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

All right. We're going to go ahead and get started here. I know people are kind of between meetings right now, but I want to make sure that we stay on time for the benefit of everybody that's here on time.

Great. Let's do it.

You're an on-time guy, right, Bryce?

No. But I got respect for those who are.

I like it. I like it. Well, before we get started with Bryce Maddock, CEO of TaskUs, I do have a quick disclosure to read. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley rep. So as I said, we're here with CEO of TaskUs, Bryce Maddock, thanks for joining us.

Maybe I'll just start with kind of like results and outlook from last week. And you outlined 3 initiatives to accelerate revenue growth in '23. First, growth in global tech and traditional enterprise clients, growth in specialized services and the expansion of go-to-market efforts. Can you elaborate on each of those a bit like what you mean by that, where your targets are and to-do list?

Yes. So in 2022, we talked about the fact that we landed deals with 3 of the world's biggest technology companies. We had a lot of success, particularly in the fourth quarter, scaling the operations for those companies and delivered great service. Those companies have awarded us with incremental share in 2023. If we can continue to scale with those businesses and start to sell into some of the subsidiaries that they own, that will be a tailwind and put us into the top end of the guidance range that we provided on our call. We also successfully signed deals with a number of traditional enterprise businesses. We talked about landing one of the U.S.'s largest airlines, a large corporate travel agency, a large retailer, and we have upside in those accounts as well. In the area of specialized services, we're doubling down on our efforts in the health care space. This business tends to stay in the U.S. market in terms of delivery, and so will add incremental revenue to the business. We've seen a lot of demand from generative AI companies, so we're very excited about that. Our efforts in Europe have been very successful. We had 13 clients in Europe at the end of 2021. That number increased to 40 at the end of 2022. So a lot of growth in Europe, successfully led by our go-to-market team in the U.K. and the acquisition of heloo, of course. So that's what we meant.

So when you look at those initiatives for this year, what are the building blocks that your foundation, if you will, on what you're developing confidence and ability to execute all 3? And I guess, more importantly, from an investor perspective, how is that contemplated in the way that you formulated your guidance and outlook for this coming year?

Yes. I mean, we feel good about all 3 of the efforts that we're undertaking. In terms of the outlook that we provided, we're contemplated a wider range than we have in the past, just given macroeconomic uncertainty. And the -- yes, the situation today, I mean, I think what we're seeing is these growth levers are continuing to bear fruit, and we feel pretty good about where we sit.

Got it. Got it. So in outlining kind of those initial points and what your initiatives are for 2023, you mentioned generative AI. And we certainly, at least on our side, have talked to some investors who think that the evolution of generative AI will negatively impact the BPO industry through disintermediation and technology replacement. At the same time, you just mentioned that as a growth opportunity that -- and that, that can -- the generative AI can be a driver for a task in the near term. But how are you thinking about the long-term threats versus opportunities? And how do you balance that out?

Yes. I mean when -- to begin, in the near term, and when I talk near term, I'm talking next 12 to 8 months, there's no question at all that this is going to be a tailwind to our business. You have 2 big drivers. The first is that we are working with the leader in the space, and a number of the best-funded companies have turned to TaskUs for AI services. So we're actually collecting and annotating data to power their models. For trust and safety services, we're actually, in many cases, provoking the models to answer in offensive ways or to create offensive imagery in order to refine the model so they don't behave that way. And then we're also providing customer service to companies in the space that are selling their services to direct end users. The other way to generative AI is going to create growth for us in the near term is that all of our companies, all of our clients are turning to us asking how can you help us integrate this work. It's clear to me that in the next few years, all of the profit in the generative AI space is going to accrue to service providers and systems integrators as companies look to tear out their existing technology stack and replace it with one that is AI-enabled. Now it's an important question. What does this mean for our business in the long term? In my view, a lot of the Tier 1 commoditized customer support work that traditional call centers do will eventually be automated by generative AI. I think there is a very low probability of that happening in the next 18 to 24 months, but that probability increases substantially when you start talking about a 3- to 5-year time frame. I think we're well positioned because we've always been a provider of premium customer support experiences. And I think companies will save on Tier 1 support and reinvest, not all but a portion of the dollars that they save, on differentiated support experiences in the moments that matter. So I was with one of our largest customers yesterday talking about automating a portion of their support, but at the same time talking about investing more in the human support experience so that they could demonstrate empathy and connection with customers in the moments that matter. The other thing that's important to recognize about TaskUs is we provide other specialized services, trust and safety, AI services, risk and response services. And while there will be some impact from AI in those service areas, I think that we'll continue to see growth regardless of the automation efforts.

