TaskUs, Inc. (TASK) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to TaskUs, Inc. Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Alan Katz, Vice President, Investor Relations. Thank you, sir. You may begin your presentation.

Good afternoon, and thank you for joining us for the TaskUs First Quarter 2022 Earnings Call. Joining me on the call today are Bryce Maddock, our Co-Founder and Chief Executive Officer; Jaspar Weir, our Co-Founder and President; 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 the website at ir.taskus.com. We also plan to post supplemental information on this website, including an investor presentation and an Excel-based metric file following this call. Please note that this call is being 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 that 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. 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 developments 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 it 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. 2022 is off to a very strong start, with both top and bottom line results for Q1 coming in above the high end of our guidance ranges. Our go-to-market function is executing well, starting the year with a strong quarter of signings from both new and existing clients. And as Jaspar will discuss later in the call, we completed our first acquisition in mid-April. We started our return-to-office and now have approximately 20% of our teammates working safely from TaskUs offices around the globe. It's been great to see teammates who've been with TaskUs for years reconnect in person and to see the engagement from those teammates who joined us during the pandemic and hadn't yet been able to experience our amazing office culture. The number of teammates returning to the office will increase over the course of this year. As always, we're prioritizing the safety of the team above all else. In terms of financials, Q1 revenue grew organically by 56.8% year-on-year to $239.7 million, above the top end of our guidance range of $232.2 million. Adjusted EBITDA grew 36.9% year-on-year to $54.1 million for an adjusted EBITDA margin of 22.6%, just above our guidance of 22.5%. In terms of people, in Q1, we set a hiring record. 5,700 net new teammates joined TaskUs as demand for our services accelerated in the Philippines and in India. Our results were driven by the continued execution on our 5 growth levers. Let's discuss how we're performing on each of these levers in a bit more detail. I'll start with a closer look at our revenue and recent sales activity. Growth in Q1 was the result of continued success on the first two growth levers; expansion with our current high-growth clients and adding new clients across verticals. Starting with our current clients. As a group, our top 20 clients in Q1 increased their spend year-over-year by approximately 50%, while revenue growth from clients outside of our top 20 customers grew at approximately 80%, supporting our continued focus on revenue diversification. Our fintech and health tech verticals grew revenues well into the triple digits, and our gaming vertical grew revenue well north of 50%, all when compared to Q1 of 2021. In digital customer experience, we grew revenue by 60.2% compared with Q1 of 2021 as a result of expansion with existing clients and new client signings. This year, we've seen an increase in demand for our services from more traditional enterprises who are turning to TaskUs for help with their digital transformations. In terms of new business signings inside DCX, we signed an engagement with one of the largest U.S. airlines in Q1. Travel demand has begun to hit a post-COVID ramp. We launched a chat button in this client's mobile app and are helping to divert thousands of contacts from the phones to more efficient digital channels. This is a great example of how our digital expertise can be leveraged by enterprise clients as they look to transform the way they engage with their customers. We also signed a Digital Customer Experience transformation contract with a large, well-known e-commerce brand to provide customer experience and order management support. This client had been working with their prior partner for 20 years, and we successfully displaced them by offering an innovative solution for customer engagement. As our high-growth technology customers increase their focus on efficiency and cost, we're seeing increased interest from clients who want to leverage our automation solutions. We've recently signed contracts to launch our chatbot technology across multiple programs. We're building RPA tools to fully automate workflows and implementing an automated security supervisor that we call Falcon to prevent fraud. These offerings were key differentiators in positioning us to win new business. We expect these capabilities to help us differentiate and protect margins while we drive improved performance and efficiency for our clients, all while maintaining our support of front-line teammates. Content Security revenues grew by 26.9% compared with Q1 of 2021, largely driven by volume growth with existing clients outside of our largest client. We continue to expand the type of work we're doing and the geographies where we provide Content Security services. In the first quarter, we signed some very exciting new Content Security work. These signings included the expanded scope of work with one of the world's largest audio streaming platforms to provide Content Security services out of Europe. And a few weeks ago, we signed another expansion of service to support them out of Malaysia. We also signed a significant expansion with one of the world's largest dating apps, providing content moderation out of India. This was a competitive RFP process, and our policy and wellness expertise truly differentiated us. At this stage, I want to provide an update on the transition of work for our largest client. We successfully transitioned hundreds of roles for this client, and the transition will be complete this month. Our relationship with our largest client remains strong. In fact, it now awarded us approximately 1,000 additional roles in offshore geographies since the transition began, and we expect to scale most of those roles in the back half of the year. As we've noted before, we make less revenue per employee offshore than we do onshore. So we'll see the impact of this transition in our Q2 revenues. As a result of the shift, we expect our Content Security revenues to be roughly flat in Q2 and decline year-over-year in Q3 and in Q4. We expect to return Content Security to growth in 2023. Since we've transitioned this work offshore, we expect our margins to expand in the back half of the year. Finally, AI services revenues continue to grow in Q1. Revenue from AI services doubled compared with Q1 of 2021 to $34.1 million driven primarily by expansions with new and existing clients in the social media, travel and autonomous vehicle spaces. While we expect AI services revenues to continue to grow this year, they will also be impacted by the shifting geographic mix. This is a high-growth market, and we expect to continue to grow this business over the medium term. In terms of specific Q1 wins in AI services, we signed a significant expansion with our largest client and a new deal with an online brand management company. We were also awarded our first enterprise project for the TaskVerse, our gig worker platform. This platform will allow us to reach a wide breadth of global talent to complete data collection and annotation tasks that are vital for the creation of the KI models. Overall, our signings were once again driven significantly by growth from existing clients, which accounted for approximately 75% of the total new business signings in Q1. We signed expansions across service lines with several of our top 10 clients. We also continued our growth trajectory in Europe, including signing with a leading audio stream platform that I mentioned earlier and an expansion with an online gaming client. Proving the power of our global platform, we will now support both of these clients from three different countries. We also continued our progress on our third growth lever in Q1, expansion of specialized services. Over the last several quarters, you've heard me speak about the progress we've made in the area of financial crimes investigations, fraud risk and compliance services. We've officially launched new services as TaskUs Risk and Response. We mostly report risk and response revenues within the Content Security service line. Here, we've won deals to support digital identity verification, regulatory compliance and anti-fraud, primarily with fintech clients, online marketplaces and cryptocurrency platforms. These are fast-growing markets where we can differentiate ourselves from traditional providers through industry knowledge and world-class tools that enable our teammates. In Q1, we expanded a risk and response relationship we have with a large vacation rental company. We're now providing support for know-your-customer, sanction and reviews, payment risk operations and anti-money laundering work for this customer. On our last call, I also discussed our learning experience services, which we call LXS. We primarily report this service within our Digital Customer Experience service line today. This is a great example of us leveraging an internal skill set and commercializing it. Given market trends, we see a meaningful opportunity to become a strong player in this space. We work with clients who tend to have an immediate need for training services given their growth rates and the expansion of both internal and vendor teams. In fact, we signed two LXS deals in Q1 with fintech clients, supporting their onboarding and training processes. This adds to the LXS business that we already deliver for one of the world's largest technology companies and a leader in the autonomous vehicle space. While this offering is still new to the market, I'm pleased with our initial success. In terms of our fourth growth lever, adding additional geographies, we're seeing good initial traction in Malaysia. We've signed several deals there and are currently ramping teammates in Malaysia for a food delivery customer. We also added new delivery capabilities in Europe through our acquisition of heloo, which was led by my partner and cofounder, Jaspar. So I'll pass it off to Jaspar to discuss our fifth and final growth lever, M&A.

