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spk09: Greetings. Welcome to the Task Us Inc. Q2 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Alan Katz, Vice President of Investor Relations. You may begin.
spk11: Good afternoon, and thank you for joining the Task Us second quarter 2022 earnings call. Joining me on the call today are Bryce Muddock, our co-founder and chief executive officer, and Balaji Sekhar, 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 this website, including an investor presentation and an Excel-based metrics file. Please note that this call is simultaneously being webcast in 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 expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from those forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 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. Any forward-looking statements made on today's conference call, including responses to questions, are based on current expectations as of today, and task force 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 of our website. Now, I will turn the call over to Bryce Maddock, co-founder and chief executive officer of TASCA. Bryce?
spk02: Thank you, Alan. Good afternoon, everyone, and thank you for joining us. We delivered another strong quarter in Q2, with revenue and adjusted EBITDA coming in above the top end of our guidance ranges. Q2 revenue grew by 36.9% year-on-year to $246.5 million, above the top end of our guidance range of $243.5 million. Adjusted EBITDA grew 26.2% year-on-year to $55.7 million for an adjusted EBITDA margin of 22.6%, just above our guidance of 22.5%. I'm also proud to report that this quarter, Everest Group named Taskus the fastest growing business process service provider in the world. While we delivered strong results, we are seeing the impact of our clients shifting their focus from growth to cost optimization. In the search for immediate savings, some of our clients have cut vendor spend. Since our last call, this trend has accelerated, particularly among our clients in the cryptocurrency and equity trading spaces. Given these trends, we've lowered guidance for the remainder of the year. I want to be clear. In the face of these significant challenges, we are still positioned to deliver industry-leading profitable growth. This is because our teams continue to execute strongly on our five growth levers. Our clients' focus on cost presents a major opportunity as they're increasingly turning to us to help optimize their spend by leveraging our offshore teams. I'll review how we performed in Q2 and then return to our updated outlook for the remainder of the year and our strategy to continue to grow faster than the industry. In Q2, we executed well across our first two growth levers, expansion with our current high growth clients and adding new clients across verticals as we delivered signings from both new and existing clients. Starting with our growth with current clients, in Q2, our top 20 clients increased their spend year over year by almost 30%, while revenue from clients outside of the top 20 grew at more than 60%. Our largest client grew 12% compared to Q2 of 2021. As expected, this growth rate is lower than prior quarters, driven by the impact of their transition offshore beginning to flow through this quarter. We've made great progress reducing client revenue concentration and improving the diversity and resilience of our client base. Looking at our service offerings, digital customer experience revenue grew 47.4% compared with Q2 of 2021 as a result of expansion with existing clients and new client signings. Demand for our DCX services has been particularly strong in gaming, travel and transportation, and among challenger banks and remittance apps in the fintech space. We signed a digital customer experience expansion with a personal wellness brand to expand from one geography to three. We expect to add an additional 400 teammates in Latin America and the Philippines to support this client. We expanded our European language support work in Greece for one of the world's largest e-commerce marketplaces. We're now delivering services from three different countries for this client. We'll provide multilingual customer support, tech support, and sales through various channels. In a quest for cost savings, our clients have begun to shift work they were previously doing in-house to our offshore teams. One of our clients, a large gaming company where we provide player support in multiple languages, shifted a large portion of their European language DCX work to our team in Greece, and some of their Tier 3 support work to our teams in the Philippines. Finally, we signed another digital transformation contract with a large travel client. This client actively sought us out, given our experience in the travel and transportation space. We've launched a center of excellence for them in Texas, where we will provide them with a few hundred travel advisors in the coming months. Going forward, we believe we will see demand for our onshore operations from enterprise clients. Moving on to content security, revenues in this service offering grew by 7.8% compared with Q2 of 2021, driven by volume growth with existing clients and new client signings. We saw particularly strong signings growth this past quarter for constant security work out of Malaysia, where we signed an expansion with one of the world's largest audio streaming platforms. We also signed a risk and response deal in Malaysia for a new client in the peer to peer payment space. We were providing this client with know your customer and fraud investigation support. Two of our challenger bank clients also asked us to take on complex processes previously done by their in-house teams. Here, our risk and response organization will be delivering any money laundering and know your customer services while significantly reducing our clients' spend on new services. Finally, we began working with one of the world's most popular gaming communication platforms. Given early success, we've already expanded the scope of trust