Yes. It's kind of interesting. I've been doing this long enough that I remember visiting a company that specialize in 411Services like call centers back, and it was interesting because there, like the writing was pretty clearly on the wall in terms of like what was going to happen. But the breadth of other customer service opportunities that grew out of technology and technology adoption generally was -- has been more than enough. So if you're -- it seems like that's kind of the real trick, though, for you is like finding like, okay, what is the next iteration of customer service and customer service technology.

When we got into the business in 2008, the first clients we signed up, in one case, we were transcribing voice mail messages. In another case, we were rating the sentiment of tweets about brands. And at the time, people told us, this work is going to be totally automated, right? Text algorithms and natural language processing for sentiment scoring. And you know what? They're right. Like that work is completely automated. Apple's visual voice mail demonstrates the fact that it's automated every single day. But what was missed in the thesis that, that meant our business would effectively die was that there would be new service demand created by the creation of new technologies. I think generative AI is a moment as seismic a shift as what the mobile phones did for the industry. And what happened when the mobile phone was created was all of these apps were built. And those apps went on to demand services from specialized service providers like TaskUs. It's very clear that there's a new generation of applications that are going to be built on top of these generative AI APIs, and I believe that those companies will demand services from us as well.

Got it. So as you continue to scale your relationships with 3 of the largest tech companies, how are you navigating those relationships and particularly as their demands are evolving along with some of the introduction of new technologies?

Yes. I mean these companies have multiple billions of dollars a year in outsourced service spend. Getting in is not easy. We were very lucky and successful in that we cracked into their vendor networks in 2022. As I said on the call, we delivered excellent service in the back half of the year. That delivery of excellence was rewarded with incremental share as we've gone into 2023. That incremental share is baked into our outlook. But what's not baked into the outlook is any upside. And if we can successfully sell into the subsidiaries that are owned by these companies and they own many subsidiaries, that would be incremental upside as well. And we've got very solid progress. We had one of the subsidiaries of one of these large technology companies down in our site in Colombia just last week, as an example.

Got it. Got it. I've got my list question here. But if anybody in the audience has any questions you want to ask as a follow-up, just raise your hand, and we'll get you a microphone to chime in here. So talking about business development and growth. Heading into this year, you've talked about a return, eventually, to double-digit growth. But when should we expect that return to double-digit growth? And can you talk to the events that have led us to be in kind of this lower than that phase and then expand on your comfort level about acceleration as we go into the back half of the year and ultimately to that double-digit level of compounding growth that you were used to?

Yes. So in the first half of 2022, we compare -- there was about 1/3 of our revenue that came from the U.S. In the back half of 2023, at the midpoint of our guidance, we're contemplating 15% of our revenue coming from the U.S.

15, 1-5.

That is $160 million annualized revenue headwind. Now some of that revenue shifted offshore. In the case that we move revenue from onshore to offshore environment, we're typically making about $0.33 for every dollar that we shifted. So even though we've shifted some of that revenue offshore, there was a huge headwind for us to sell in. We're growing headcount and revenue in every geography that we operate in outside of the U.S. and Ireland. So our revenue and headcount grew in every geography we operate in 2022 and will grow again in 2023. In Q3, we said that we expect to return to double-digit revenue growth in the back half of 2023. On this most recent call, we provided guidance. And if we hit the upper half of our guidance range, we'll return to double-digit revenue growth in Q4 of this year. The reason for the delay in that return to double-digit revenue growth has to do with a couple of factors. We've seen continued declines in our U.S. business in the first quarter. As an example, our largest customer eliminated 186 roles, which we expect it to remain onshore in the U.S. And they actually didn't move those roles offshore. We just -- they just eliminated that line of business completely. There's been some other reductions in the U.S. business. And so that has produced an incremental headwind, which has delayed that return to growth, also to double-digit revenue growth. Also in the guidance, we're just taking a cautious approach to the back half of the year and the remainder of the year in terms of...