Thanks, Bryce, and good afternoon, everyone. Since our IPO, we've ramped up our focus on M&A. We've hired industry veteran, Trent Thrash, to lead this practice to TaskUs. We see M&A as one of the key strategic levers to drive growth moving forward. We saw the results of our efforts and achieved an important milestone this past month through the acquisition of heloo, a European provider of outsourced specialized services. This is the first acquisition in the history of our company and will support expansion of our European delivery footprint in a meaningful way. We now have teammates in Croatia and a handful of other European locations, deepening our capabilities to support more than 20 European languages to our global clients. We're already discussing these additional European language capabilities with our clients and are seeing significant interest. We're excited about the heloo acquisition for a number of reasons, but the one that is most important to us is the cultural alignment. Tom and Dunn the two co-founders of Heloo, have built a company that completely aligns with the vision that Bryce and I had for TaskUs when we first started. They're hyper-focused on their teammates and culture, and they bring a portfolio of high-growth tech clients with an especially strong presence in e-commerce and gaming. On our Q4 earnings call, Bryce told you that in addition to cultural alignment, we're focused on companies that are accretive to our long-term growth rates and margin targets. While heloo isn't going to be a large driver of revenue this year, I'm pleased to say that this acquisition is expected to meet both of these criteria. We expect heloo's growth rate to exceed our overall growth for the foreseeable future. The acquisition was paid for through a combination of cash and stock, with a significant portion to be paid if the company achieves performance milestones. It's exciting to see this deal come to fruition after a lot of hard work from the team. More broadly, in the medium term, we see our expanding footprint as a significant driver of value for our clients and growth for TaskUs. In the context of the current economic and inflationary environment, expanded geographies and the ability to offer country diversification through multiple offshore and nearshore locations is very attractive to our clients that are looking to drive further efficiencies in their operations. We continue to see interesting M&A opportunities in the market, and we remain disciplined and are pursuing deals that we are confident will drive long-term value. Let me turn it back to Bryce to go through our outlook for the rest of the year.

