Good afternoon, and welcome to the TaskUs Fourth Quarter and Full Year 2023 Earnings Call. My name is Liz, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speakers’ 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 Investor Relations. Trent, you may begin.

Good afternoon, and thank you for joining us for the TaskUs fourth quarter and full year 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 an Excel-based financial metrics file. Please note this call is being simultaneously webcast on the Investor Relations 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 filing is accessible on the SEC's website and our website at ir.taskus.com and may be supplemented with subsequent periodic reports we file with the SEC. We expect our 2023 10-K to be filed with the SEC no later than March 15, 2024. 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 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 of 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. I want to start by expressing my deep gratitude for our TaskUs teammates around the globe who have worked tirelessly over the holidays and into the New Year to deliver for our clients and our shareholders. As a result of their efforts, we outperformed the top end of our revenue and adjusted EBITDA guidance for the fourth quarter. We delivered $234.3 million in revenue compared to guidance of between $225 million and $227 million. In terms of profitability, we delivered $59 million in adjusted EBITDA for an adjusted EBITDA margin of 25.2%, 270 basis points above our guidance of 22.5%. For the calendar year 2023, we delivered $924.4 million in revenue and $220.8 million in adjusted EBITDA, representing an adjusted EBITDA margin of 23.9% compared to guidance of 23.3%. Finally, we delivered $131 million in free cash flow in 2023, excluding acquisition-related payments, well above our guidance of more than $115 million. While I'm pleased with our team's efforts and results, we are not satisfied. 2023 was a challenging year and we did not deliver anywhere near the top line growth rates that we have historically. In 2024, we're determined to do better and to return to consistent year-over-year revenue growth. While it is still early in the year, 2024 is off to a solid start. Despite a macro backdrop that remains challenging, we've continued making investments in technology, sales, and marketing. We're pleased with the dividends that those investments are producing and have seen increasingly strong demand over the first quarter of the year. I'll recap some of the highlights from our Q4 and full year 2023 performance before discussing our 2024 outlook. Balaji will then walk through our financials and 2024 guidance in greater detail. Q4…

Thank you, Bryce, and good afternoon, everyone. I'm going to focus my remarks primarily on our fourth quarter, but will reference a few key full year metrics. Please note that some of these items are non-GAAP measures and the relevant reconciliations are attached to the press release we issued earlier today. The fourth quarter was another quarter of both top-line and bottom-line performance that exceeded expectations, while revenue declined by 3.3% year-over-year to $234.3 million became in higher than the midpoint of our guidance of $226 million. Adjusted EBITDA of $59 million and adjusted EBITDA margin of 25.2% came in higher than our guidance of 22.5%, primarily due to better than forecasted revenues, as well as lower than expected seasonal costs. Adjusted EBITDA margins improved by 130 basis points compared to Q4 of the previous year. For full year 2023, revenue declined by 3.8% to $924.4 million, but came in above the top end of our guidance range of $917 million. We achieved adjusted EBITDA of $220.8 million for an adjusted EBITDA margin of 23.9%, again above our guidance of 23.3%. The strong revenue performance in the fourth quarter compared with guidance was driven primarily by volume risks that we expected not materializing along with strong seasonal revenues that we discussed in our Q3 call. The stronger than expected results also reflected our ability to ramp and consistently deliver on key metrics for our clients. Moving on to our service offerings. In the fourth quarter, our digital customer experience offering generated $151.9 million for a decline of 4.4%. Our trust and safety business grew 23.5% to $52.2 million and AI Services declined 26.5% to $30.1 million. In Q4, we continue to see the diversification of our revenue base. Our revenue concentration with our largest client was 19% consistent with Q3,…

Before we open for questions, I want to share another TaskUs teammate story. At the end of last year, TaskUs as senior leaders gathered in the Philippines for our 2024 strategy session. In addition to planning, it was critical to me to bring leaders together from across the globe so that everyone could experience the magic of our sites and the culture of our people in the Philippines. During one of our site visits, we met with Desiree Omiles. I know Desiree well because she started with TaskUs 12 years ago as a transcriptionist when we're still a very small operation. Back then, I still knew everyone's first name. Desiree originally trained to become a nurse. However, when she graduated, the Philippines job market for nurses was very tough, so she took a job with TaskUs instead. Today, Desiree is a senior wellness and resiliency coach working directly with our content moderators. She received extensive training from TaskUs and now teaches teammates everything from the importance of positive self talk to the power of music, how to better regulate their emotions. Thanks, TaskUs, says Desiree. You've changed my life. I get to make a difference one wellness session at a time, end quote. Reconnecting with Desiree was a powerful reminder for me and our senior leaders of the positive impact TaskUs has on the lives of our teammates across the globe. With that, I'll ask the operator to open the line for our question and answer session. Operator?

