Good afternoon, and welcome to the TaskUs Second Quarter 2023 Investor Call. My name is John, and I'll be your conference facilitator today. And now I would like to introduce Alan Katz, Vice President of Investor Relations. Thank you, Alan. You may begin.

Good afternoon, and thank you for joining us for the TaskUs second quarter 2023 earnings call. Joining me on the call today are Bryce Maddock, our Co-Founder and Chief Executive Officer; 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. We have also posted supplemental information on our website, including an investor presentation and an Excel-based metrics file. Please note that this call will be simultaneously webcast on the IR section of our 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 6, 2023. 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. 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. I will now 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. In the second quarter, we outperform both our revenue and adjusted EBITDA guidance ranges. We delivered $229.2 million in revenue compared to the top end of our guidance range of $228 million. We delivered adjusted EBITDA of $54.7 million for an adjusted EBITDA margin of 23.8%, also above our guidance of a 23% margin. These results were once again stronger than our expectations. This is the result of the tireless efforts of our global team. However, similar to other players in our industry, a number of our clients in the tech space have continued to focus on driving efficiencies, thereby reducing volume expectations for the remainder of the year. As a result of this reduction, and the continued lengthening of our sales pipeline, our revenue outlook for the remainder of the year has decreased. We've updated our guidance range to reflect this. Given the lower revenue outlook and the investments that we're making to drive growth, we've returned our adjusted EBITDA guidance to 23% for the full year in line with our initial guidance. Our team has made great progress on our efficiency program, which has protected our margins, despite top line headwinds. I'll spend some time going through the details of our Q2 performance and signings, and we'll then discuss in more detail some of the investments that we're making to drive our three strategic growth initiatives. Balaji will then walk through our financials as well as our updated guidance ranges for Q3 and the remainder of 2023. Starting with growth with our current clients, revenue from our top 20 clients declined by 12% year-over-year in Q2, impacted by the transition of work offshore at our largest client, and the declines in volume at our largest crypto,…

Thanks, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the second quarter of 2023. 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 second quarter, we earned total revenues of $229.2 million, a decrease of 7% compared to Q2 of 2022. We outperformed compared to our guidance as a result of revenues from new client signings coming in slightly stronger-than-expected, primarily within our digital customer experience service line. In the second quarter, our DCX offering generated $150.9 million for a year-over-year decline of 9.9% driven by the impact of lower revenue As from our largest client, and from crypto and equity trading clients, as well as the impact of process improvement at an outcome baseline. Our Trust and Safety business declined by 2.4% compared to Q2 of 2022, resulting in $45.2 million of revenues. This decline was the result of the geographic mix shift from our largest client moving volumes offshore and lower volumes from one of our equity training clients. Our AI services business grew 1% year-over-year for revenues of $33 million. As a result of expansion, with both existing and new clients partially offset by the geographic mix shift from our largest client moving volumes offshore. Our client base has continued to diversify in Q2. Our revenue concentration with our largest client was approximately 19%, down from 22% in Q2 2022, primarily driven by the shift from onshore to offshore. Our top 10 and top 20 clients accounted for 55% and 69%, down from 58% and 73% in Q2 of last year. In the second quarter, we generated 55% of our revenues in the Philippines, 16% of our revenues in the United States, 13% of our…

Thank you, Balaji. Before we open for questions, I want to share another TaskUs teammates story. Next month, TaskUs will celebrate our 15th anniversary. One of the most meaningful parts of our incredible journey is seeing our teammates grow here at TaskUs. Almost as long as TaskUs has been around, I've worked with Faith Colonia. Faith has been with us for over 13 years. She began her journey as a teammate in the Philippines right after graduating from college. Over the years Faith demonstrated strong skills and a dedication to her work, leading to a promotion to team leader. And today Faith is an operations manager for our brand new site in Molina Philippines, which we call greenhouse, she's doing a tremendous job. One of the things that makes me most proud is how TaskUs has supported Faith's personal journey. As a single mom, Faith was among the first recipients of our TaskUs scholars program. And for the past 7 years, we've paid almost 100% of her son's tuition fees at private school. As part of our commitment to fostering even greater impact, we recently announced the expansion of the program for our 15th anniversary, aiming to provide tuition support to 1,500 students worldwide. Faith story shows the potential of our people first culture in creating rewarding lives and careers for our teammates. With that, I'll ask the operator to open our line for question-and-answer session. Operator