Thanks, Jaspar. Before I turn the call over to Balaji, I'll spend a few minutes on our guidance for the year and the current hiring environment. We are maintaining our outlook for 30% revenue growth at the midpoint of our range. Although we are off to a very strong start for the year, the current environment is volatile. Since our last call, we've seen several of our clients in the high-growth technology space quickly shift their focus to reducing cost. We have also seen the impact of the recent downturn in the equity and crypto markets caused fluctuations in volumes in our fintech vertical. Across all verticals, the operating environment has led to an acceleration in our clients' demand for growth in offshore work and a decrease in demand for onshore work. We've also seen a number of additional clients shift existing work being done onshore to our offshore delivery locations. We are well positioned to deliver for our clients here as our largest and most mature delivery locations are in India and the Philippines. While these geographic shifts will have some impact on revenue in the near term, our clients' increased focus on costs actually creates a massive opportunity for us. We're partnering with our clients to help them drive efficiency into their businesses. We're leveraging our global footprint and automation capabilities and seeing an increased appetite for unit-based pricing, which will allow us to expand margins over time. Given the strength of our client relationships and global operations, we're confident in our ability to take share and continue to grow significantly faster than our peers. These geographic shifts will now lead to some employee layoffs in the U.S. Our teams continue to fight to find roles for as many of our domestic teammates as possible. And nothing disappoints me more than having to say goodbye to great colleagues. Throughout this process, we'll maintain our commitment to being a best-in-class employer and provide robust transition assistance to all exiting teammates. In Q2, we'll incur severance costs as we support these employees through this transition. Despite this, we continue to see robust growth across the rest of the globe and expect to continue to grow our total number of global teammates in Q2. The combination of our Q1 revenue and bookings and the opportunities we see ahead of us with both existing and new clients gives us confidence in our ability to deliver our 2022 guidance range of $980 million to $1 billion in revenue. Before I finish up, I'll touch on the very important topic of talent. Attracting and retaining front-line teammates and leaders remains a key point of focus for every company in this industry. Our team delivered another quarter of very strong performance on this front in Q1, adding approximately 5,700 net new TaskUs teammates, which is a company record. As we began to return teammates to the office in Q1, we saw an uptick in attrition when compared to our annual 2020 and 2021 numbers, but we remain below our 2019 attrition levels. Finally, our Glassdoor rating remains among the highest in the space at 4.6 stars. Working at TaskUs continues to be an aspirational career across geographies, enabling our teams to deliver for our clients' talent demands. Q1 was a very strong start to the year. We're well positioned to meet our growth commitments, and we look forward to sharing our progress throughout the year. With that, I'll hand it over to Balaji to go through the financials in a bit more detail and provide our outlook for Q2 and the year ahead.

