Good evening, and welcome to TaskUs Third Quarter 2023 Investor Call. My name is Sherry, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid any background noise. After the speaker’s remarks there will be a question-and-answer period. [Operator Instructions] I would now like to introduce Trent Thrash, Senior Vice President of Corporate Development and Interim Head of Investor Relations. Trent, you may begin.

Good afternoon and thank you for joining us for the TaskUs third quarter 2023 earnings call. Joining me on today's call 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 the website at ir.taskus.com. We have also posted supplemental information on our website, including an investor presentation and Excel-based metrics file. 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 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 these 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 file 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 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 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 metric, please see our earnings press release which is available in the IR section on our website. Now I will turn the call over to Bryce Maddock, our Co-founder and Chief Executive Officer. Bryce?

Thank you, Trent. Good afternoon, everyone, and thank you for joining us. In the third quarter, we outperformed both our revenue and adjusted EBITDA margin guidance. We delivered $225.6 million in revenue compared to the top end of our guidance range of $222 million. In terms of margins, we delivered adjusted EBITDA of $52.9 million with adjusted EBITDA margin of 23.5%, 110 basis points above our guidance or a 22.4% margin. I am so proud of our global team, which continues to work tirelessly despite a challenging macroeconomic backdrop. As a result of these efforts, we're increasing our revenue guidance for the full year between $915 million and $917 million in revenue, up from a midpoint of $905 million. Despite this improvement, the environment remains challenging. In the face of these challenges, our team has continued to focus on maximizing cash generation by optimizing our G&A and CapEx spending, while continuing to invest in our generative AI initiatives, along with sales and marketing to drive growth. As a result, we generated $32.2 million in free cash flow in the third quarter, excluding the impact our heloo acquisition earn out payment. As a result, we're increasing our full year free cash flow guidance for more than $100 million for more than a $115 million, excluding the earn out payment. I'll spend some time going through the details of our Q3 performance, consigning, and we'll then discuss in more detail some of the results of our strategic growth initiatives. Balaji, will then walk through our financials as well as our updated guidance ranges for the remainder of 2023. Starting with our current clients, total revenue declined by 2.8% on a year-over-year basis. Revenue from our top 20 clients declined by 7% year-over-year in Q3 as the top 20 continued to be impacted…

Thanks, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the third 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 third quarter, we earned total revenues of $225.6 million, once again beating our guidance range of $220 million to $222 million in revenues. Revenues decreased by 2.8% compared to Q3 of 2022. We outperformed compared to our guidance as a result of new client signing and existing client volumes, both of which came in stronger than expected. In the third quarter, our DCX offering generated $146 million for a year-over-year decline of 3.6%, driven by the impact of lower revenues from our largest overall client, as well as cost optimization initiatives and declines in volume from a few other clients. This was partially offset by expansions with existing clients and new client signings. For trust and safety business, grew by 10.9% compared to Q3 of 2022, resulting in $48.7 million of revenue. This increase was the result of continued growth in our large on-demand travel and transportation clients, as well as clients in the social media and fintech markets, offset by the year-over-year impact from our largest equity trading client. Our AI services business declined by 15.7% year-over-year for revenue $31 million as a result of the contractions at our largest overall client and our largest autonomous vehicle client. Our client base has continued to diversify in Q3. Our revenue concentration with our largest client was approximately 90% down from 22% in Q3 of 2022, primarily resulting from their cost optimization efforts. Our top 10 and top 20 clients accounted for 55% and 67% respectively down from 56% and 70% in Q3 of last year.…

