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

Good afternoon. My name is Puneet Jain. I'm from payment processing and IT services team at JPMorgan. Glad to have here with us, Bryce Maddock, TaskUs Co-Founder and CEO. Welcome, Bryce.

Glad to be here.

And Alan Katz is also here. So the format of this presentation is going to be fireside chat. I'm going to ask a few questions of my own, and then I'll open floor for questions from audience. And please use this question -- if you have any questions, feel free to send us through that Ask a Question platform.

So Bryce, you recently reported Q1 results. Can you briefly review your results outlook? What do you expect this year?

Yes, absolutely. So we reported a very strong Q1. We delivered around $240 million in top line revenue, $54 million in adjusted EBITDA, which top line growth was about 57% year-on-year. The outlook for the year that we set at the start of the year was for $980 million in revenue to $1 billion in revenue, and we left that outlook unchanged. There were sort of a combination of factors that led to that. The first was we outperformed our Q1 guidance, and so that was positive. But we also have been embarking on a project with our largest client to move a portion of their work from the U.S. to the Philippines and India. And the work that we were doing for them in the U.S., we were sort of cautious whether we could scale this work offshore. Fortunately, the teams in India and Philippines did a great job of delivering ahead of schedule. And so that transition is now almost complete. It will be complete at the end of this week. So that acts as a headwind to revenue in Q2 and Q3. But the flip side of that is we've been awarded over 1,000 incremental roles with that customer. In fact, I was just in Philippines last week with them. And there's just a tremendous amount of growth opportunity for them in offshore markets at the moment. The other positive was that we closed on our first acquisition of a company called heloo, which is based in Croatia, to do European language support. That will also be -- it's a small amount of revenue. It will add some revenue to this year. But that addition was offset by a shift in one of our large cryptocurrency clients and to a lesser extent, an equity-trading client. So the combination of that and just the macro environment left us in a position where we left our guidance unchanged. We are very confident in our ability to deliver against that guidance. And again, at the midpoint, it would be just over 30% revenue growth this year.

That's great overview. We get a lot of questions on TaskUs exposure to technology startups, which it appears are focused on cutting costs, even laying off staff in the current environment. So can you talk about how much of business stems from start-up customers?

Yes. So we are a company that is focused on high-growth technology clients. And it's a thesis that we've developed over the years, initially, when we were starting the business and bootstrapping it, it was because they were the only customers that would work with us. But increasingly, it has looked like a wise strategy because we believe that these companies will become the future enterprises, right, the next-generation largest companies. Amongst our top 20 customers and our top 20 clients make up 75% of our revenue, over 15 of those companies are publicly traded. So while we do have a lot of companies or clients by count that are still private and in some cases, venture-funded, the vast majority of our revenues come from publicly traded companies. Now they're technology companies, a lot of them have had their valuations impacted in this market. But our revenue is linked to underlying volumes. So as long as those businesses continue to grow their revenues, we continue to see our volumes increase.

Got you. And as some of your technology customers, you talked about clients looking to move offshore, talk to us about the journey of a customer who you had been servicing from the U.S. and decided to move to Philippines or India, how much time it might take them to ramp up those processes in other locations?

There's been a shift in the business in this current environment. But historically, what we saw was the onshore delivery was often a gateway to scaling offshore delivery. Typically, a customer would have built a large customer support or content security team in-house. And then when they look to outsource and scale, they would want to start in the U.S. And once they've gained confidence in our ability to execute, they would turn to us to scale offshore. And that's been happening. I mean we talked about what happened with our largest customer already. Though in this environment, we are seeing more clients than before look to start in offshore geographies. The focus on cost is making our clients look increasingly at their in-house function. So these are more complex workflows that they had built out in-house and look to us to basically take that work and move it into lower-cost offshore geographies from day 1.

And -- so your U.S.-based business, give or take, it represented about 1/3 of your revenue, I think, at the end of last year.

Yes. I mean Q1 -- it was 33% of Q1 revenue to it.

Got you. And so can you size how much work could potentially move to offshore? And when it does talk about the economics, what could be the revenue contraction on a like-to-like basis? What could be margins of that business?