Thanks, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the first quarter of 2022. 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 first quarter, we earned total revenues of $239.7 million, an increase of 56.8% over the prior year. We saw growth in each of our three specialized service offerings. In the first quarter, our Digital Customer Experience offering generated $159.7 million for a year-over-year growth rate of 60.2%. Our Content Security business grew 26.9% versus Q1 2021, resulting in $45.9 million of revenue. Our AI services business grew 100.2% year-over-year for revenues of $34.1 million. In Q1, we saw continued diversification of our revenue as growth from our largest clients was exceeded by the ongoing expansion of the rest of our client base. As a result, our revenue concentration with our largest client was approximately 24%, down from 25% in Q4 and down from 29% in Q1 of 2021. Our second largest client was 10% of our revenue, up slightly from Q4 2021 as we return to sequential quarterly growth, but down from 11% in Q1 of 2021. Our top 10 and top 20 clients accounted for 61% and 75%, flat compared with Q4 of 2021, but down from 64% and 78% as of Q1 2021. In the first quarter, we generated 50% of our revenues in the Philippines, 33% of our revenues in the United States and 17% of our revenues from the rest of the world, mainly driven by our operations in India, Taiwan and Latin America. Our concentration of revenues is expected to continue to shift towards our offshore geographies this year. As a reminder, our cost of service as a percentage of revenue, and as a result, our margin profile is primarily driven by the geographic location from which services are provided rather than the fixed service line. Over time, this geographic mix shift should drive margin expansion. Our cost of service as a percentage of revenues was 58.9% in the first quarter compared to 57.6% in Q1 of the prior year. The increase was primarily driven by increased absenteeism due to Omicron, additional expenses associated with our return to the office and costs that we typically incur as teammates are back in the office, which was partially offset by the currency benefit. As Bryce discussed, given wage inflation and the increased focus on profitability, we are seeing an acceleration in clients, leveraging our offshore delivery capabilities. Net-net, we think this environment will ultimately be a benefit for us. Given our deep presence in markets like the Philippines and India, we are well positioned to win clients and expand volumes with existing clients. Again, revenues generated at our offshore locations come at a higher margin profile. In the first quarter, our SG&A expenses were $64.2 million or 26.8% of revenues. This compares to SG&A in Q1 of 2021 of $31.5 million or 20.6% of revenue. Stock compensation expenses in the quarter were $18.9 million relating to equity grant, while we did not accrue any stock compensation expenses in Q1 of 2021 when we were not a public company. Q1 2022 also included full quarter public company-related expenses, which we did not have last year. In the first quarter of 2022, we earned adjusted EBITDA of $54.1 million and a 22.6% margin compared to $39.5 million and a 25.9% margin earned in the first quarter of 2021. The reduction in adjusted EBITDA margin was primarily driven by the increase in cost of services that I just explained and public company costs. Adjusted net income for the quarter was $35 million, and adjusted earnings per share was $0.34. By comparison, in the year ago period, we earned adjusted net income of $28.2 million and an adjusted EPS of $0.31. Now moving on to the balance sheet. Cash and cash equivalents were $77.1 million as of March 31, 2022, compared with the December 31, 2021, balance of $63.6 million. Cash generated from operations was $36.9 million for the first quarter of 2022 as compared to cash generation of $39.9 million in Q1 of 2021. We maintained our DSO at 65 days again this quarter. Our capital expenditure increased in the first quarter of 2022 to $17.8 million compared to $10.1 million in Q1 of 2021. The increase was primarily driven by facilities expansion as part of our return-to-office plans. In terms of our financial outlook for the remainder of the year, our guidance remains unchanged. We continue to anticipate full year 2022 total revenues to be in the range of $980 million to $1 billion, representing year-over-year growth of 30% at the midpoint. We also continue to expect to earn a full year 2022 adjusted EBITDA margin of approximately 23%. For the second quarter 2022, we anticipate revenues to be in the range of $241.5 million to $243.5 million, representing year-over-year growth of approximately 35% at the midpoint. We expect to earn a Q2 2022 adjusted EBITDA margin of approximately 22.5%. I will now hand it back to Bryce before we take your questions.

Thank you, Balaji. Before we get to Q&A, I want to share another TaskUs teammate story. Last month, I was able to visit our team in India for the first time since the pandemic started. Every time I visit India, I'm reminded how strong our team there has become in such a short period of time. This has been the fastest-growing region that we ever entered, and we now have over 7,500 teammates in the country. One of our India-based teammates, Ayushi, joined TaskUs in indoor 2.5 years ago as a front-line teammate supporting an anti-money laundering campaign for one of our fintech clients. This was her second job out of school, and she was the first woman in her family to work for a multinational corporation. Ayushi was an impressive talent from the start, exceeding service levels and always raising our hand to take on additional responsibilities. Within a year, she was promoted from front-line teammate to team leader. She excelled in a leadership role, and we fostered this by giving her additional opportunities and responsibilities. She's continued to support her fintech client and is now an operations manager with approximately 150 teammates on her team. She consistently receives accolades from her teammates that work on the campaign as well as from her client. Ayushi's journey with Tasks is a great metaphor for what we've seen in India since 2019. Just as TaskUs in India has grown at a rapid pace, Ayushi's career has expanded exponentially. One of the things I'm most proud of is building a company that provides a career path for smart, motivated, talented teammates who share our vision of doing great work for our clients, all while not taking ourselves too seriously. As we continue to grow, developing talent and providing opportunities for advancement will be a key driver of our success. With that, I'll ask the operator to open the line for a question-and-answer session.