Yes. Hi. Thanks for taking my question. Quick questions on the guidance cut. So first, what gives you confidence that the worst is behind you and there should not be any incremental surprises this year. And also given the exit rate implied for Q4 and high single digits or maybe low double-digit decline, can you share qualitative comments on next year's growth rate?

Yes, Puneet, thanks so much for the question. So, clearly, over the past 18 months we've seen our clients shift their focus to cost reduction. Many of our clients have laid off internal employees, and they have cut their outsourcing budgets, they've driven efficiency into their outsource relationships by shifting work from high cost, low cost geographies, in some cases, improving their own product and process to contain more contacts, and finally deciding to simply stop supporting certain non-critical workflows. Mix shits at our clients have been a headwind to revenue growth, and they've also slowed our sales as companies reducing spending are less likely to introduce new vendors. With that being said, there is a limit to how much these efficiency improvements can drive volumes down. There remain millions of customer interactions to respond to millions of pieces of content to moderate, in addition to exciting new investment areas like creating and reading content from Generative AI applications. So while I'm not ready to predict exactly where we're at in this cycle of efficiency, I do believe that we're closer to the end than the beginning. And while we're not providing guidance for 2024, at this stage, I do feel confident we will return to growth next year.

That's fair. And then your largest customer said the weakness there stem from content moderation volume, or was it like some other initiatives that you had been working on for that client? And the clarification, like in Balaji's comments like about increased offshore mix there, I'm assuming that year-on-year change not necessarily on sequential basis.

So let me take the first question. And then I'll hand the second question to Balaji. At our largest client, we continue to have a very strong relationship. We have more people supporting our largest client, currently than we did at this stage last year. So we've seen volume growth. The revenue decline has been driven primarily by moving work from high cost onshore markets to low cost offshore markets, which we obviously described prior. And Balaji, I will have you jump in on the next question.

Yes, Puneet, you’re right. So the numbers that I provided is year-on-year comparison, therefore, the largest client, where we were approximately at 19%, when compared to 22% in Q2 of 2022.

Got it? So on sequential basis, there is -- there was no incremental increase in low cost labor mix there. Because that is -- it was already low as of last quarter.

Yes, last quarter, we were approximately at about 20 person, and this quarter, we are about 90%.

Got it. All right. Thank you.

And the next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.

Thank you. On the volumes, can you help translate that into what kind of visibility you have into the guidance that you put out, what kind of factors specifically are impacting those volumes? And then are you assuming any sort of recovery in the back half of any of those volumes?

Yes, so as we've demonstrated in the past, we've got very strong visibility into the current quarter. Given that we're already more than halfway through the year and halfway through Q3, we've got less potential variability in our range than we had when we guided at the start of this year. We've incorporated every main risk from a client perspective into our forecast, and have embedded further conservatism into our expectations around new sales and around client volumes. We feel reasonably confident in our visibility into client volumes headed into 2024 as well.

And then can you give us some idea of how you're viewing AI and Generative AI in terms of the opportunity and threat from a more granular level, like across your different service lines, I imagine there'd be different impacts there.