Thank you, Balaji. Before we open for questions, I wanted to share another TaskUs teammate's story. This month, we officially opened our new site in Beautiful Thessaloniki, Greece which I visited last July. It was amazing to see teammates from dozens of different countries and cultures, all working together in one building. Our teammates here speak more than 30 different languages. One of these teammates [Valerie Sablu] (ph) is a trust and safety professional providing multilingual content moderation services. Valerie moved to Greece in March of 2022 as a Ukrainian war refugee. It was not easy for him at first, but he started to make new friends in the Ukrainian community in the city. And that's where he first heard about TaskUs. Two of his new friends were already TaskUs teammates, and they encouraged him to apply. We met Valerie at one of our career days, and he impressed us with his Russian Ukrainian and English language skills. Today, he's a valued member of our content moderation team and doing extremely well. He takes great pride in ensuring a safer online world, monitoring for everything from offensive images to political misinformation. Valerie story is just one example of the impact that TaskUs has on people and communities all around the world. With that, I'll ask our operator to open our line for our question-and-answer session. Operator?

[Operator Instructions]. Our first question is from Maggie Nolan with William Blair. Please proceed.

Thank you, and congrats on the results. I was hoping you could expand on a comment that you had made about your top 20 clients you referenced some efficiency efforts from clients outside of your top clients. Can you just elaborate on what those are and whether you would expect that trend to improve or worsen or be stable in the coming quarters?

Yes, Maggie, thanks so much for the question. So, what we've seen amongst our top 20 clients is the vast majority of them continue to grow revenue year over year and invest more with TaskUs. However, there have been a few pockets where clients have used contact deflection, and other forms of automation to drive down volumes. We've also seen a few more work from onshore to offshore. At this stage, we think that this trend is closer to the end than the beginning. If we take the example of our largest client, we've seen a decrease in revenue there this year But at this stage, we would expect revenues to stabilize next year given all the conversations that we're having with them. So we feel good about where we're at despite obviously having a challenge in 2023.

Thank you. And then in the past, you've mentioned some success at moving clients to outcome based pricing. Are those conversations that you're still engaging in with existing clients? And are they coming up with some of the new clients that you're signing and any kind of notable progress on this in the quarter?

Yes. Well, really the automation efforts that we've been making with TaskGPT have increased the number of conversations we're having about outcome based pricing. We've seen clients become much more interested in fixing unit economics and really kind of baking in savings. And we think that the investments we're making in generative AI will position us well to be able to deliver there.

Thanks, Bryce.

Our next question is from Ryan Patton with Citi. Please proceed.

Hey, thanks for taking my question and congrats on the good quarter. Yes, so just looking at the outlook, you're guiding 4Q to be flattish on a sequential basis, which would be a nice bounce back from the sequential declines you've seen in the last few quarters. So what’s driving this confidence in improving sequential performance. I know you mentioned some seasonal volumes there, but our clients also communicating, increasing volumes overall in their end businesses to you, or do you believe you're also taking some wallet share here?

Yes, I think it's a combination of all three. We've definitely seen a real success in selling into certain seasonal volumes this year. I gave the example of our large e-commerce client, where we've seen a very significant seasonal ramp as well as the first open enrolment client that we've signed in the US, improving the health care business. I think we're also seeing clients, in some cases, increase kind of our base business and we've seen some success selling into clients -- selling new services and declines who are looking to reduce costs.

Got it. And then kind of diving more into the health care vertical. I mean, you mentioned you signed a large enrolment client there, is the strength you're seeing in terms of the 4Q ramp or just overall there from just a couple of clients or is it kind of multiple clients you signed over recent quarters and what kind of opportunity do you see overall in the vertical going forward?

Yes, we've made great progress this year, signing up a number of health care clients, and we've got a very active pipeline of health care opportunities. I think this will be a really big growth area for us as we head into 2024.

Got it. Thanks again.

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

Hey. Thanks for taking my question. So, I wanted to ask about margins. So, for the full year, the guidance is 23.3, yet you are going to be below that in Q4. So, are there any seasonal headwinds to margins that you're expecting Q4? And how should we think about next year? Is 23.3 the right pace for margins next year given, like, we've been hearing pricing pressure and whatnot from everyone else.