[Operator Instructions] Our first question comes from the line of Maggie Nolan with William Blair.

Congrats on yet another quarter in the books. I wanted to ask a little bit more about the transition with the largest clients. And as you're seeing that delivery transition create some growth headwinds, can you talk about your confidence in the long-term sustainable growth rate that you've put out and how that investment in the client kind of factors into the equation?

Yes. Maggie, thank you so much for the question. So our relationship with our largest client is as strong as it's ever been. At the start of the year, we came together with this client, and we built a plan to optimize their global delivery footprint by moving hundreds of roles to the Philippines and India. And in that initial plan, we were cautious about how fast we can hire and train these teammates. Given the incredible work of our recruitment, training and transition teams, we deliver faster than we expected. And most of that transition has already been completed, and the remaining portion is going to be completed this month. While this is going to impact Q2 and Q3 revenues, it has further strengthened our relationship with our largest client, and we're continuing to be awarded business here. We've now won over 1,000 additional roles from this client. We've significantly expanded the services that we're delivering to them, and we've really deepened our partnership. And we expect that this client's revenues, while flat in 2022, will return to growth in 2023. I'll just comment from a high level on our growth outlook. We remain confident in our ability to drive 25% or higher revenue growth over the medium term. And this is based on the strength of our 5 growth levers. The sales acceleration that we're seeing in the market today continues to give us a deep confidence in that medium-term outlook.

That's helpful, Bryce. And then you also had some commentary about clients engaging you for work to help them reduce costs. And then you also had the commentary about the Content Security segment and how you expected that to perform. So could you kind of bring all of that together with some updates on how the pipeline looks across kind of your 3 disclosed service buckets?

Yes. So actually, Q1 saw the highest sales numbers that we posted as a public company. And our pipeline today is as large as it's ever been. I'll comment on a couple of things that we're seeing in the pipeline specifically. We've seen an increased interest from Fortune 500 companies that are looking for support with their digital transformation. In the prepared comments, I mentioned the airline deals that we closed in Q1, and we expect to close more deals like that this year. We're also getting great traction with the world's largest tech companies. Here as well, we expect to close a number of exciting deals this year. At the time of our IPO, we mentioned that we didn't have significant work with any of the 4 largest tech companies in the world. And by the end of this year, we expect to have deals in place with at least three of those 4 companies. We've also seen more high-growth technology companies interested in launching operations offshore. Many of these companies are looking to ship in-house operations being done in the U.S. or Western Europe today to our low-cost delivery centers. And finally, we're seeing demand from our existing clients for more complex specialized services. Here, again, we're seeing areas of the business that our clients have previously been hesitant about outsourcing. We're seeing our clients turn to us with increased opportunities in those areas. On the call, I mentioned the learning experience services that we're seeing and also the risk and response services that we're seeing there. So the pipeline is very strong. There's definitely a shift to demand for higher value services in addition to leveraging our nearshore and offshore footprint to control costs.

Very helpful. Thank you.

Our next question comes from the line of James Faucette with Morgan Stanley. You may proceed with your question.

This is Jonathan on for James. You had mentioned the signing of the airline client, which marks a departure from your usual high-growth new economy and customer base. Is this a change in strategy? Are you going after more traditional BPO and call center work? And how are you thinking about the airline industry as a new vertical?

Yes. Jonathan, thanks for the question. So Fortune 500 clients are turning to us to support their digital transformation. In the past, we mentioned that during the pandemic, one of the U.S.' largest grocery chains turned to us to launch their delivery app. And we successfully scaled an operation for that customer both in the U.S. and in one of our nearshore markets. This quarter, we launched a chat button within the mobile app of one of the U.S.' largest airlines. And we see demand for similar services from the Fortune 500 down the line. To be clear, we are not interested in traditional call center work. Instead, we're selling our digital expertise to these established enterprises. And we expect demand for digital transformation deals like this to really take off this year.

Got it. And then I guess one for Jaspar. Now that you've announced your first acquisition, how are you thinking about future ones? What does the pipeline look like? And are valuations palatable in the space?