Yes. So I mean, obviously, with our largest clients making the transition and what we've seen currently, we have -- we've taken a look at the business and factored in what we think will shift for the remainder of the year. And it puts us at about a 25% revenue run rate in the back half of the year. So we think in Q4, roughly 25% of our revenue will come from onshore delivery, which is down from 33% in Q1. I think that's probably a good estimate for what 2023 will look like. What is left in the U.S. tends to be revenues with health tech clients, who either from a regulatory perspective or just a strong internal preference, they don't want to move the work offshore. There's some work still left with our largest client that needs to stay in an onshore environment, some trust and safety work for some of our other global clients that needs to stay onshore. And so we don't see a significant downside to U.S. revenue beyond that.

And margin implications when that will...

Sorry. Yes. The -- it's a little bit tricky here. But if you look on an hourly basis, we're typically making about 2 to 3x -- generally sort of 2 to 2.5x as much per hour in the U.S. as we would in the Philippines and India. But in the Philippines and India, our gross margins are about 80% higher, 8-0% -- a multiple of 8-0% higher than they would be in the U.S.

That's substantial. So on gross margins, I wouldn't say it's about the same, but...

Gross margin dollars end up -- do end up declining on a like-for-like basis, all the gross margin percentage...

Yes. Got you. Yes. Then talk to us about -- so when you move to offshore, you've talked about content security business, how do you replicate the capabilities you have in the U.S. outside the country. A lot of that work could be context driven like the services you provide. So talk to us about the investments and how do you make sure the level of service that you generate from Philippines, from India is the same as what you can deliver from the U.S.

Yes. I mean we have -- what I would argue is the best learning team in the industry. They're just phenomenal. And so it's a combination of classroom, online and actually like at the desktop when our teammates are doing the work, contextual training. And it's the combination of those things that has made the transition with our largest client for some very complex workflows so successful. Again, I think there are portions of the business that from a regulatory or client preference reason need to stay onshore in the U.S., but we are increasingly finding that more and more of what we're doing can be done in offshore environments.

Got you. And then you recently talked about on your Q1 call that you won an airline customer. And that is a different type of customer than you typically service. So talk to us about strategy of servicing enterprise clients instead of focusing only on digital disruptors and the risks that it can hurt TaskUs' long-term positioning as being like a pure play in servicing digital clients.

Yes. So at the time of our IPO, we talked about the fact that we wanted to be the world's largest tech-enabled service provider. And to do that, we're going to have to work with more than just hi-tech disruptors. We believe that starting squarely focused on the high-growth technology space is the best path forward to achieve that long-term goal. But the way we get there is by starting with small companies that are scaling quickly and helping them to grow their operations, earning a reputation for being best-in-class when it comes to digital customer experience and other specialized services and letting the market come to us. At the time of the IPO, we had done a deal with one of the U.S.'s largest grocery chains, again, not a digital disruptor, but they had come to us because of our reputation building, customer experience for delivery platforms, and they wanted to build an Instacart competitor. And we helped them design and support their grocery delivery application. This opportunity similarly was an inbound opportunity for one of the U.S.'s largest airlines. They came to know about the work that we did for one of the largest on-demand transportation platforms. And they said, we want to build an experience that is similar, a digitally native experience. During the pandemic, almost all of their customer service interactions were happening by phone. People were having to wait hours. Customer experience scores were very low. And we helped them to cut wait times, increase customer experience scores and reduce their costs through the launch of this in-app chat platform. And if you open their app, it's upper right-hand corner, it's right there and you can chat with one of our teammates. Interestingly, I think when we talked about this, there was a perception that somehow we were compromising, working with a traditional company and cutting our margins. That is not the case. This work is being done at a higher gross margin than the average for the geography from which we're delivering the service. So it's actually margin accretive to our business. And as far as hurting our pure-play positioning, I think it's actually the opposite. I mean we have always been a company that wants to help clients with digital disruption. And some of our clients are trying to disrupt incumbents. But in some cases, our clients are trying to actually disrupt themselves, and we're looking to help them with that as well.

No, that's good color. That's great. And then how large -- it seems both of these customers were in inbound queries. How large these enterprise clients could represent as a percentage of revenue...

I mean, today it's relatively small. But I think there's serious upside on both of these clients as well as we hope to have other clients turn to us for similar processes. Again, we're not going to find us doing traditional call center work for a telco, that just is never going to happen. But you will find us helping companies of all stripes with digital transformation projects, helping them to build out training data for their AI models, helping them to outsource their learning experience functions, kind of a list all of the specialized services we're delivering for high-growth technology clients.