and safety support that we will be providing this platform. We see an enormous growth opportunity ahead at this client. At our largest client, we completed the transition of hundreds of roles offshore at the end of May. Given the timing of this transition and the offsetting ramp of additional roles, we expect Q3 to be the lowest revenue quarter for our content security service offering this year. We expect to return content security to growth in 2023. Our relationship with our largest client remains very strong. we're in the process of scaling over a thousand new roles in our offshore delivery environments for them. Given the reduction to our onshore teams, this client's revenues in the back half of the year will be down slightly when compared to the first half. But we now expect to earn more from this client in 2022 than we did in 2021. We also expect to continue modest annual revenue growth with this client in 2023. AI service revenues grew 39.4% in Q2 compared with 2021. This growth was driven primarily by expansions with existing clients in the social media, travel, and autonomous vehicle spaces, offset by the transition of work with our largest client. We signed several exciting projects for the Taskverse, our gig worker platform. This included multiple projects with two big tech firms, one of which is a first-time Taskus client. We also signed a Taskverse agreement with another one of our top 10 clients in the e-commerce space. Taskverse.com is seeing strong initial demand for our data labeling and AI support services. In response, we're investing in sales and marketing to fuel its growth. Overall, our signings were again driven largely by growth from existing clients, which accounted for approximately 75% of our total new business signings in Q2. Looking at revenue growth within our industry verticals, we're seeing particular strength from our health tech, entertainment and gaming, and non-crypto fintech clients, all of which grew revenue over 50% year on year in Q2. As economies around the world have reopened and business travel has resumed, we're also seeing a pickup in demand for our on-demand travel and transportation business. Revenue in this vertical grew by over 40% year on year, This includes astounding growth at our largest ride-sharing client, where we more than tripled our revenue compared to Q2 of 2021, as we took significant share from our competitors. As I mentioned earlier, several enterprise travel companies have now turned to us to support their digital transformations. We're also seeing exciting opportunities in the autonomous vehicle space, where we have seen traction for both our AI services and learning experience solutions. The high-tech vertical also continues to be a major area of focus. Last quarter, I discussed opportunities we were pursuing with some of the biggest tech companies. I'm proud to report that we've since signed deals with three big tech firms. Here, we're focused on delivering the operational excellence Taskus is known for to earn the opportunity to expand. While we don't expect significant revenues from these clients this year, they have the potential to contribute meaningful growth over the next few years. Moving on to our third growth lever, we also showed continued progress expanding our specialized services. As I mentioned, we closed multiple AI services deals on the task force and several risk and response engagements this quarter. We also expanded our engagement with our largest learning experience services client. We're now servicing this client from three locations, providing training services to their global teams. As clients are shifting their focus to cost, we're beginning to see opportunities to bring other service offerings to the market. Our learning experience solution is a great example of our client's willingness to look at certain in-house functions or processes that may have not been a candidate for outsourcing in the past. We're seeing good progress with our fourth growth lever, adding additional geographies, with Malaysia and Europe performing particularly well this quarter. Since launching Malaysia at the start of the year, we've signed four clients, including geographic expansions with three of our existing global client relationships. We've also had strong sales performance out of Greece, where our headcount grew by more than 50% from Q1 to Q2 of this year. Finally, our acquisition of Heloo has opened up Central and Eastern Europe as a delivery hub for our clients. This gives us a lower cost footprint for European language support work. This brings me to our fifth growth driver, M&A. We closed our first acquisition in April, and over the past three months, we've made great progress integrating the Heloo team into Task Us. Heloo is performing ahead of plan, and we're starting to see opportunities for our sales teams to sell alongside one another. Given the current market dynamics, we are very excited about using M&A to consolidate our market over the medium term. However, we have not yet seen private market valuations align with the current public market reality. We remain disciplined and focused on our creative acquisitions, and we have the balance sheet and operating capacity to move quickly and to take advantage of these opportunities. Turning to our teammates and the environment for talent, at the end of Q2, total headcount was 45,300. down by about 500 teammates compared with the end of last quarter. This was driven by our clients' focus on cost reduction by reducing team sizes, primarily in our US operations and among our cryptocurrency clients. We also moved to eliminate certain corporate roles in response to our updated revenue guidance. The environment for talent continues to be competitive. We've seen attrition increase this quarter compared to both last year and Q1. The primary driver of this increase in attrition has been returning teammates to the office. We now have approximately 40% of our teammates working safely from Taskus offices around the globe, up from 20% last quarter. Whether working from home or in our offices, we continue to