Good morning. Welcome to the TaskUs Investor Call. My name is Paul and I'll be your conference facilitator today. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce Alan Katz, Vice President of Investor Relations. Alan, you may begin.

Good afternoon and thank you for joining us for the TaskUs fourth quarter and full year 2022 earnings call. Joining me on the call today are Bryce Maddock, Co-Founder and Chief Executive Officer of TaskUs; and Balaji Sekar, our Chief Financial Officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the Investor Relations section of our website at ir.taskus.com. Please note that this call will be simultaneously webcast on the Investor Relations section of the company's corporate website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal Securities Laws, including but not limited to, statements regarding our future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from those forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 9, 2022. This filing is accessible on the SEC's website and on our website at ir.taskus.com, and may be supplemented with subsequent periodic reports we file with the SEC. We expect our 2022 10-K to be filed with the SEC in the coming week. Any forward-looking statements made on today's conference call, including responses to questions, are based on current expectations as of today and TaskUs assumes no obligation to update or revise them, whether as a result of new development or otherwise, except as required by law. The following discussion contains non-GAAP financial measures. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metrics, please see our earnings press release, which is available in the IR section of our website. Now, I will turn the call over to Bryce Maddock, Co-Founder and Chief Executive Officer of TaskUs. Bryce?

Thank you, Alan. Good afternoon everyone and thank you for joining us. We had a strong end to 2022 with both revenue and adjusted EBITDA coming in above our guidance ranges. I am so proud of our global team that worked tirelessly throughout this year to advance our strategic goals. We completed our first acquisition of heloo, which expanded our European delivery footprint and finished the year ahead of plan. We expanded our operations into new geographies such as Malaysia and Japan and launched new service offerings such as the financial crimes work led by our risk and response team and training and development solutions led by our learning experience organization. We also officially launched our TaskVerse platform delivering scaled AI annotation and e-commerce data projects to both existing and new TaskUs clients. We signed contracts with three of the largest global tech companies in the world and added and expanded our business with large enterprise clients. Lastly, we continue to maintain what we believe is the strongest corporate culture in the industry and have brought 42% of our teammates back to the office as of the end of the year. Overall, sales activity remains strong throughout the year as we continue to strengthen and diversify our revenue base. We ended 2022 with 86 clients billing $1 million or more on an annual basis and 21 clients billing $10 million or more annually, up from 72 and 16 the year prior. We also made significant progress on our efficiency and cost efforts. As a result, we increased our adjusted EBITDA margins in Q4 and ended the year well above both our most recent guidance range and our initial outlook that we provided at the start of the year. These are just a few of the incredible accomplishments of our team…

Thank you, Bryce, and good afternoon, everyone. I’m going to focus my remarks primarily on our fourth quarter, but we’ll reference a few key full year metrics. Please note that some of these items are non-GAAP measures and the relevant reconciliations are attached to the press release we issued earlier today. In the fourth quarter, we earned total revenues of $242.2 million, an increase of 6.8% over the prior year, leading to total revenues for the year of $960.5 million, and growth of 26.3% higher than the top end of our guidance range. The strong revenue performance in the fourth quarter compared with guidance was primarily driven by two factors. First, the timing of offshoring for our largest client, which shifted from Q4 to Q1 resulting in higher revenues from this client in the quarter. Second, we also saw stronger seasonality with our consumer exposed clients than we had expected as of the last earnings call and some of the volume risks that we expected did not materialize. This was particularly true for clients in the e-commerce, food delivery and on demand transportation spaces. Our offshore delivery model presence an attractive way to drive efficiency into their businesses. Hence, as these clients had shifted their focus to cost this past holiday season, we were able to grow volumes with them. Moving on to our service offerings. We saw year-over-year growth in two of our three specialized service offerings. In the fourth quarter, our digital customer experience offering generated $159 million for a year-over-year growth rate of 7.3%. Our trust and safety business declined 5.1% compared to Q4 of 2021, resulting in $42.3 million of revenues, driven by the offshoring of volumes from our largest client. And our AI services business grew 20.1% year-over-year for revenues of $40.9 million. In Q4,…

Thank you, Balaji. Before we open for questions, I want to share another TaskUs teammate's story. Earlier this month I visited our team in Tijuana, Mexico. Our frontline first mantra means we invest in providing inspiring facilities and world-class benefits to attract and retain the best talent in the industry. In Mexico, we offer our teammates scholarships to take college courses part-time to advance their careers. Additionally, our teammates told me that we are the only BPO provider in the region to offer fully paid comprehensive health insurance. This program proved to be a critical investment for Marcos, our Procurement Officer at the Oasis location. Marcos joined TaskUs from a manufacturing company, partially because we provided such good healthcare coverage. Marcos is a passionate motorcyclist, and earlier this year he hit a major fall while riding. TaskUs insurance paid for Marcos to go to a private hospital where he had emergency surgery and covered his salary during his recovery. In our conversation, Marcos remark that joining TaskUs might just have saved his life, and he ended the conversation by saying, I got my soul back when I joined TaskUs. Listening to Marcos was a powerful reminder for me of the positive impact that TaskUs has on the lives of our teammates across the globe. With that, I'll ask the operator to open our line for our question-and-answer session operator.