And then the other thing you talked about on a recent call was potentially winning 3 out of 4 largest technology companies. Talk to us about the timing of those wins, ramp rates. And you have typically shied away from doing low-end commoditized work for your customers, like you talked about don't want to do traditional call center work, right? So what's the strategy of penetrating those customers? Will you be okay doing commoditized work with the promise of getting a lot more higher value add work?

Again, during our IPO, one of the growth levers that we pointed to was the fact that we had signed no work with the world's 4 largest technology companies. And we now have either signed or will sign contracts with at least 3 or 4 of them this year. Obviously, being such large companies, they have large procurement departments and are sensitive to cost. But again, we're not going after their commoditized work. In the case of one of these clients, we've already implemented a large-scale learning experience outsourcing engagement, where we're taking over their knowledge management, their curriculum, instructional curriculum design for all of their in-house training. In the case of another one of them, we have signed an AI services deal that leverages the TaskVerse, which is our new gig worker platform, where we're going to be collecting and annotating data for their machine learning purposes. So again, those are a couple of examples of the types of engagements we're looking to do with all kinds of clients, but particularly the largest companies in the world.

Let's talk about fintech. You talked about crypto trading platform, seeing weakness in crypto trading platform and to a lesser extent that equity client -- equity trading client. Was that incremental to your expectations from 3 months ago? And then has any other vertical also got incrementally worse over the last 3 months?

Yes. So to answer the question, it was, we did see a turnaround in particularly one of those clients that was surprising. But when we look at our fintech vertical, it grew at triple digits in Q1 compared with last year. It will grow again year-over-year in Q2. And what's driving that is the fact that our fintech vertical is not just cryptocurrency. We're seeing solid growth from some of our challenger banks that we support. And we have a very quickly growing offering, which we call risk and response, where we're doing any money laundering, fraud risk and compliance and know your customer work, and there's growing appetite and demand there. Again, it's kind of a perfect example of what's happening in the market today where our clients who used to think that these portions of their business were sacred and could only be done in-house are quickly realizing that outsourced experts like TaskUs can help them to cut their operating expenses. And so those things are going to be tailwinds to fintech revenue overall. Every other one of our verticals will grow this year. 2022 revenue will be higher than 2021 revenue across all of our other verticals. We're seeing particular strength in health tech, which is growing very, very rapidly and in gaming, actually, which is also growing very quickly.

And can you also talk about your exposure to consumer-oriented businesses and how some of those businesses are doing?

Yes. I think obviously, there's concern about how much of our revenue comes from consumer businesses. Again, if I can just comment sort of with some specific anecdotes across our top 20 clients, we've got multiple health tech and insurance clients. We've got very, very profitable and fast-growing gaming customers, which I suppose you would consider it to be somewhat consumer-oriented. We've got multiple logistics marketplaces. We've got multiple challenger banks in the fintech space. We've got e-commerce technology platforms, a number of enterprise SaaS clients. And so while we do have our kind of 2 largest clients are consumer-facing, actually on an account basis across our top 20, it's a pretty healthy mix between kind of consumer and more enterprise type of clients.

And one question we often get from investors is cyclicality of TaskUs business. If there is a macro recession, how would this business perform? Back in 2020, you did phenomenally well given the headwinds because you had businesses that were countercyclical, like the food delivery and whatnot. So talk to us if there is a macro recession, how do you see TaskUs business doing? How much visibility you have? And if there are any verticals that could prove to be a countercyclical to macro recession?

Yes. I think what we're seeing in the current environment is we have taken a very cautious approach to building out the guidance we provided for the remainder of the year. We've built our guidance at an individual client level. We have looked at the risks of business moving from onshore to offshore and risks to top line sort of volume forecasts. We then apply just a macro level risk because of some of the uncertainty in the market in the back half of the year. And so with all of that, we remain confident in our ability to grow above 30% this year at the midpoint of our guidance. And as we look at the year and how it lays out, what we said on the call was because of the shift in our largest client, because of the shift in our cryptocurrency client, that's impacting to a certain extent our Q2 revenues, and you'll see full quarter impact on that in Q3. But the sales pipeline at TaskUs today is stronger than it's ever been, and it is filled with opportunities from both existing clients and future prospects who are looking to cut costs. In general, our industry can be countercyclical because our clients are getting much more focused on operating expenses, and we can help them reduce those operating expenses. So you're going to see that begin to show up in Q3 as we close and ramp these deals. There's going to be enormous impact, I think, in Q4. And that's what gives us confidence that we'll continue to grow at or above 25% for the medium term.