Yes, we ultimately believe that Generative AI is going to be a net positive for us. We launched past GPT, which is our generative AI agent assist tool that's based on open AIs, GPT 4 API, we've been integrating past GPT into client workflows driving efficiency gains that we're sharing with clients. And we believe that our progress on this front is increasing our competitiveness. We do believe that certain digital customer experience workflows are likely to be further automated. However, our customer support work is mostly complex, involving real time interactions with multiple systems and changing variables. We believe that this work is less likely to be automated in the near-term. Additionally, we believe strongly that Chat GPT and generative AI, in general is going to create significant demand for trust and safety services. It's hard to imagine all of the workflows that are going to be created as a result of this. But when you think about the amount of content, both image video and text that is going to be generated using these Generative AI tools. The potential here is massive. We also believe that we're going to continue to see growth and demand for AI services to support the development of these Generative AI models. So ultimately, we're very aware that Generative AI may automate some of the work that we do today, but we believe it has the potential to create a lot more work as well.

Thanks, Bryce.

And the next question comes from the line of Ryan Potter with Citi. Please proceed with your question.

Hey, thanks for taking my question. I want to double click on the lowered outlook one more time. I guess regarding the demand environment, where would you say things have moved incrementally worse since last earnings in terms of service offerings and verticals? And is the softer client volumes concentrated more in larger clients. Or is it more of a broad base? No, no, I'm seeing across the general client base.

Yes, let me comment on this. And I'll have Balaji add any color. You know, ultimately, the lower outlook is being driven by lower volumes and existing clients and a slowdown in our overall sales pipeline. The size of the pipeline remains robust, but the velocity is significantly slower than it was at this stage last year. We're seeing existing clients really push the boundaries of how they can drive efficiency. We've gone through a wave of moving work from high cost years to low cost years. We have worked with clients to automate certain workflows and follow client's instructions on not supporting certain non-critical workflows. As I said, I do believe that we're closer to the end of this efficiency cycle than we are to the beginning. But those are the things that have been driven to review the revised guidance. Balaji, do you have anything you want to add to that?

No, I just kind of reiterate what Bryce mentioned just from a forecasting process perspective. So one is that we do have very strong visibility in the current quarter. So for this year, we are halfway through the year, halfway through Q3. So we have less potential variability. And also in terms of risk assessment, we do capture name risk at the client level, and then further conservatism into the expectations are on both client volumes and new sales from a forecast perspective.

Got it. And then on your U.S delivery. Have you seen any incremental client reductions away from the U.S beyond the client? They kind of called out last quarter? Is there any change your expectations in terms of U.S delivery fall into 10%, in terms of what's embedded in the outlook?

Yes, so between last call and this call, there hasn't been a material change in our expectations for U.S delivery. This revision and guidance has been driven more by volume reductions across clients at a global scale. So we would still expect the U.S to represent 10%, or perhaps more of our revenues at the end of the year, and into next year.

Got it. Thank you.

And the next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Yes. Good afternoon. Thanks for taking the question. I guess wanted to dig in a little bit on the health tech vertical, it's an area that has been emerging for you. And I'm curious what you're seeing in terms of trends there, really kind of outside of the bigger tech realm, but curious on how much you're seeing, you called out the mental health startup, but any other commentary that you can have to give us some directionality on that group?

Yes, health tech has been a huge driver and growth for us. In the past year, we've seen a lot of demand from mental health startups, both counselors, and psychiatrists that are available remotely to patients. And we've developed a real expertise in that area, as well as across the health tech space more generally. Right now, what we need to do is use our credentials in the health tech space to get into the enterprise health care space. We've been making solid progress, but have yet to close any material deals. In that area. I think that represents a potential upside as we continue to expand into more enterprise customers.

And then, I guess on a similar vein, earlier -- over the last several quarters, you've talked about getting into kind of newer areas of or newer business units across more traditional enterprise customers. Any updates on maybe a potential new business or at least pipeline generation, trying to get into traditional enterprise that are looking to be a little more disruptive, or guard against other disruptors coming into their space. We've made really good progress on the retail front here. We signed two enterprise class retailers in this past quarter, both to deliver out of our Latin American operations. And we see meaningful upside there. Right now health care is an area, obviously, that's very interesting for us, yet to make significant progress in terms of closing deals, but have a strong pipeline. We're also interested in more traditional banking and financial services. We're making investments to bring on sales leaders who have Enterprise expertise. And we expect that to accelerate our sales pipeline going forward.