Thank you. [Operator Instructions] Thank you. Our first question is for Maggie Nolan with William Blair. Please proceed with your question.

Hi, thank you. You had given some color on the pipeline, including some mention of large transformational deals. How quickly are you able to close deals of this nature and would there be a resulting margin impact from these types of deals?

Yes. Thanks Maggie for the question. So I've talked before about shifting the way we bill our clients from hours to outcomes. We've done this in a number of cases in the past, but we're now seeing increased interest and larger deal size. The transformational deals in the pipeline today are in the tens and millions of dollars a year in revenue and this shift is being driven by the increased focus on cost across our client base and the revolution that we're seeing in the generative AI space. So again, these transformational deals tend to have larger deal sizes and longer contract terms. They give us control over the levers that we need to drive margins, whether that's automation process or geographic delivery. And finally we do expect that these deals will take somewhat longer to close than traditional deals. All that being said I'm very excited about the prospect of these types of engagement to drive growth and margin expansion over time.

Okay. That's great to hear. And then, so it sounds like maybe they materialize a little bit later in the year in terms of the revenue and then Balaji, you had mentioned some seasonality that drove revenue in the fourth quarter of 2022. What sort of expectations should we have for seasonality in 2023?

Yes, so Maggie, in terms of season...

I can jump...

Yes. Go ahead.

No, go ahead, Balaji.

Yes. So Maggie, in terms of seasonality what typically happens is that with especially with some of the consumer businesses, we do see seasonality pick up in Q4 and then we see that impacting in Q1. And then for the rest of the year, we typically don't see seasonality. We'll typically see a pickup again in Q4 of 2023 as we start gaining more seasonal work. But again, for the overall business seasonality is not a big impact. It's a pretty small impact from a overall revenue perspective for the year.

Okay, thank you.

Thank you. Our next question is from Kathy Cheng with Bank of America. Please proceed with your question.

Hey guys, thanks for taking my question. So first I just wanted to ask, what are some of the assumptions that are baked into your 2023 outlook? So how much are you expecting for growth in your top client, you mentioned that in 4Q and 3Q you grew your second largest client as well year-over-year and quarter-over-quarter? Are you expecting that trend to continue into 2023? And I think you gave a little bit of color on crypto as well, but I just wanted to make sure that I got that right. In terms of you're expecting declines in crypto throughout 2023, is that as a percentage of your total or is that in dollar terms of that like $10.5 million you gave? Thank you.

Yes. Thanks Kathy. So our current outlook for Q1 is consistent with the outlook that we provided on the Q3 call. In terms of Q2 and the back half of 2023, restricting a cautious tone just due to macroeconomic uncertainty and specifically we're watching two things. The first is the speed of decision making, while our pipeline is larger than ever, we do anticipate some delayed decision making. And as I just said, those large transformational deals we do expect those to take longer to close. The second is the economic environment continues to cause our clients to pursue cost savings, and this has increased the potential for further reductions in offshore shifts that impact our U.S. business. We do believe we're approaching a floor here, but at the midpoint of our guidance range, we contemplate a scenario in which U.S. revenues fault to just 15% of overall revenues in the back half of 2023 down from about a third of revenues in the first half of 2022. If we look at specific clients, at our largest client we continue to have a very strategic relationship. Given our large offshore footprint, we do expect to see significant opportunities to help them save costs in 2023. As I said on the call in 2022, our headcount supporting this client grew 29% year-over-year. With that being said our largest client is very cost focused this year, and that has meant they have looked for additional areas to cut costs in Q1. As an example in addition to the reductions and on offshore shifts that we discussed last quarter, this client has eliminated a line of business that we had expected to remain permanently in the U.S. during the first quarter, and this will have an impact on our year-over-year growth rates. As a result, the midpoint of our guidance contemplates a small year-on-year revenue decline, while our volumes increase modestly at this client. Given our offshore footprint and the strong client relationship, we believed we're well positioned to continue to take share from our competitors and grow here over time. In terms of the crypto space, our guidance contemplates a slight reduction in run rate annual revenues from Q4. We continue to support the largest players in both the crypto and equity trading spaces, and I believe we're actually the largest provider for many of our clients in this space. But the volumes that some of these clients have been reduced by up to 95% given the ongoing crypto winter that's being experienced.