I have a few questions from investors here. Similar question to what I just asked, your guidance for this year, 30% at midpoint and 25% plus beyond this year. What does that assume for macro environment? And is there any buffer in this year's guidance?

There is a macro level risk adjustment that we have built into this year's guidance, just to recognize the uncertain economic environment. For next year, it assumes that we will continue to be able to sell significantly faster than our peers and that the opportunities we're seeing in the, call it, cost savings, operating expense reduction space from clients who are looking to us to help them outsource specialized services like any money laundering, learning experience solutions, some of the more complicated elements of AI services that we'll be able to continue to close those opportunities. We're going to need to continue to close those opportunities to continue to grow well above the market.

And your guidance implies an exit rate of below 25% for this year. You continue to have confidence in growing that at least 25% beyond this year. So we get -- again, this is the question we often get, what will drive acceleration from below 25% in Q4 to 25% plus next year. Is it just like the play of volume versus pricing?

Yes. I think, again, we are determined to communicate transparently to the market and to earn a reputation of delivering upon the guidance that we set. And so with that in mind, we have set a guidance range that we are confident we can meet or exceed. Even with all of that factored in, we are going to have to go out and close the deals we've got in front of us. And the pipeline is larger than it has ever been. We had a very strong sales quarter in Q1. Obviously, that isn't showing up completely in our Q2 numbers as a result of some of the shifts that we've had in the U.S. business. But under the surface, things are performing really well as we're looking to continue to support our clients to reduce their overall operating expenses.

Got you. Switching gears a little bit. Let's talk about investments. How do you decide which verticals -- on your roadshow during IPO, you talked about fintech as great case study, where TaskUs invested ahead of trends, ahead of the curve in the vertical. So how do you decide which verticals, which areas to invest in? And where are you investing right now?

Yes. So I mean, we're in a very fortunate position because we have a business that is cash flow positive and is generating quite a bit of cash despite the fact that we're continuing to invest in our business. And so we're investing in a couple of different areas beyond just the vertical selection. First, we're investing in building a truly global platform. The number one reason we've lost opportunities in the past is because we didn't have the global platform to be able to support our clients and the languages and cultures that they needed. So you've seen us launch new operations in Malaysia, as an example. We just signed 3 clients and are scaling those clients now in Malaysia. And we're launching operations in Japan, work from home, Poland, Romania, in addition to the acquisition we did of heloo, which is adding European language capabilities. So we've built out a global platform and are continuing to invest in that. Secondly, we're trying to invest in building out our specialized service capability. And this is very much in line with what we're seeing happen in the market, where the more sophisticated portions of our clients' business are now coming up for bid for outsourcers like TaskUs. The work that we've done building out our risk and response business, our learning experience business, our AI services business, that's all paying off now as our clients are looking to outsource these more sophisticated areas of their business. In terms of the actual verticals that we're focused on, this is very much led from what we hear from the market. And so in the fintech example, in 2015, 2016, we saw examples from companies that we were talking to in Europe in the challenger bank space. We recognized that, that trend was going to come to the U.S., and we began to build the thesis around that. Similarly, we've got go-to-market teams that are out at every conference talking to technology companies, talking to tech entrepreneurs, seeing what the next trends are. And at this stage, despite what's happening in the macro environment, I'm actually more excited than ever about the type of creation companies we're going to see created over the next few years. It reminds me a little bit of when we started TaskUs back in 2008 and the Ubers and the Airbnbs of the world that were created in that market.

At this time, are there any questions from the room?

So within that 25% medium-term guidance, what are you assuming for the revenue trajectory for your top 2, 3 customers?

Yes. So the revenue percentage from our top client is declining and will continue to decline. We've said that the revenue from last year to this year will be roughly flat at around $200 million. We believe that we can return our largest customer to growth again next year. The fact that we've been able to sign over 1,000 incremental roles in offshore geographies in the back half of this year gives us confidence that we're going to be able to do that. Our second largest customer has remained relatively constant, around 10%. And we are factoring in some risk to food delivery in general, just given the macro environment when it comes to the consumer. We have not seen that play out in volumes yet. The volumes have held up across all of our food delivery businesses, but we're just being a little bit cautious when it comes to that. In the medium term, we want to reduce revenue concentration. So the goal was to grow the rest of the business faster than those 2 clients.

Can you talk about the opportunities in AI data, what are you trying to solve there? And how large that business can become for TaskUs?

