I'll also mention that, just in terms of service lines, we're really focused on hiring industry experts. So we brought from -- over from Twitter a gentleman who runs our content security business. We're hiring cryptocurrency experts to run our financial crimes business. So there's a lot of investments we're making there. I think lastly, the biggest final lever for us is continuing to improve our technology stack. So in most cases, for our core technology, we're using third-party systems that our clients will choose or will recommend to our customers. But increasingly, we're building our own proprietary tools that sit on top of our client systems and improve the efficiency and the accuracy that we're able to drive. I think that's another really big growth lever. I think it will drive further differentiation for our customers and can expand our gross margins in the medium term.

That's great. One last question. It's got to be lightning. Unless we get...

Let's discuss our free cash flow conversion of the business. It looks like EBITDA margins are quite healthy and growing, but it looks like you burned free cash flow this year. Are there onetime impacts there?

Yes. So in 2021, there were phantom stock payouts that happened, which is -- IPO was a trigger for those payouts. So there was about close to $133 million that was paid out in 2021 relating to the IPO. That is the reason why cash flow was negative. But getting into 2022, the free cash flow conversion to adjusted EBITDA would be about between 35% to 40%. And we're going to be investing more from a CapEx perspective in 2022 as we start returning to office. About 90% of our employees currently are at home. So that's an expansion cost that we'll start to incur while continuing to invest in the business, including sales and service line differentiation. But getting into 2023, I would expect free cash flow conversion to EBITDA to be somewhere between 40% to 50%.

Great. Well, that's all the time we have. Bryce, Balaji, thank you very much for joining us. I appreciate all of you joining us today.

Thank you.

Have a good one.