So can you talk to that dynamic of moving functions from onshore to offshore, like as companies do that. I mean there's clearly, as you said, there's a -- it seems to be a cost savings motivation. But how -- and if that is the primary driver, though, is it as simple as like we'll just take one person from onshore, move it to offshore, take the cost savings and it's a one-for-one change? Are they doing other things that also impact it, like maybe reducing response levels? Or maybe just one -- talk us through like that dynamic.

So in many cases, our customers are looking for cost savings. In some cases, they are looking for those cost savings by asking us to move what we're doing for them in the U.S. to the Philippines or India or a nearshore geography. In some of those cases, many of those cases, we're actually growing the amount of volume that we're supporting them on. So as an example, our largest customer where we've seen a substantial decline in our U.S. business, our headcount with our largest customer grew by 29% from the start of 2022 to the end of 2022. We're taking incremental share because we're delivering work for them for more efficient cost geographies.

So can I ask you on that particular case, would that be -- but with that move, was that still kind of like that 2/3 reduction in revenue?

It was, yes. So if you look at our largest customer, they grew revenue year-on-year from 2021 to 2022 despite that headwind because we took incremental share and we grew volume by 29% for the year. This year, we're seeing a similar trend. We're seeing continued growth with our largest customer in our offshore delivery geographies. And after the elimination of these 186 roles, we'll have effectively no work for them left in the U.S. Outside of that, we're also seeing customers turn to us to help save costs on functions they're eliminating internally. We have a number of very large clients who have very publicly announced layoffs. And at the same time, they've turned to TaskUs to take on a portion of those roles in our offshore delivery geographies. So that is obviously incremental to the business in those areas.

Got it. Got it. And so -- and then you said you roughly get to 15% onshore. I mean, is that like the baseline at least on an absolute level you would expect for the U.S. and then the growth as we return to double-digit is largely offshore? Or -- and just help us think about the mix.

So 15% is at the midpoint of the guidance range. It contemplates going from 21% of our revenues in the U.S. in Q4 2022 dropping to 15%. Some of that decline is happening and has already been decided. Some of that decline is not. It's just an additional risk hedge. What we did was we did a bottoms-up build on the U.S. business, and we looked at every line of business. We have business that's supporting health care businesses. We have business that are supporting clients who have the U.S. government as their consumer. That business will never go offshore. And so we -- in talking about 15%, we've said what business needs to stay within the U.S. Could that number be a little lower than 15%? Perhaps. But we're very close to a floor on the U.S. revenue. And given the continued success growing our offshore delivery locations, we expect that to get us back to double-digit growth.

Okay. That makes sense. So let's talk about decision-making and decision cycles. I mean, that's always kind of the canary that people are trying to watch. How has that progressed since the start of the year, particularly given the macro uncertainty? And can you talk a little bit about like what the drivers or behavior drivers are in those conversations?

Yes. So last year in Q2, we saw a real slowdown in decision-making. We had a couple of very large deals, which -- that basically got shelved because CFOs said no incremental spend, don't bring in any new vendors. That slowdown accelerated -- sorry, I mean, we sort of turned around that slowdown in Q3 of last year, and we saw an acceleration in the pipeline and in deal closures. And that continued through the end of Q4. I think what was happening was we had a lot of customers who were going through 2023 budget cycles and were leaning on us to help them cut costs by leveraging our offshore teams. In Q1, we've seen a slowdown in the velocity of deal closures. Some of this is being driven by the fact that the pipeline includes a lot of large transformational deals, which are more complex than deals we've closed in the past and they take longer to negotiate and close. So I hope to be able to close one of those deals, if not in Q1, in Q2 and get back to a regular cadence of deal closure.