[Operator Instructions] Our first question will come from the line of Puneet Jain with JPMorgan.

So I wanted to ask, like, so for 2024, what could be the incremental headwinds that you expect, relative to Q4 of this year? I know like there is seasonality in fourth quarter, but adjusted for that, like, are there any incremental headwinds that you expect? I'm asking this because the guidance implies like the exit rate of around mid single digits, high single digits based on where you end in the guidance, in that range for the full year. So how should we think about like the long-term growth beyond this year for the Company?

Yes. Thanks, Puneet. So this year, our number one goal is to return to year-over-year growth. And given the strong performance in q four and the performance we've seen in at this point to Q1, we're cautiously optimistic that we're going to be able to do that. So, essentially, I think the numbers you're outlining there, happen at the midpoint of our guidance range, and our goal is to try to drive revenues towards the top end of our guidance range. And to do that, we need to execute on the four elements of our growth strategy. We need to get aggressive and take share from our competitors. We need to continue to grow our relationships with enterprise, health care and banking and financial service clients, and we need to successfully cross sell our specialized services. And finally, we have to leave the industry on the deployment of generative AI tools, in our service delivery. At this stage, things are trending well on all of these fronts. We've seen increased sales velocity and a reduction in cost optimization discussions that may lead to reduced volumes. And we successfully targeted and taking share from our competitors. And so, we're very, very excited about what is going to come in 2024. As we look ahead, obviously, we're not providing guidance, but, at this stage, we believe we will be able to return to year-over-year revenue growth in the back half of 2024, and we would hope to sustain that into 2025.

And then, your free cash flow guidance like so despite, like, the revenue headwinds, margin headwinds this year like the free cash flow remains, solid, even like revenue is down relative two years ago, but free cash flow is not. So going forward, if for there are continued revenue headwinds. What should we expect for free cash flow? Are there more levers that you have to protect free cash flow to continue to grow free cash flow?

So like I said, we delivered very strong free cash flow despite a very challenging macro environment in 2023. And as a reminder, we delivered $131 million close to about 60% adjusted EBITDA conversion which excludes payment for the heloo acquisition. And the way we did this is due to the proactive multiyear efficiency effort that we announced pretty early in 2023, and we kind of reacted pretty early in terms of the changes that we saw from a macroeconomic perspective. We continue to optimize CapEx spend by leveraging existing investments. And we also actively started to manage our working capital, including like a new invoicing process. So like Bryce said earlier, this is an ongoing activity, which is now part of the DNA of the business. So it is not like one time project, it's something that we're going to continue to do. So we are confident that we will continue to generate strong free cash flows, despite any changes that we might see in the business environment.

Our next question will come from the line of Maggie Nolan with William Blair.

I wanted to expand on something that, Bryce, you briefly touched in your prepared remarks. You mentioned the focus on enterprise clients, and I wanted to kind of understand your progress there, maybe how you've adjusted, the go-to-market versus when you were more historically focused on maybe tech clients or more kind of emerging disruptive clients?

So we continue to expand, our sales and client service teams. Over the course of 2023, we've recruited a number of industry veterans who've got deep experience selling into the enterprise space. I mentioned on the call that we successfully signed a leading credit union in Q4, and I think that's, one of many examples of the success we've seen selling both into banking of financial service clients and more traditional enterprise healthcare clients. It's this is obviously one of the four important growth levers for us as we continue into 2024, and we really see the enterprise as forming a much more stable balance of revenues that, there may not be ripe for exponential growth, but they're also not going to see the declines that we've seen in certain pockets of the high growth tech space. So that will pair that strategy with continuing to be a leading provider in the high growth technology space, and, the combination of those two things will lead us back to growth.