Got it. Super helpful. And then just a follow up, so, you guys obviously gave a guidance range for revenues, but gave a more of a specific number for margins for that 23%. At the low end of the revenue range how should we think about how much flexibility you have in terms of achieving that margin outlook?

Yes. So, Kathy, in terms of the guidance we provided 23% guidance at the Bitcoin. And in terms of the low end of the range, we have demonstrated that in 2022 that we've been able to react to changes in revenues by adjusting our cost base and maintaining our EBITDA margins. So we beat our initial guidance that we provided for EBITDA and for free cash flows in 2022, despite some of the headwinds that we had from a revenue perspective. And also on the call I spoke about an efficiency program that we kick started in 2022 and we'll continue through that in 2023, which will deliver full year savings of about $20 million. So we'll size this program appropriately based on our forecast and performance throughout the year. And also we'll be very thoughtful in this exercise to make sure that we continue to invest in all the appropriate areas that's required in the business to grow double-digit and continue to invest in sales and technology.

Thanks guys.

Thank you. Our next question is from Dan Perlin with RBC Capital Markets. Please proceed with your question.

Thanks. Good evening. I just wanted to follow up a little bit on the question around AI. I mean, it's obviously super topical. You guys are kind of talking about it like it's going to be a potentially large opportunity, transformational, I think just the way you described it with your clients, but I also want to understand maybe the flip side of that. I mean, do you see maybe the balance between the positive out – attributes and new client wins for you, but what about potential headwinds or risks that you foresee to your businesses, maybe some of the things you've done in the past get a little bit more cannibalized if possible. Thanks.

Dan thanks so much for the question. So we're incredibly excited about the revolution that's taking place in generative AI. And as you say, there are two important questions that we need to ask when considering the potential implications of this technology for TaskUs. The first question is in what ways can we support the creation of these generative AI technologies? As I mentioned on the call, we're working with the market leader in the space, providing them trust and safety and AI services. And since our last call, this industry has exploded with hundreds of new entrants and hundreds of millions of dollars in venture funding. We're engaged with many of these companies on opportunities to provide them with our AI services and trust and safety support. As with past technology trends in social media and on-demand transportation and food delivery, we plan to become the industry leader for short – support services for degenerative AI space. But the second question that we need to ask is what will the impact of generative AI be on our Digital CX business? Our digital automation team has been working with open AI's GPT-3 API for over a year, and we've built a number of amazing prototypes and are actively engaged with clients to use this technology to improve the efficiency of their support process. In fact, in 2022, we launched a scaled support solution using generative AI technology for one of our large enterprise customers. The results are really exciting, but there are also challenges. Large language models have a well-documented tendency to hallucinate, in other words, make up an answer. And these models must also be integrated into our client's existing technology stack in order to be effective. So for the foreseeable future, generative AI is going to create a…

Yes, that's a great answer. Thank you. Just a quick follow up on gross margins. As you think about kind of the pivot to more offshore out of the United States and the pace of that change is that cadence – I mean obviously it's positive for gross margins, but is that cadence, I guess, consistent with the trends that we would expect to see within EBITDA? Or is there a timing difference between certain aspects of that? Thanks.

Yes, so while – I'll maybe just quickly talk about gross margins while we do not guide on gross margins, but we are expected to be roughly flat compared to 2022. So – and the reason why we're seeing is that we are continuing to see the benefit from mix shift, but it is being somewhat offset because of the impact of wage inflation. And then the second factor is what I spoke about earlier is the depreciation in the U.S. dollar when compared to especially the second half of 2022 for the Filipino peso. So while majority of our revenues is built in U.S. dollars, we do have exposure from a cost perspective when this happens. And then the last is the shift that we saw for the largest client shifting from onshore to offshore getting into Q1. So, that that is what is happening from a gross margin perspective. And you would kind of see some kind of a pretty good alignment between gross margins and EBITDA. One additional factor is that we will be optimizing our G&A expenditure which I spoke about earlier, by capturing about $20 million of optimization in our G&A cost. So that will be additional benefit that we may not see at a gross margin level, but we'll start seeing more at an adjusted EBITDA level, is what we would see. Bryce, anything else to add there?

Yes, I would just add that, while our expectations this year is for essentially flat gross margins as we look at 2024 and more of a full year impact of those offshore shifts, also combined with the automation projects and large transformational deals that we're undertaking, we see a path to expanding gross margins over time.