Yes. Thanks for the question. So look, we're seeing compression in public market valuations flow through to the private markets, but I think that actually helps our case to continue to acquire companies. We do see a high level of deal activity in the market today as well. We believe TaskUs is a strong acquirer for the same reasons that our clients choose to work with us, which is our great culture and our industry-leading growth. So our pipeline remains strong, and we're going to continue to be really disciplined in our approach to find those rare companies that meet our criteria, mainly ones that are accretive to financials in terms of margin and growth and, most importantly, culturally accretive as the heloo acquisition is. So we're looking to continue to expand our footprint, add specialized digital services. And any acquisitions that we can find that accomplish that is certainly a bonus. We'll continue to evaluate those sorts of opportunities. We'll also look at bolt-on technology opportunities that make our teammates and our offerings more productive or deliver higher quality service.

Our next question comes from the line of Puneet Jain with JPMorgan. You may proceed with your question.

Appreciate the commentary on how some of the digital clients are focusing on profitability in the current environment. While I agree like that could result in higher cost focus and more offshore over the long term, but is it also driving any sort of delays in decision-making or project awards as clients adjust to this new environment?

Thanks for the question, Puneet. It's actually accelerating the awards. What we've seen here is clients who have large in-house operations turning to us for quick transformations of their businesses. Again, these are operations typically that have been built by the customers themselves in the U.S. or Western Europe. And as a result of the cost focus, they're looking to leverage our nearshore or offshore delivery footprints quickly. So we've got a number of those opportunities that we closed in Q1 and a number in the pipeline for Q2 and beyond.

Got you. And then there was some news in Philippines as it relates to delivery, the new law there. Can you talk about what that means for you, what it means for attrition rate, if there could be any wage inflation impact as well as taxes for this year?

Yes. I'll take the question around impact on attrition, and then I'll have Balaji jump in on any tax impact. So PEZA, the Philippine Economic Zone Authority, has put out guidance on return-to-office. And while we're not breaking out the specific percentages that have returned to office by region, we can say that the Philippines is the geography where we have the highest percentage of teammates who've returned to office. And we actually have certain offices in the Philippines that are 100% back in office. So similar to our other regions, as I said in my prepared remarks, we've seen a slight uptick in attrition rates as we return teammates to the office in the Philippines, but the Philippines remains one of the lowest regions globally for us when it comes to attrition. So we're confident in our return-to-office strategy as it relates to the Philippines. And then I could have Balaji comment on any tax impact.

Thanks, Bryce. And Puneet, from a tax perspective, we believe that we will be compliant with PEZA requirement to return our office -- employees to the office. And just a reminder that not all of our facilities fall into the PEZA tax zone, and we do not expect to see any material impact towards PEZA tax incentives as a result of the return-to-office requirements.

And how about any impact on wage inflation there to incentivize people to return to offices maybe?

Yes. Thanks for that -- Sorry, Balaji. Do you want to take that question?

Yes. Let me take it and, maybe you can add a little bit more. So from a wage inflation perspective, again, Puneet, that is something that has been added to the forecast. And one of the things that we spoke about before is the majority of our contracts have COLA provision. So that's kind of been a net benefit. And second, also we are having a benefit from a currency perspective, which is a positive impact for both in the Philippines and India. And we continue to hire very successfully in Q1. So we added a total of 5,700 net new roles in this quarter.

Our next question comes from the line of Jason Kupferberg with Bank of America. You may proceed with your question.

This is Casey on for Jason. First, I just wanted to ask 2 clarification questions. Just kind of following up on your answer before, Balaji. Was there any update on the FX assumptions in your overall 2022 guidance? And in the quarter itself, I know you called out some FX benefits on the cost side, but was there anything incremental on the revenue side we should be aware of? And then the second question as also clarification is just for the top clients that you guys mentioned kind of like the shifting, headcount, geographical location, going to be a headwind for content moderation and selling AIOps as well, is there any impact on the Digital CX business? Or is that pretty much untouched and it's more in the other 2 segments of the business?

Yes. So thanks, Cassy for the question. I'll take the FX question, and I'll have Bryce answer the service line question. So from an FX perspective, as a reminder, majority of our contracts are billed and collected in U.S. dollars. So we don't have an exposure from an FX perspective, fortunately, on a revenue basis. But on the cost side, we do hedge our about -- approximately about 50% of our exposure in the Philippines. And we kind of get some of the -- as an example, in Q1, and we are expected to do that in Q2, we would get a net benefit from a currency perspective in our offshore location. And like I said before, that is going to be helping us offset some of the impact that we will have on wage inflation, along with the COLA provision that we have in the contracts. So Bryce, you want to talk about...

