Good afternoon, and welcome to the TaskUs First Quarter 2024 Investor Call. My name is Daniel, and I will be your conference facilitator today. [Operator Instructions] Please be advised that today's conference is being recorded. 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 First Quarter 2024 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 our 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 that 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 8 of 2024. This filing which may be supplemented with subsequent periodic reports we file with the SEC, is available on the SEC's website and our Investor Relations website. 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 metrics, please see our earnings press release, which is available on 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. In the first quarter, we outperformed the top end of both our revenue and adjusted EBITDA guidance. We generated $227.5 million in revenue, approximately $3 million above the top end of our guidance of $224.5 million. We delivered $50.6 million of adjusted EBITDA for an adjusted EBITDA margin of 22.2%, also above our guidance of 22%. I'm very happy to announce that we now expect to return to year-over-year revenue growth in the second quarter, and we expect our growth rate to accelerate in each subsequent quarter this year. We've updated our annual revenue guidance and now expect to grow annual revenue year-over-year at any point in the guidance range. I'm also very pleased with our team's financial discipline, which is focused on balancing cash flow generation with our investments in sales, marketing and technology, including our Generative AI initiatives. As a result, we generated strong free cash flow in the first quarter of 2024, putting us on track to deliver on our full year free cash flow guidance of $120 million to $130 million. Next, I'll spend time going through some of the highlights of our Q1 performance. Balaji will then walk through our Q1 financials, our Q2 outlook and our increased full year 2024 guidance. Q1 revenue was $227.5 million, a decline of 3.3% on a year-over-year basis, but $4 million ahead of the midpoint of our guidance. The 2.9% sequential quarterly decline was reflective of an anticipated decline in seasonal revenue discussed during our Q4 2023 call, which was partially offset by better-than-expected performance by our top 20 clients during the quarter. In terms of delivery geographies, revenue from U.S. delivery declined 45% in Q1 year-over-year. As a result, U.S. revenue is now approximately 11%…

Thank you, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the first quarter of 2024. 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 $227.5 million, once again beating our guidance range of $222.5 million to $224.5 million. Revenues decreased by 3.3% compared to the previous year. We outperformed our guidance as a result of new client ramps and existing client volumes, both of which came in stronger than we expected. In the first quarter, our DCX service offering generated $143.5 million for a year-over-year decline of 8.7%. As Bryce covered earlier, the decline was primarily from certain client cost optimization initiatives, including the Q1 2023 project ramp downs from our largest client and a U.S. client who lost a large contract, both of which we previously discussed in Q1 of 2023. This was partially offset by expansion with existing clients and new client signing [ ramps ]. Our Trust and Safety business, which includes our risk and response solutions, grew by 36.1% compared to Q1 of 2023, resulting in $55.3 million of revenue. As we pointed out earlier, we are excited about the fairly broad-based progress in this service line, which included Q1 growth from new and existing clients across our on-demand travel and transportation, social media and fintech verticals. Our AI services business declined by 23.6% year-over-year for revenues of $28.7 million due to contractions at our largest client and our largest autonomous vehicle client. We expect revenues from this service line to stabilize over the course of 2024 as we [ lapsed ] the difficult comparison resulting from client-driven cost optimization programs in 2023 and as recent signings…

Thank you, Balaji. Before we open for questions, I'd like to share another TaskUs teammate story. [ John Rowley de Guzman ] has been navigating life with cerebral palsy since birth. Cerebral palsy affects movement and muscle tone and makes everyday mobility very challenging for Rowley who relies on crutches to get around. As a Tier 2 dispute teammate supporting a fintech campaign, Rowley is responsible for providing timely resolutions to escalated customer complaints, leveraging his comprehensive understanding of the dispute process and strong customer service skills. He recommends solutions and solves customer problems with each interaction. Rowley says that his work at TaskUs is more than just a job. It's a source of purpose and fulfillment. He is an active member of the TaskUs community in Bulacan, Philippines, where his site is located. On a recent visit to the site, his colleague shared with me how impressive he is. He never makes excuses, shows up to work early and always delivers for our customers. Rowley embodies our core value, inspire others by believing in yourself. His story is just one example of the positive impact TaskUs has on people and communities all around the world. With that, I'll ask the operator to open our line for our question-and-answer session. Operator?

[Operator instructions] Our first question comes from Jonathan Lee with Guggenheim Partners.

Good to see the earlier inflection expectations here. Bryce, what's contemplated in your outlook from a macroeconomic perspective and across your solutions here?

I think we're taking an appropriately cautious stance when we look at the macroeconomic conditions across the rest of the year. Some of you will have undoubtedly seen that a number of our clients have had slower-than-expected growth rates announced in their own earnings calls. That's not a surprise to us. The vast majority of our largest clients continue to grow revenue and [ contact ] volumes year-over-year and that's reflected in the updated guidance. So we're cautiously optimistic, but we're aware that there is a risk in the macroeconomic environment, and that's been factored in.