Great. Thank you.

Thank you. Our next question is from Puneet Jain with J.P. Morgan. Please proceed with your question.

Yes. Hey, thanks for taking my question. Bryce I was glad to hear you talk about growth strategy. Can those strategies get you growing into double digits beyond this year? And if you can double click on benefits you can expect from the large tech and enterprise clients this year and beyond, that would be great.

Yes, thanks so much for the question Puneet. So on our last call; I said that we expected to return to double digit revenue growth in the back half of this year. As we start 2023, we see double digit revenue growth returning in Q4 in the top half of the guidance range that we're providing today. And as I said on the call, there are three growth initiatives that we're focused on to get us there. First, we need to continue to expand our relationships with those big tech and enterprise clients that we won in 2022. And as these clients ramp up their cost savings initiatives, there are meaningful opportunities ahead for us. There are also meaningful opportunities ahead across their subsidiary companies, which we're actively engaged with. Second, we need to take advantage of the significant opportunities that we're perfectly positioned for, just like those in the generative AI space that I just discussed. And finally, we're going to accelerate our go-to-market efforts in both Europe and Asia. So the combination of these three growth initiatives will bring us back to double digit revenue growth and I believe put us on a trajectory to grow in double digits in 2024 and beyond.

Got it. And you also talked about the U.S. mix to revenue could decline to 15% in the back half of this year. How much of downside is left to that mix or how low that mix can go given there is some work that cannot move offshore, and how should we think about gross margin benefit if we can quantify the gross margin benefit of makeshift?

Yes, thanks Puneet. I'll take the first question and I’ll let Balaji answer the second. So clearly the biggest headwinds to our business in 2022 and 2023 have come from the impacts we've seen in our U.S. delivery. As we've discussed before, this was driven by the large volume reductions at our large crypto and equity trading clients, as well as the shift offshore at our largest client. In addition to these impacts, we have seen some smaller movements of teams offshore that which have created additional headwinds that we need to outgrow. Besides this in dollar terms, if we compare our annual U.S. revenue run rate from Q1 of 2021 to Q1 of 2023 the forecast we have for the U.S., we've lost approximately $130 million of annual revenue from U.S. delivery. Given these trends, before we provided our guidance we did a detailed review of our entire U.S. business and we struck a cautious tone in today's guidance, taking the percentage of revenues coming from U.S. delivery in the back half of 2023, down to 15% of total revenues at the midpoint. At that stage, the majority of the work that remains in the U.S. must stay in the U.S. for regulatory reasons and process compliance. Additionally, we continue to win exciting new clients for our U.S. operations, just like the two healthcare firms that I mentioned earlier who rely on us for sensitive and regulated operational processes. So with all that said, the U.S. is absolutely a key geography for us and will continue to play a vital role in our global delivery model.

And Puneet, I’ll touch upon your second question quickly. So from – so offshore revenues generates the lower revenues per head when compared to onshore. So it’s let’s say about 30% to 40% of onshore revenues, but from a margin perspective, it does tend to say higher so which means about 70% to 80% higher margin. So while the profit dollars that you get offshore may not be flat in terms of what you’re losing, but we do generate higher margin percentage. So that is going to be accretive to the model, especially as we start growing offshore in the second half of the year, so that is going to be helping us from a margin acquisition [ph] perspective getting to about 23% EBITDA for the full year.

Got it. Thank you.

Thank you. Our next question is from Ryan Potter with Citi. Please proceed with your question.

Hey, thanks for taking my question. On the call, you mentioned that some clients were turning you to – for support following headcount reductions on their side. So I was just wondering if this is a trend you’re seeing in multiple instances, and I guess could you remind us as clients kind of pivot and shift their focus more to costs whether the typical actions do they take like they immediately certain do you help on the cost side or is there usually kind of a leg where they kind of think through their actions?

Yes. Thank you for the question, Ryan. So we’re seeing this across industries and across geographies. I believe on our last call I talked about both a gaming customer who shifted a large portion of their European support to our operations in Greece and a large e-commerce customer that shifted a large portion of their global support to our operations in the Philippines and India. And that that trend continued into Q4 across clients in the social media, FinTech, and gaming spaces. And sorry, the second question was?

Just typical actions clients take as they kind of pivot to cost?

Yes. I think what we’re seeing is really a consultative led approach here. So our client service teams are having strategic conversations with our clients as they’re contemplating these shifts. Those shifts has been factored into the 2023 budget conversations that we talked about earlier. And we do see that as a continued driver of growth this year.

Got it. And I guess off of that, are you also seeing increased instances of clients undergoing better consolidation exercises? And if so, have you typically fared in these? Have you continued to maintain or approve wallet share with the majority of your clients?