All right. Thank you.

And the next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

Great. Thanks. I wanted to ask in terms of the efficiency programs, et cetera. And Bryce, I understand that the comments that we may be near the end, particularly for those that have been undertaking that for the last few quarters, but how are you feeling about the broader segment of clients that you have and where they're at in those processes? And do you think that they're like -- what are the things that you're looking forward to? That may be indicators that they may want to start to undertake their own efficiency programs, et cetera?

Yes, so the bulk of the efficiency programs have been at our largest clients. And as we said, in the past, we've gone on a journey with many of our clients, from Venture funded startups to publicly traded enterprises. And this is a chapter in that journey as they shift their focus from growth at all costs to being more efficient and profitable. And so, at this stage, we have seen early signs of demand reviving at certain of our larger clients. We're actively in discussions that most of them about new exciting opportunities in areas of potential expansion, but clearly in the near-term we've seen a decline just as a result of the three factors I mentioned earlier.

Got it, got it. And then you made interesting comments there on outcome based pricing. Can you break down percentage of contracts maybe that are outcome based right now versus time and materials and just kind of help us think through what the potential trajectory is for outcome based pricing and the impact that could have on the business and what kind of timeframe?

Yes, as we said, we've got one large client that we have on an outcome based agreement. And over the past two quarters, we've seen material improvements in their margins, as we've driven additional efficiencies into the business. This has resulted in lower top line revenue, but expanded margins and a strong relationship with the client. At this stage, we've got a low double-digit percentage of our revenue that is derived from outcome based contracts. But in an environment in which our clients are so focused on efficiency, we continue to have lots of conversations about making the shift. We believe that the future of the business will be more outcome based agreements supported by tech enabled talent.

Got it. Got it. Great. Appreciate that.

And the next question comes from the line of Cathy Chen with Bank of America. Please proceed with your question.

Hey, guys. Thanks for taking my questions. So first, I just wanted to ask a little bit about geography. You guys mentioned some strong faction, and you were countries in Latin and Europe, for example, Colombia I guess how much and then at the same time, you guys mentioned, your headcount sort of declined 700 -- about 700,000 to 47k. So two part question. The first is, how much of that is net versus gross, voluntary versus involuntary. And then the expectations for headcount in the back half of the year. And then the second is related to that offshore and geography pieces. How big is offshore in terms of your total global delivery model now? And are you expecting any margin impact from continuing to expand offshore?

Yes, Cathy, thanks so much for the question. So, clearly, the Latin American near-shore region has been a huge driver of growth over the course of the last year. We grew revenues by approximately 70% there. The slight decrease in headcount over the course of the last quarter was driven mostly in the United States. Although we have seen, I would say, a modest flattening of growth in our offshore regions. Philippines and India continue to be the bulk of our business, and that's good because we make higher margins in those geographies and feel like we've got a more robust product to sell. But in recent quarters, we've seen our clients really more interested in buying a near-shore product versus the offshore product. And so we'll have to keep an eye on that going forward.

Okay. And then switching gears, I saw that you guys also launched TaskGPT with MoneyLion, I think that's pretty new. That's exciting. Can you just give us a little bit of insight about how that partnership has been going, who initiated that conversation initially? And are you guys able to maybe take that as an initial use case and then easily implement that with other customers? Are you seeing some interest in that as well? Thank you.

Yes. So the product is totally applicable to other customers. In fact, we've launched with a number of other clients. But we've made great progress with MoneyLion, increasing the efficiency and accuracy of the teammates that we have supporting their clients. So we are very excited about that, and we expect to see similar results across our other clients.

Okay. Thanks, guys.

There are no further questions at this time. Now I would like to turn the floor back over to Bryce for any closing comments.

Thanks so much. In closing, I wanted to thank every one of our incredible teammates around the globe. In the face of challenges, this team has continued to work tirelessly to return TaskUs to growth. We look forward to updating you on our progress towards that goal on our next earnings call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.