And just a follow-up. Can you talk about any sort of evolution you've seen in the demand environment through the quarter since the start of the year and how your customer conversations have trended since the start of this quarter?

Yes, it's accelerated. The demand environment last year was challenging with delayed decision-making and a real focus on cost reduction. What we've seen thus far this year is both an acceleration in new client sales and expansions amongst our broad base of existing clients. We focus just on our largest clients. Our largest client is back to growth year-over-year this year. But in fact, if you look at our top 5 clients, we expect 4 of our top 5 clients will increase revenue in 2024 when compared to 2023, and some of those are back in double-digit growth rates. So we're seeing just quite a broad-based increase in demand for our services from both new and existing clients.

Our next question comes from Maggie Nolan with William Blair.

Maybe to dig into that a little bit further. Is it Trust and Safety that's driving the better outlook for Q2 and beyond? Is it a particular client, perhaps better traction with your top client that you spoke of? And then what level of visibility and confidence do you have into this trend continuing into the second quarter and the second half of the year that allowed you to raise the bottom end of guidance?

Yes. So obviously, Trust and Safety is really the shining star amongst our service lines at the moment. We've seen an increase in demand for content moderation services amongst our social and [ dating ] clients. We've seen an increase in demand for our risk and response services amongst both FinTech and enterprise financial service clients. And we're also seeing a lot of new demand from Generative AI clients to help secure their models. So there's a fair amount of that growth for the rest of the year will come from Trust and Safety. We're also expecting the decline in digital customer experience at AI services to moderate. In particular, on AI services, we've got some very challenging comps when we look at 2023, just given the onshore to offshore shift that we saw at our largest AI services clients. But the number of projects that we're working on in AI services continues to increase, both year-over-year and sequentially. And the demand for this looks like it will help to slowly decline and get us back to growth by the end of the year. As far as visibility goes, we've proven that [ in ] ability to very accurately forecast in all cases, beat the revenue guidance we provide on a quarterly basis. That's just given the strong client conversations and contractual commitments that we have from our clients. And when we look at the back half of the year, we've had conversations with many of our largest clients. We are actively selling new locations and new services. And so that gives us confidence that we'll be able to deliver on this [ guidance ].

Okay. And then you talked a couple of times in the script about incremental investments. I'm assuming to prepare for this incremental revenue that's coming, and that would likely primarily be headcount additions. Help me understand what this means for margins? Does that mean that margins are a little bit more compressed in Q2 and you start to see some leverage in the back half of the year? Or does that mean that margins look better more like in 2025 as you get some of those investments in -- here in the near term?

Yes. I'll have Balaji add color here, but let me just provide a 30,000-foot perspective. At the start of this year, we made a decision that we were going to play offense. We were going to go out and hire sales and marketing leaders and continue to invest in our Generative AI initiatives by expanding our technology team. And those investments are beginning to pay off with our return to growth and our expectation of accelerating growth rates over the course of the rest of the year. When we consider sort of just that level of investment, there's naturally going to be some downward pressure on our margins. But we expect to maintain best-in-class margins. And we would expect that the margins would expand as we get back to a state of growth into 2025. Balaji, do you want to add color on that?

Yes. Thanks, Bryce. And so, Maggie, from a -- like just to reiterate what Bryce said, from an investment perspective, we're continuing to invest in strategic growth areas between sales, marketing and technology. And like you mentioned, to support the revision in the revenue guidance that we are providing right now, we are going to be investing in facilities and we'll also be incurring certain ramp costs to deliver those revenues. So both of those are baked into the forecast that we are providing today. So from an adjusted EBITDA perspective, the full year will be somewhere between 22% to 23%. So that's unchanged from what we gave last time. And for Q2, we would be somewhere between 22.5%. So what is going to happen from a [ cannibalization ] in the back half of the year, I would expect Q3 to be the highest quarter from an EBITDA perspective, EBITDA percentage and then Q4 will incur some additional seasonal costs that we typically incur every year. So that's how the [ cannibalization ] is going to be looking from a margin perspective.

Our next question comes from Ryan Potter with Citi.

Good results here. I want to start on GenAI. How does the client adoption of offerings like TaskGPT and AssistAI look so far? And then this is where clients are leveraging these tools, have they been able to see tangible benefits? And have you also seen some tangible benefits or share shift yet from these tools?

Yes. Thanks for the question, Ryan. So we're continuing to have success deploying GenAI into our customers through the TaskGPT platform and our AssistAI offering, which we're offering to all of our TaskUs clients free of charge. That offering has seen a steady increase in demand. I would say that more generally, we have seen a number of clients deploy Generative AI themselves in various ways. Some of these initiatives have driven modest efficiency increases. But I would classify most of the work that we've seen from our clients as in the experimental stage at this phase. And so we have not yet seen any material impact to revenue as a result of clients deploying Generative AI and automating volumes. But we have seen an uptick in demand for our GenAI-related services, whether that's Trust and Safety or AI services to support those models. So we fully expect that we will see an increase in efficiency gains, both from TaskGPT and our AssistAI platform as well as from our clients' own initiatives, but we continue to expect that those will be exceeded by the [ gains ] that we get from selling GenAI services to our customers.