Yeah. Great. Thanks for the question. So in Q3, you're right, we came in higher than our guidance range at 23.5% and the full year guidance has been now revised to 23.3%. And that implies that Q4 is at 22.5% and the reason is because we do incur seasonally expenses. As an example, holiday pay, typically in Q4, and this is something that we see in Vidyard. So that is factored into these numbers. So while we are not providing guidance for 2024, what I can say is that we will continue to optimize G&A. We'll continue to gain additional leverage from our offshore geographies. Like Bryce mentioned, we are we are growing those geographies. And last is continuing to grow our specialized service lines.

Got it. And then on top line price, you mentioned that you expect like a sequential decline from Q4 to Q1 given there is some seasonal benefits that you expect in Q4. But how should we think about sequential trends beyond Cuba next year. Is the business, the incoming business as well as existing book of business at a point that we should we can see growth next year beyond Q1?

Yeah. I mean, getting back to growth is the number one prior of the business. Our team has done an excellent job capturing incremental share and new opportunities, which is what allowed us to revise our guidance range up. Obviously, we'll provide more detailed guidance on 2024 on the next earnings call. But we're focused on the three part growth strategies, selling into enterprise clients and big tech clients, selling into new clients in Europe and Asia and cross selling our specialized services to our portfolio of clients. And that strategy does seem to be working.

Got it. Thank you.

Our next question is from David Koning with Baird. Please proceed.

Yeah. Hey guys, thanks so much. And yeah nice results. When we think about you gave your employee count 47,000, maybe just reflect a little on morale of the just given the backdrop right now, just maybe talk a little bit about wage, whether inflation or how pay is going, but just kind of the whole feeling of employees and, how that's all going right now?

Yeah. Well, I'll start, with our frontline teammates, which is the primary focus of everybody in our business. We want to make sure that we've got the best experience for our employees around the globe. And the experience here, I think, really varies based on the geography. We've got some geographies where we're growing 70% or more year over year, like our near shore geographies in Mexico and Colombia. And so it's very easy in that type of environment, I think, to have positive employee morale, lots of opportunities for upward mobility. I think that our offshore business continues to be one where employees are very satisfied very engaged. In our onshore business, we definitely have challenges. And these challenges exist from the fact that we've seen a substantial decline. I mentioned nearly 34% decline in revenue over the course of the last year. And that's led us to have to say goodbye to a lot of really great frontline talent in the US. So that does make for a challenging, environment. And then I think more broadly from our leadership team's perspective, it has been a challenging 18 months, so there's no doubt about that. But the team has stuck together and I'm incredibly proud of the work that they have done.

Yes. Let me just repeat the catch up on the wage inflation question that you have. So, we did see significant wage inflation in 2022, but this has returned to more normalized levels in 2023. And since the share of onshore business is expected to be lower, the impact of wage inflation will be mostly in our offshore location, which has been offset by the mix shift, which is margin accretive as we work from onshore to offshore locations. And second is we do have cooler provisions in our contracts that, that we've been enforcing this year.

Got it. Okay, thanks. And maybe just as my follow-up, within the content business, how do you see the next several months kind of going with the political cycle, like maybe how much of that business is political, how much of it is other stuff, just kind of how the backdrop might be for that the next few quarters.

Yes. So, I mean, clearly, our trust and safety business continues to grow, and this is being driven both by risk and response work in the financial space as well as content moderation, for a variety of different companies, including social networks. As we head into 2024, we do expect, to have more work in the political realm. And I think we're well positioned to capture growth that comes from that. I would just sort of moderate expectations though and just say that we have a team today. I think that staff to handle, everything that we're expecting, amongst our current clients. We also have a lot of opportunities amongst large, social media video streaming companies that aren't TaskUs clients today in that realm.

Got you. Thanks. And congrats on the great margins too.

Yes, thanks so much Dave.