Got it. Got it. And then last question, at least for me, on the demand environment. You've talked about large transformational deals. Can you talk through the scope of those and the competitive landscape, especially for those transformational deals? And I guess, integral to the conversation around how you formulated outlook, do you need to close those to achieve your revenue outlook for the year?

Yes. So at the midpoint of our guidance range, we don't need to close any of the transformational deals to achieve that. To get us into the upper portion of our guidance range, really at the 990 point, we do need to close one, at least one of the transformational deals. We have a number of these deals in the pipeline. There are deals with existing clients where we are perhaps a small vendor in a large vendor network. And the clients have approached us about consolidating the vendor network, taking out a few of their existing vendors and giving us more share. There are also deals with new clients where we're using this moment, where clients are very focused on cost savings as an opportunity to step in and help them transform. In general, these deals are priced based on outcomes rather than based on hours. We're getting paid per contact resolved, per piece of content moderated, per piece of data annotated. We take on some upfront margin risk because we're passing on cost savings to the customer and guaranteeing them that cost savings upfront. But in exchange, we're given the levers to control our own destiny because the client is allowing us to implement technology to get more efficient, to potentially move work from onshore to offshore or, in some cases, to a lower-cost geography in our offshore delivery footprint and to use process design to drive additional efficiencies into the operation. As we make the operation more efficient, the margins expand over time. As a result of this structure, these are multiyear deals and they're very large deals, every single one of the deals we're talking about is north of $10 million in annual contract value. And so I'm really excited about this. I think it has the potential to really shift the dynamics in our business.

So let's talk about the other side of the equation and that's supply. I mean, I don't think you're alone by any stretch of the imagination in terms of customers looking to move incremental work offshore or even onshore work offshore as those clients look to optimize cost. How would you characterize the hiring environment in these lower-cost geographies, particularly given that it seems to be like everybody is trying to move into -- or at least move some work to lower-cost geos?

Yes, there's definitely a very healthy demand at the moment for talent in offshore geographies, particularly the Philippines, India and Colombia, I would say. We have always been an employer of choice in those geographies. We've invested in a world-class employee experience. We have a great brand. We support customers that our employees want to support. You can think about the experience of being a millennial in the Philippines and your choices are to get yelled at by angry AT&T customers or support the latest social app. It's obvious which you're going to choose. So that helps us. We have been able to deliver on our clients' demand forecast in every case in our offshore delivery geographies. We are seeing some wage pressure in those geographies. We've had to increase wages at the start of this year by kind of mid- to high single digits.

And can I just ask you on that? Is that like newer wage pressure? Or do you think this is just like latent and lagging wage pressure from what most places saw last year?

Yes. I mean we saw the wage pressure last year. So I mean, historically, what I'd say is there's always wage increases that happen every single year. They were higher in 2022 than they have been historically. And they stayed at those elevated levels, at least in those 3 geographies in 2023. And so we have kind of 2 countervailing trends. On the one hand, you've got some wage pressure. On the other hand, our business is becoming more offshore. And so gross margins are growing in that case. But that's the reason why we talked about gross margin staying flat compared to 2022 despite the fact that more of the revenue is going to come from offshore.

Got it. Got it. And then as far as -- back on the competitive question. I mean, what's that landscape look like both at customers as well as for hiring? You say you're seeing a little bit of pressure, but are there -- I'm just -- let's start on the demand side. Like are you seeing other competitors for these, if your, say, biggest customer, they're looking to move some things offshore. Are they bringing that to RFP and trying to bring in other potential vendors to deal with that? And what's the response there?

In almost all the cases with our biggest customers, we've got very well-established relationships, and the opportunities that we're working on aren't being bid out. They're being planned strategically as a partner in their solution. When we're dealing with new business, there's obviously a fair amount of RFP activity to get your foot in the door in some of these larger businesses.

And are you seeing any change in the players -- competitive players there or what they're offering?