Yes. So AI services has been a very interesting business. These are enormous projects where particularly the largest technology companies in the world are investing tens of millions of dollars to both collect and annotate training data. The examples we've given in the past are autonomous vehicle companies. So we work with autonomous vehicle companies to tag images of street scenes and in some cases, basically do software quality operations where we're triaging mistakes that cars have made in order to basically improve the underlying algorithm. We've worked with smart home devices to transcribe audio clips, utterances that come off those devices and then annotate them for parts of speech. We work with social media companies to annotate content that's being posted on the social media companies to better place advertisements and to automatically moderate some of their content. We've built a platform called the TaskVerse, that's live, and we signed up our first few clients and have projects ongoing at the moment. And this is a gig platform where we are sourcing teammates who are working from home all across the globe. And basically, we're getting paid to do 2 things. One is collect data. So this could be taking pictures of yourself or of your home environment or using a particular device. And then the next is to annotate data. And so that could be annotating images, annotating audio clips, annotating search results. We think that this is going to be an enormous industry. The investments that the largest technology companies are making in artificial intelligence are only increasing. And I don't think we've seen any of the significant investment that kind of the next tier and long tail of companies will be making in developing their own AI.

Let's talk about headcount and supply. Obviously, industry-wide supply has been challenging. You also talked about seeing high wage inflation in the U.S. and Philippines. At this point, given the demand and supply dynamics, would you say TaskUs is still supply constrained?

I believe that supply constraint has always been a challenge for the industry. We've done much better than our peers because you have a culture that people want to come and work in. We are an employer of choice in almost all of the markets that we operate in. I was in the Philippines last week, and it's just amazing to walk into one of our offices there and be greeted by teammates whose lives have been changed by working at TaskUs. Because of that reputation, we are able to attract teammates to apply for jobs, be tested for those positions and essentially wait until we have a program for them to work on. That's a large portion of our ability to ramp quickly and acts almost like an unpaid bench for our business. So even in this environment, I'm not significantly concerned about our ability to both attract and retain talent in our global delivery locations.

And that's great. Margin expansion, other things that you've talked about is achieving 25% EBITDA margins over the medium term. This year, the guidance implies, give or take, about 23%. So talk to us about the drivers, margin expansion drivers built in the business model.

Yes. So this year, we'll do 23% adjusted EBITDA margins. There are a few levers that we're going to pull to get to and above 25% adjusted EBITDA margins. The first is geographic delivery location. Our gross margins are significantly higher offshore than they are onshore. We're already beginning to see this take place as revenue from onshore delivery will go from 33% in Q1 to 25%, roughly 25% in Q4. So that's going to help us expand margin. Secondly, we're selling specialized services that now have a higher margin. Historically, geography has been the biggest driver of our gross margins as there hasn't been significant margin percentage difference between our services. But when we look at learning experience services and when we look at our risk and response services, those actually do come at a higher margin than our core services. So that will drive expansion. Lastly, we've got a lot of leverage that we can -- and sort of scale we can get over our SG&A spend. And so we think that we can drive multiple points of expansion just based on that SG&A leverage alone. And so that's what gives us confidence that we'll be able to achieve 25% EBITDA margins in the medium term. And when we talk about continuing to grow at or above 25% for the medium term, we're talking about the next 2 to 3 years, and it's same with the adjusted EBITDA margins. We are confident we can achieve 25% adjusted EBITDA margin in the next 2 to 3 years.

And talk to us about your acquisition strategy. You recently closed your first acquisition, heloo. So what do you look for in potential targets? And how large deals are you willing to pursue?

Yes. So we're looking for additional geographic delivery, additional specialized service, a focus on high-growth technology clients, businesses that are at or above our margin and growth profile and businesses that align with our culture. And in heloo, we found all of that. It is a business that has delivery in Europe, tons of European language coverage, particularly German language coverage, which is in demand amongst TaskUs clients. It's a business that services high-growth technology clients. Their 2 most significant customers are a gaming customer and e-commerce customer in Europe. So that's great. It is a business that is accretive to our growth rate and our margin profile, and it's led by 2 founders, Dom and Tom, who remind me of Jaspar and myself, but just with Croatian accents. So it's kind of like a perfect fit for us. And it is a relatively small bolt-on acquisition that is teaching us a lot about how to effectively acquire companies. So going forward, we're looking for businesses like that and perhaps a little bit bigger to continue our strategy of growing mostly organically.

That's great. 2 seconds left. Let me just say thank you.

Awesome. Thank you, Puneet, and thank you, everybody.