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

Thank you. I wanted to follow-up on the margin collection. Balaji, I hear you loud and clear that, the December quarter, you have some SG&A pressure just given the nature of the calendar. But with as much growth as you guys are seeing overseas and then new delivery geographies, in particular. How can we think about that as a source of SG&A as well as CapEx on a go forward basis? Where are we at the point where we can start to get good leverage on those operations already?

Yeah. No. So, James, like, in terms of margins for next year, like I said that while we're not providing any guidance there, but we will continue to optimize on G&A, you know, so there still opportunities for us to continue to optimize DNA and that's something that I feel like the team did really good work. And in terms of the EBITDA margin guidance for the full year at 23.3%, I feel like it's one of the industry leading margins currently. And we'll continue to optimize G&A. And second is we'll continue to gain additional leverage from our offshore dollar base, but we'll also see the impact of wage inflation getting into next year. Some of this additional leverage that we'll get will be an offset to wage inflation. And then the third is we'll continue to grow our specialized service lines, which we believe is going to be margin accretive. And then, again, from a CapEx perspective, if you kind of look at, what, the year to date CapEx has been about 3.3% of revenues, And then for the full year, at about $35 million, it'll probably be at about 3.8%. So we will continue to invest back in the business, both in terms of OpEx, in sales and in Generative AI and also from a CapEx perspective where it is required in terms of expansion. But again, we've been very mindful this year in terms of where we have to invest, which is leading to these current CapEx projections.

Got it. Appreciate that. And then Bryce, I want to go back to something you talked about. You talked about some of the engagements you have around Generative AI and large language model training, etcetera. How are you thinking about the type of investments that TaskUs needs to make over at the next cycle of Generative AI development. I'm training seems like it's the 1st, but what comes after that and how can we think about the ways that you'll look to pursue that investment? Thanks.

Yeah. I mean, we've been investing pretty heavily in building a technology organization that's capable of building a platform in the form of TaskGPT. We also have a team of AI experts that lead our AI services line. I think that those investments will increase as we go into next year. We expect to invest more in generative as well as more in sales and marketing to drive growth. And then I would just say also though that there's a huge opportunity for us to grow revenue, through the training of large language models and the trust and safety services that these image generation and language models are going to require.

Got it. Appreciate that.

Our next question is from William McNamara with BTIG. Please proceed.

Hi. This is Bill on for Matt. With the support of autonomous driving that is currently in use, is there a number of agents per car we should be thinking about or is it too early to know for vehicle safety operations and kind of how large do you think this can become for Task?

Yes, thanks so much for the question, Bill. So I think that, at this point, it's very early days in the autonomous vehicle space, but we're very well positioned. We support a number of the leading makers of autonomous vehicles. And this vehicle safety operation that we launched this quarter, is an incredibly exciting expansion of that work. At this stage, we're seeing clients look for ways to make sure they're ready to deliver safety for their cars and riders in the field. But to do so in a way that's a bit more cost efficient, we mentioned one of our large autonomous vehicle clients, cutting spend on certain AI services in the last quarter. So it's early days to figure out exactly what that per car ratio to agents would be. But I think we're really well positioned as this space continues to grow.

Great. Thanks for taking my question.

Our final question is from Cassie Chan with Bank of America. Please proceed.

Hi. I just wanted to dig in a little further on your comment on 1Q 24. Should we expect, you know, a commodities central decline quarter over quarter versus 4Q similar to trends you saw in 2023? And also on a year over year basis, could you just clarify, could we see maybe further year over year deceleration as well versus, you know, call it down 7% based on the guidance you gave for 4Q? Thank you.

Cassie, thanks so much for the question. So I think that's right. We're talking about the reversal of those seasonal volumes and the risk of some incremental churn given the macroeconomic environment. At this point, we're really satisfied with the results we were able to deliver this quarter and we hope to deliver similar results going forward. But given the more challenging comp in Q4 and in Q1 of next year, the year over year decline may be slightly larger.

Got it. That's helpful. Thank you.

This concludes our question and answer session and this will conclude our conference. You may disconnect your lines at this time and thank you for your participation.