I mean, I think it's clear people are aware that consolidation of vendors is taking place. We have been the beneficiary of that consolidation. I pointed out the example that our largest customer are ready. There's a number of examples in our top 20 customers, where we've taken share from our competitors and have consolidated that share. And so that is definitely taking place. We're having conversations with customers about how to drive efficiencies into their business. And in all cases, we're using our global delivery network and our automation capabilities to do that.

Got it. Got it. Now recently, you called out some near-term headcount reductions given the elimination of a line of business of your largest client. But how are you thinking about pace of hiring beyond that? And what are the things that you're looking to add specifically to try to substantiate what you need to do in terms of hiring?

Yes. So the reason -- so first, we ended the year with 49,500 teammates. We expect that number to decline in Q1. That is partially as a result of reductions in the U.S. business. It's also partially as a result of seasonal volumes that we had at the end of Q4, seasonal volumes going away. Going forward, we expect headcount to increase sequentially quarter-over-quarter in every quarter of this year after that. So it will increase in Q2, Q3 and Q4. The pace of that increase is going to be driven entirely offshore. And so -- and it will be impacted as well, in some cases, by our ability to use our automation capabilities. But it will continue to increase.

So I guess tied into that is that you kicked off an efficiency program in 2022, and you've said that you're going to continue that through 2023. What are the efficiencies you're looking at driving? Is it through your own automation, et cetera? But I guess, more importantly, how are you balancing that with the need to invest?

Yes. So we recognize that like our customers, we have to drive efficiency into our own business. So in 2022, we went after our G&A spend. We've used offshore shared services to do more of our -- of the work that we were previously doing in the U.S. We've also used technology to automate large portions of our internal general and administrative functions. As far as growth, we are continuing to invest in sales and marketing. We're also continuing to invest in hiring software engineers to power our digital and automation capabilities. I think we're not different from other companies in that strategy. We're going to continue to double down on the things that differentiate us and will get us back to double-digit growth.

Got it. Got it. And then just as you're kind of reorienting a little bit where your people are, et cetera, any impact that we should anticipate on things like free cash flow and yield? Do you need to build additional facilities and capabilities in some of these new geos that maybe hadn't been planned and those kinds of things we should in this space?

Yes. I mean I think, importantly, we are -- in our guidance, we're forecasting 23% adjusted EBITDA margins and over $100 million in free cash flow. Personally, my goal is to make sure that regardless of what happens in the macro economy, we increase those numbers over 2022. In terms of incremental facility demand, I mean, we're not expecting significant CapEx investments relative to what we've seen in the past, yes.

Okay. Got it. Got. And are you getting -- just out of curiosity, how much is your in-person versus remote work? And is that providing any efficiencies from a CapEx standpoint?

Yes. We ended the year with 42% of our employees back in office. We expect that number to normalize around 50%. So there will be some efficiencies versus the business in 2020 and 2018, but obviously there's incremental cost to returning people from -- into the office versus 2020 and 2021.

Got it. Got it. And then lastly here to wrap on M&A, how should we think about your M&A strategy now going forward? What do you see in terms of opportunities and pipeline? And are you looking to add specific capabilities or geos? Like that would help drive that?

Yes. So we've got an active pipeline of M&A opportunities. The private market valuations have not come down to reflect where the public market is trading. We're not interested in buying businesses that are going to be significant premiums to our multiple. And so at this stage, we think that using our stock buyback program to purchase our own stock is a good way to return capital to shareholders and efficiently allocate our capital.

Are you seeing any softening? Because like what you said in terms of like private valuations not matching what's happened in the public market, that's got to be like the most universal quote in the whole conference from everybody. So...

Well, I think -- I mean, I think our business -- I mean, particularly, if you have a business that generates cash and is profitable, I mean I understand why an entrepreneur wouldn't sell in this market because they can wait.

They can wait and see what happens, right? You may get paid to wait, maybe you don't.

Yes. The great thing is, look, I mean, we've got very healthy balance sheet. We have 0.6x debt to EBITDA leverage. And so when either their valuations come down or our valuation goes up, we'll be ready to act.

That's great. Hey, Bryce, thank you so much for your time today. I appreciate it.

Thank you, James. Yes. Appreciate it.

Good seeing you.