And then, can you just talk a little bit more about within that context of that last comment you made leading you back to growth. The second half in particular, it seems like you feel a little bit more optimistic about. Can you talk about your visibility levels into the second half? Maybe talk about what level of optimism is just driven by year-over-year comps versus some of the initiatives you were just outlining and any others? Thank you.

Yes. Thanks, Maggie. So the first half of the year, we've got very strong visibility into. Historically, we've always demonstrated an ability to accurately forecast our quarterly revenues, and this is based on the strength of our relationships with our clients and the contractual terms that we've got in place to protect us against any major volume fluctuations. As we look into the second half of the year, our confidence is really based on the budget conversation that we've been having with our clients. And I'll give you just an example, of our top three clients. Last year, our top three clients' revenue declined by a double-digit percentage, when you combine the three of them and this is led by our largest client where we saw massive shifts of volume from onshore to offshore. And this year, we are forecasting that that group will grow by a single digit percentage. So we're, you know, going from a pretty substantial decline back to, fairly modest growth. That gives us confidence that the base of the business is a lot more secure in 2024 and that strong sales momentum that we've seen in the first quarter will get us back to growth.

Our next question will come from the line of David Koning with Baird.

Hey, guys. Thank you. I guess, my first question, your margins have held up extremely well despite some volatility in revenue and I know part of that is the offshore shift. Now that you're pretty fully out of the U.S., you won't get the kind of the incremental benefit to margins, but is there some other offset or I mean could margins come down or how do you see that now that you might not get that kind of incremental kind of benefit from the shift?

Yes. So, hi, Dave, I'll take the question and I'll have Bryce to add more color if required. So, we did see benefit from an offshore mix shift in 2023. But some of the drivers that they've been focused on is one is we started the optimization and efficiency building process sometime late part of 2022. And like I said earlier, that's kind of part of the business now. So we'll continue to find efficiencies from an operational perspective, from a G&A perspective. So that's something that we'll continue to drive. Second is as Bryce spoke about growth rates, especially in the second half of the year. So as we start seeing growth rates improve, we will begin to see that margins also will start to expand. And then we'll also continue to see that the growth is happening more in offshore locations. And like we have spoken about this before, those are margin accretive. So again, that's going to help from a margin perspective. And then, as we continue to grow some of our specialized service lines, we've seen that these are higher margin. So again, that's going to be a focus area from a business perspective. So, those are some of the things that we are thinking about as how to deliver margins that we are guiding to getting into '24.

That's really helpful. And I guess the second question. You guys are signing new clients at a pretty amazing pace still. And it wasn't long ago you were probably around 100, you're probably around 200 clients now give or take. But given revenue hasn't grown a ton lately, the average size client is smaller. Maybe what are the dynamics there? Are you just doing smaller deals? Or is that just the incremental client that comes on just doesn't need as much service or how should we think about that dynamic overtime?

The number of clients that we closed in 2023 was the highest that we've seen, since we started keeping track of this number back in 2018. So, we were very pleased to see that. But you're right that the initial deal size was smaller than we've seen historically. Part of that is because we're seeing more interest for offshore deals. So while the volume of work may be the same, the dollar value associated with that work is lower in an offshore environment than in the United States. And as we think about this going forward, I think it's just important that we continue to maintain our sales velocity and bring on more clients, because each one of these clients is a has the opportunity to scale exponentially if their business model, begins to grow. So that's really what we've seen there. The other thing I'll just say is some of the challenges we faced in 2023 were more to do with our large clients optimizing their spend. As I as I already said, our top three clients' revenue declined by a double-digit percentage in 2023, and we've now seen that stabilize. That number will increase by a single digit percentage in 2024.

Our next question comes from the line of Matthew Roswell with RBC Capital Markets.

It's Matt Roswell on for Dan Perlin. A question on the AI assist, how do you think about balancing pricing and investment in internal solutions like AI assist against helping companies sort of they are investing in their own solutions. What's the dynamic between those 2?