Yes. As far as the top client, while we're seeing an impact because of the shift from onboard to offshore inside Content Security and AI services, we don't expect to see any impact there to Digital CX.

Okay. Perfect. And then my second question is just on heloo. I know you guys said it's not a material contributor in '22, but is that already kind of baked into your updated, reiterated 2Q and 2022 guidance? And I guess just like how is the integration going there? What's the strategy there for like enhancing that asset and maybe cross-selling to that existing client base? Just wanted to get some more details there.

Yes. Balaji, do you want to take the first part? And then I'll talk about the integration.

Yes. So we have factored that into the guidance currently, but it is not -- we don't believe it's a material portion of the guidance currently, but it has impacted in the model.

Yes. When it comes to the integration, look, heloo is a high-growth business with an excellent management team led by their 2 founders. This is not a turnaround story or a cost synergy play for us. So we're taking a somewhat light touch approach to integration as the companies get to know one another. With that said, we have a dedicated project management team who is running the integration, and we plan to support heloo operationally in areas where we have strength, and it might be a little bit more operationally mature just based on our size versus theirs. Now we will continue to focus on cross-selling heloo's clients who are looking for a global footprint, along with our clients who are looking to expand further into Europe and have already expressed interest in some of their locations.

Our next question comes from the line of Brian Essex with Goldman Sachs. You may proceed with your question.

I guess either one of you could fill this one. But I was wondering if -- I guess I certainly appreciate as you migrate customers to other geographies, particularly the largest customer, but others as well as you ramp up the accelerated hiring in the Philippines and India, that would provide some margin benefit. Could you perhaps let us know what some of your assumptions are with regard to reiteration of margin guidance for the full year? What some of the offsetting effects might be? I don't know if you can quantify any of them such as -- I think you listed a number of them, including absenteeism related to Omicron. Just maybe if you could quantify some little more substantial headwinds, perhaps the impact of this quarter. Are they relatively recurring? Or might we see some of those abate in the back half of the year? Just so that we can evaluate how that margin progression might be throughout the remainder of the year.

Yes. Absolutely. So Brian, we delivered about 22.6% adjusted EBITDA in Q1, and we're going to about 22.5% in Q2. And first half margin has the impact of certain onetime or nonrecurring costs, like you called out. One is the higher absenteeism that we saw due to Omicron. The second is additional cost that we incur as we return our teammates back to the office. And then Bryce spoke about the severance costs that we're going to be incurring in Q2, and that's been factored in the model. In H2, we would have also had transitioned of our largest client to offshore resulting in incremental margin. And in the short term, we are prioritizing growth over margins due to the volatility that we are seeing in the market by increasing our investments in sales and digital initiatives while maintaining our 2022 guidance of 23%. And maybe just talking about the medium term, we feel confident about the medium-term target of 25% by scaling more work nearshore and offshore, driving greater G&A leverage and focusing on our specialized service offerings.

Got it. That's helpful. And maybe just a follow-up on the margin theme. Maybe if you could help us understand some of the dynamics that you might have for customers that may not choose to migrate to other geo locations. Any sense of that you can offer for typical contract duration? Are you able to put through pricing increases with a measure of success? And what impact might we expect on particularly gross margins as you progress through the year for those customers?

Yes. So if we look at our onshore delivery footprint, we've got a core -- strong core of customers that rely on our onshore delivery for regulatory reasons or for specific services. And so we feel very confident in the resilience of that business. We have been able to successfully pass along cost of living adjustments to our customers regardless of the region that they're in, but we do see the greatest wage pressure in the U.S. market. And so this is part of the reason why an acceleration in growth in our offshore delivery geographies will expand margin in the back half of the year.

Our next question comes from the line of Dan Perlin with RBC Capital Markets. You may proceed with your question.

I was wondering if you could just comment on visibility. I think in the past, you've had a pretty high level as you kind of enter any one period. I think you've talked about 5%. But this year, it seems like it's got a particularly large amount of moving parts. And I'm just wondering what are some of the key tenets to the confidence you've got to reaffirm guidance, how much visibility do you really have as we think about the cadence over the next couple of quarters? And then just secondarily, when we think about the guidance, and you talked about having to do some layoffs in the U.S., what should we be expecting around headcount growth that's necessary to support the reaffirmation guidance?