Yes. So we have seen a few instances of vendor consolidation efforts brought on by our clients increased focus on cost. Fortunately, we stared very well in all of those exercises and have increased our share. As I discussed on the call, we’ve seen our share increase materially as our – at our largest client. We try to size this by talking about the headcount increase that we saw in the year of about 29%. This has been consistent across our largest clients. We are a key part of their vendor strategy. They like to work with TaskUs because of our agility and innovation and our offshore delivery footprint in the Philippines and India positions us very well to help them save costs.

Great. Thank you.

Thank you. Our next question is from Dave Koning with Baird. Please proceed with your question.

Yes. Hey guys, just a couple quick ones on, I guess in the content business, I know this year obviously the drag has been – in the back half has been just on offshore movement. Is that a business, do you expect that to grow or are there any headwinds whether it’s political ad review stuff or any one-off type stuff into 2023 that kind of goes away in the future? And just kind of how do we think of that once we’re steady state geographically, is that a 10% plus business?

Yes. Thanks for the question, Dave. So at a volume level, this business continues to grow well into the double-digits, but obviously at a revenue level, we’ve faced some headwinds as a result of those shifts at our largest client. As we lap those shifts this year, we do expect to return to meaningful revenue growth within the trust and safety space. And to elaborate here a little bit, we’re seeing opportunities across clients in the social media, dating an e-commerce space for our content moderation solutions. And we’ve also embedded most of the work we’re doing in the risk and response space to be in our trust and safety numbers. And there we’re continuing to see strong demand for all of our financial crimes and fraud work across our e-commerce and FinTech customers.

Yes. That makes sense. And then just for Balaji, just a couple really quick ones. Tax rate kind of moved around this last year, but is it kind of mid-teens to high teens, just like in 2022? And then debt rates, I would assume maybe interest goes up just a touch sequentially and then kind of holds in there the rest of the year?

Yes. So from a tax rate perspective, again, 2022 effective tax rate was about 37% compared to the 2021 effective tax rate of 4%. And the reason why, 2021 was low is because we had the one-time Phantom stock payouts. And from a GAAP, non-GAAP ETR, we will be about – we were about 20% – 21% or 20% between 2022 and 2021. And then we expect 2023 ETR to be at about 36%, which is pretty much in line with 2022. And then from an interest cost perspective, again, we ended the year at about 6.6% interest rate and we would expect that to continue getting into 2023.

Got you. All right. Hey, thanks, guys.

Thank you. Our next question is from James Faucette with Morgan Stanley. Please proceed with your question.

Great, thank you very much. I just wanted to go back to this point around offshoring. I think Balaji, you mentioned that in the fourth quarter you’d expected to move some work offshore and then that didn’t happen, so that result in some better revenue. But hey, I want to make sure that I understood that correctly, and if you are expecting that to still go offshore in the future. But more importantly and more broadly, what are the conversations that you’re having with beyond your existing customers where it sounds like you’ve kind of did an analysis of what could happen there. But with new customers, are they looking to TaskUs to amp up or ramp up what they can do offshore from a customer support perspective, et cetera?

Yes. I’ll take that question, James. So to be clear here at our largest client last quarter, we talked about the fact that we would be transitioning some additional work offshore in Q4. That shift got pushed from the end of Q4 to the start of Q1, thus the revenue impact. We saw an additional just reduction of work at that client, which brings the total permanent workforce supporting that client in the U.S. to just a handful of teammates. So effectively, all of the recurring revenue from that client is no longer going to be in the U.S. When we think about this trend more broadly, we’ve looked across our U.S. client base and really asked the question, which of these revenues must stay in the U.S. because of regulation or process compliance reasons. And we factored those risks into the guidance that we provided today, which at the midpoint contemplates U.S. revenues dropping to 15% in the back half of the year.

That’s great. And then just quickly sequential headcount growth looks somewhat muted in the quarter. How much of that is a function of the mix shift offshore? And really what I’m trying to get at is, how should we think about your pace of hiring into calendar 2023 especially as we think we’re probably reaching some level of mix stabilization here.

Yes, it’s a great question. So we added 800 net new teammates in the fourth quarter. That number was lower than it would have been if we factored in all of the seasonal volumes. And the reason for that is that a lot of the seasonal hiring that we do happens in September preparing us for the full quarter. As we look at this year, we will see a reduction in our global headcount in the first quarter as those seasonal volumes are removed. And we take into consideration some of the additional reductions in the U.S. business. But we expect to get back to sequential headcount growth in the second quarter of this year.

Thank you very much.

Thank you. There are no further questions at this time. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.