So AssistAI is a platform that our teammates use to improve their productivity and the accuracy or quality of the responses, or actions that they take. And then this is a technology that we're actually baking into our service free of charge to our clients. We think that the future of our industry is going to require service providers to bring a well-trained combination of both teammates and technologies to solve client problems. And we've been wrestling quite a bit with, okay, how do we do this in a way that is margin accretive and protects our underlying revenue? And where we've gotten is we need to be the best and most efficient and most high quality provider in terms of services. And that in the cases in which we're able to do that to take the number one spot amongst all the vendors that we're competing against, we capture more share of the client spend and where we can demonstrate service excellence, clients tend to also give us more work that they may have been doing historically in inside their own operations. The second part of your question is that the entire industry that's being created in front of our eyes, the generative AI industry requires a huge amount of services, everything from expert prompt writing to red teaming, the various generative AI tools to kind of provoke them to create illicit content, to some of our more traditional trust and safety services. And so we've seen an uptick in demand from GenAI companies for our core trust and safety and AI services. And as companies continue to invest more and more in those services, we think that we will benefit from that. That being said, we're not seeing that many examples of clients building their own generative AI technology for our core workflows things like customer service. There are definitely a few there was some interesting headlines today. But for the most part, we're seeing clients are interested in either using a third party technology or on partnering with a company like TaskUs who has AssistAI as a core solution that we baked into our services.

And as a follow-up, should we anticipate any changes to capital allocation now that sort of the revenue growth seems like it's coming back?

Well, I can start, and Balaji, maybe you can jump in there. We are going to be investing more in sales and marketing, as well as technology. And so right now, the number one use of capital is going to be funding the expansion of our growth team. We expect that those investments will pay off here in the near-term, as we said, getting back to growth in the back half of the year as well within our sites. Beyond that, we continue to look at the uses of capital, for everything from CapEx to potentially share repurchases at the right prices, and also considering the potential of M&A.

Our next question comes from the line of Matthew VanVliet with BTIG.

I guess, first was, where do we stand in terms of the progress of, I guess, the off-shoring initiatives of a number of clients, especially the larger ones? Are we pretty much through all of that now or are there still some sort of in-process movement there? And then sort of natural follow-up there is, how much do you anticipate other clients looking to further offshore, maybe any U.S. revenues that are still here today?

Yes, great question. So in 2023, we saw U.S. revenues decline by more than $100 million from 2022. U.S. revenues ended up about a $148 million in 2023. So it was the only region that we report on that declined. All of our other regions, Philippines, India, and the rest of the world grew year-over-year in 2023. So as we look at the future here clearly with almost a $150 million in revenue in the U.S., there is some risk. We've said for a while that we don't expect the percentage of our overall revenue to ever get below 10%. It was at 14% of revenues coming from the U.S. in Q4 of 2023. So, there is a possibility of some incremental onshore to offshore shifts, but those will not be anywhere near the size of the on trade-off ships that we saw in 2022 and 2023.

And then when you talk about greater focus on some of the specialty services, especially being sold back into the existing client base. I guess at what point during the year do you expect that to show sort of an inflection point higher? And I guess how many of the clients that have gone through a pretty detailed off-shoring initiative over the last year plus are now ready to sort of come back and look for more opportunities to use TaskUs, especially for those specialty services?

I mean, we're seeing a real increase in demand for our specialized services. As I said, the number of clients who are using the one or actually, I should say two or more of our specialized services has increased quite substantially in 2023 over 2022. The growth in our trust and safety offering, which also includes all the risk and response work that we do for financial crimes and compliance, is really, really encouraging. I think the decline that we saw in our AI services revenues is really driven by two simultaneous impacts. The first is that over the course of 2023, our largest client cut spending on certain AI-related, R&D investments. And the second is that, our largest autonomous vehicle client has, did a huge onshore to offshore ship in 2023. So, we expect to lap the impact of those, towards the back half of 2024, and we're continuing to see an uptick in the number of customers who are using our AI services. A lot of these clients are coming from the generative AI space, and while the projects themselves may be starting small, I think there's massive potential upside. So, we're excited and encouraged to see a continued increase in demand for our specialized services.

This concludes today's conference call. Thank you for participating. You may now disconnect.