And then on headcount, it was nice and a surprise, honestly, to see the sequential headcount growth following the seasonal headcount drop, and they usually see from 4Q to 1Q. So were you able to staff some of the seasonal headcount kind of better than expected? And then just in terms of the headcount growth, where are you adding the most headcount currently across your geos and service lines? And should we expect the sequential headcount growth to continue through the rest of the year?

Yes. Given the more robust demand that we saw in Q1, we were able to retain many of our seasonal staff and move them on to new programs successfully. The overall talent environment remains competitive, but not as competitive as it was in 2021 and 2022. We saw increases in headcount in a number of different geographies. We've seen very robust growth in Latin America in both Colombia and Mexico. We've got strong growth in the Philippines and in Europe. And so we would expect in those regions a continuation of this kind of headcount growth and perhaps even an acceleration in places like Europe and the Philippines into the back half of the year.

[Operator instructions] Our next question comes from Cassie Chan with Bank of America.

First, I just wanted to ask, obviously, you guys just piggybacking off the LatAm growth of the greater than 50%. How big is that geo relative to some of the others sitting in the rest of world? And I'll just stop there for my first question.

Yes. So the region is relatively recent for us. We only entered Colombia in the last couple of years, and we entered Mexico in the last 5 years, I believe. But we're talking about a region that's on its way to triple-digit millions in revenue and growing at 40% to 50% year-over-year growth rates. So obviously, we expect the percentage growth rates to moderate somewhat as those numbers get bigger, but it will become one of the biggest regions for us over the course of the next 12 months.

And are you still expecting revenues from some of those few top clients to be flat to slightly up in '24 that's contemplated in your updated guide? And on the back of that, like any changes in the pricing environment that you guys have seen as of late?

Yes. As far as the biggest clients go, I think on our last call, we talked about the top 3 clients which declined at a double-digit percentage year-over-year in 2023, would be back to single-digit percentage growth. That is still the case, although the growth amongst those clients is now higher than we had last quarter. And as I mentioned, our top 5 clients -- of our top 5 clients, 4 of them are going to be growing revenue in 2024 and 2 of those will be by double-digit percentages. So we're back to some robust growth rates amongst those clients.

Our next question comes from Robert Bamberger with Baird with Baird.

So just given the recent solid crypto volumes of Fintech, did that contribute anything to Q1? And then I guess what amount do you expect for all 2024? I think you had talked about it being somewhere around 4% to 5% of total revenue. Should that tick up a little bit?

Yes. We've seen the crypto markets really grow rapidly, but that hasn't been as directly reflected in the volumes that we've seen from our crypto customers. I think what we said was that last year revenues from crypto and equity trading clients were 4%. They were also 4% in Q1, and we're forecasting full year 2024 crypto and equity-related revenues to be 5% of total revenues. As a reminder, at their peak for a full year we had 12% of our revenues coming from crypto and equity trading clients. And Balaji can correct me on any of those numbers if those are wrong. But obviously, that was a very different time. I think what we saw was -- what we've seen is that the clients who move work from onshore to offshore have kept all that work offshore, and they've taken a much more conservative approach to scaling up in the face of the recent [ bull ] market.

And then in terms of just the shift to offshore, has that slowed down at all recently? Or does that 10% of U.S. revenue still makes sense longer term from that 11% now? Or do you think it could be lower or higher from the 10% you talked about previously?

Yes, we've seen a gradual reduction in onshore to offshore shifts. I think the majority of the work that we've got in the U.S. now is going to stay. Historically, we've said that we don't expect U.S. revenues to drop below 10% of overall revenues, and we still feel that way. Obviously, we're down to 11% in Q1, but we expect to be somewhere between 10% and 11% for the full year.

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

Congratulations on a nice quarter. Most of my question has been answered. So I'm going to ask a somewhat difficult one to tease out, and that's, the better performance that you're seeing, how much of that would you attribute to industry trends? And how much of that would you attribute to TaskUs specifically where you're getting increased volumes because clients are consolidating vendors? Hopefully, that question makes sense.

Yes, it totally does. So I think that we have a cohort of clients that cut earlier than others. Particularly, I think, generally, we've seen that the high-growth technology space began reducing their spending in 2022 and into 2023, but now are back to a period of growth. I think what we see when we look across the industry is that some of the more legacy clients are beginning to go through that same cycle now. And given that we're not as exposed to those verticals, we're probably less impacted. But we [ had ] a 4-part growth strategy, which I talked about in our last earnings call. And the first part of that strategy was to take share from the competition. I'm really proud to say that we've been very successful at that. In the first quarter we took tens of millions of dollars of business from our competitors on the heels of superior performance. And so I think that's a little bit of both, to answer your question.

Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.