Yes. So Dan, let me talk about just the forecasting process. So we have a bottoms-up process for both budgeting and forecasting. So what we do is we work with clients to develop an outlook on their expected volumes based on their current visibility, which includes any transition that is happening to offshore geography, then we incorporate the base level assumption of new business signings. And finally, we factor in macro level risk from increased market volatility that you're seeing to ensure we present the forecast that we are confident that we can deliver. Bryce, do you want to take the question on headcount?

Yes. Let me take that one. So Dan, we're seeing an acceleration in net headcount additions in the first quarter. And the majority of that was driven from our nearshore and offshore delivery locations. In the second quarter, as a result of the reductions in the U.S., that number will be lower, but we still expect to add thousands of net new teammates globally as we would expect for every quarter of this year.

Got it. Okay. And then just a quick follow-up. I think you said 75% of new business signings are coming from existing clients in the quarter. I'm just wondering, is the nature embedded in those client relationships -- is the nature of that work changing materially? I know you talked about enterprise and some of those. I wasn't sure if that was in the same vein of that cohort.

Yes. So for our existing clients, what we're seeing is 2 trends. The first is an interest in outsourcing more sophisticated services. These are services that they weren't previously comfortable turning to an outsourced service provider to deliver. And since we've proven ourselves capable of delivering against their core business needs, our clients that are facing cost pressures are increasingly turning to us for a more specialized offerings. The second trend we're seeing is that interest in offshore and nearshore geographies in order to control costs of their core operations. And those core operations could be being done by TaskUs in the U.S. today or they could be being done by an alternative vendor domestically or by in-house operations at our customers.

Our next question comes from the line of Matt VanVliet with BTIG. You may proceed with your question.

Wanted to ask one maybe about a little bit longer-term view on Europe, especially in light of the heloo acquisition. How is this going to impact your sort of ongoing geographic and office expansion across Europe? And then also, how do you expect it to impact maybe winning net new logos with European-based headquarters rather than a lot of U.S. operations with European headquarter -- or European operations and the like?

Yes. Thanks for the question, Matt. So to start, we remain committed to expanding our European footprint. In the past, we've talked about launching offices in Romania and in Poland, and we intend to continue those operations in addition to the expansion of offices in Croatia through the heloo acquisition. We also are very excited by the client base that the heloo acquisition brings us. We've got some exciting European-based customers in the gaming and e-commerce space that we're excited to be able to cross-sell our global platform into. In addition, we're very excited to be able to sell our current global customers into our European operations, including heloo's operations.

All right. Very helpful. And then when you look at what sounds like maybe a little bit of an acceleration or kind of a very short-term decision for some of your U.S. work to be moved offshore, how has that maybe the last couple of months been different than previous times where you've had U.S. operations that want to move to offshoring as they expand with you, both from sort of the time frame that it takes to have that revenue headwind as you get slightly lower, but then also the total scope of the project in the past versus where you're seeing now maybe companies looking to directly move like-for-like offshore?

Yes. So historically, what we've seen is clients want to launch and scale in the U.S., and then as they get confidence in our operations, look to supplement those operations with offshore teams. The change this quarter is -- started with our largest client who we came together with and built a plan to optimize costs by scaling teams in the Philippines and in India. And then we've seen other clients, particularly those clients whose volumes have been impacted in the crypto and equity spaces, follow suit. And so just the amount of that shift -- the amount of those shifts that are happening simultaneously is just kind of what has led to this onetime situation. When we look out at the market, what we're seeing is a simultaneous focus across our client base on optimizing their cost structures. And so we're leaning into that opportunity. We actually think that this is one of the most exciting markets we've ever seen to sell into. Despite the slowdown in revenue growth that we'll see in the next quarter, we remain very confident in the guidance we provided to grow at or above 30% this year and at or above 25% for the medium term.

And then sorry, quickly, Balaji. On the margin impact from that ongoing shift, do you get any kind of, I guess, extra benefit or a little bit more leverage in terms of how those contracts are structured when the clients are looking to reduce costs as quickly as possible?

Yes. So typically, when one -- like Bryce mentioned, when the transition happens from an onshore to offshore perspective, we do see benefit from a margin perspective because we get incremental margin percentage in terms of what we deliver on the P&L. But in terms of just purely the way the contracts have matured, tend to be pretty similar in terms of what we sign up with the customer, and then the statement of [indiscernible] will be slightly regional in nature in terms of what we signed with each of these customers in each of the geographies.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Bryce Maddock for closing remarks.

Well, thanks so much. In closing, I want to thank our teammates, clients and shareholders for their continued support. We look forward to connecting with you again on our second quarter results in August.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.