deliver classes on time and meet our clients' needs. We're working aggressively to reduce attrition, and I'm happy to say that our initial investments appear to be paying off as attrition in July was lower than in Q2. Our Glassdoor rating also remains amongst the highest in the space at 4.5 stars as of the end of the quarter. Now, let's move on to our outlook for the remainder of the year. While we've performed well in the first half of the year, the current macro environment is impacting many of our clients. As a result, we revised our outlook for 2022 and now expect to grow at 23.6% at the midpoint of our guidance. This change in outlook was primarily driven by two factors. First, our clients in the crypto and equity trading spaces have reduced volumes faster and deeper than we expected as of our first quarter call. To put this in context, crypto and equity trading clients as a group accounted for over 15% of our revenues in Q1. We now expect that there will be approximately 5% of our revenues in the fourth quarter. While some of this impact was baked into our outlook provided on the Q1 call, we've since seen incremental volume reductions. Second, we're seeing other high growth tech clients look for immediate savings in response to market uncertainty. Here, our clients have focused on our US-based resources. Some of these clients are leveraging our offshore model and others are reducing vendor spend across the board. While the increased focus on cost creates meaningful opportunities with both new and existing clients over the coming quarters, it also puts immediate pressure on revenues. In response to these updates, we've not only taken steps to reduce our corporate spend, but have also frozen hiring for most non-revenue generating roles. We will continue to invest in our technology and go-to-market teams as these investments will drive our growth in 2023 and beyond. In terms of margins, we now expect that our adjusted EBITDA margin for the full year will be approximately 22.3%, or $210 million at the midpoint of our guidance range. We also expect to generate approximately $100 million of free cash flow this year. Taskus is a highly cash-generated business and our disciplined approach to capital allocation will continue to support our growth. As we look to 2023 and beyond, we remain confident in our ability to grow faster than the rest of the industry. Taskus has been the fastest-growing business process service company since we were founded in 2008 because we are the preferred provider of high-growth tech disruptors. While it is a volatile time for tech firms, our view is that these companies will continue to outgrow the market over the long run. More immediately, we have a strong pipeline of opportunities to help these clients reduce their operating expenditures by shifting functions that they are currently doing in-house to our offshore delivery locations. Finally, we're expanding our addressable market by working with enterprise clients on their digital transformations and closing deals with big tech. This quarter, we signed pilots with three big tech firms. These are companies that spend billions of dollars a year on outsourced services. As we've done in the past, we expect to earn the opportunity to scale with these clients through the strength of our execution. With that, I'll hand it over to Balaji to go through our Q2 financial results and provide more details on our guidance.
spk04: Thanks, Bryce, and good afternoon, everyone. I'm going to discuss about financial results for the second quarter of 2022. Please note that some of these items are non-GAAP measures, and the relevant recommendations are attached to the press release we issued earlier today. In the second quarter, we earned total revenues of $246.5 million, an increase of 36.9% over the prior year. We saw growth in each of our three specialized service offerings. In the second quarter, Our digital customer experience offering generated $167.4 million for a year-over-year growth rate of 47.4%. Our content security business grew 7.8% versus Q2 of 2021, resulting in $46.3 million of revenue. And our AI services business grew 39.4% year-over-year for revenues of $32.7 million. In Q2, we saw continued diversification of our revenue as growth from our top clients was exceeded by the ongoing expansion of the rest of our client base. As a result, our revenue concentration with our largest clients was approximately 22%, down from 24% in Q1 and 27% in Q2 of 2021. Our second largest clients was 9% of our revenue, down from approximately 10% in Q1 and 12% in Q2 of 2021. Our top 10 and top 20 clients accounted for 58% and 73%, down from 61% and 75% in Q1 of this year, and down from 63% and 77% as of Q2 of 2021. In the second quarter, we generated 51% of our revenues in the Philippines, 30% of our revenues in the United States, and 19% of our revenues from the rest of the world, mainly driven by our operations in India, Europe, and Latin America. As Bryce discussed, we've seen a pickup in signings for services to be delivered out of our Malaysia and Greece locations. We expect to see our revenue concentration generally shift towards our offshore geographies for the remainder of the year. As a reminder, our margin is driven in large part by our geographic mix. Our cost of service as a percentage of revenue is lower in offshore locations, which positions us well for margin expansion over time. Our cost of service as a percentage of revenue was 58.2% in the second quarter, compared to 57.7% in Q2 of the prior year. The increase was primarily driven by ongoing expenses associated with our return to the office and costs associated with the transition of work from onshore to offshore locations. While we have seen wage inflation across geographies this year, the majority of this impact was offset by the currency benefit of the strong US dollar and price increases from COLA provision in our contracts. In the second quarter, our SG&E expenses were $68.9 million, or 28% of revenue. This compares to SG&E in Q2 2021, of $177.8 million or 98.8% of revenue, which included one-time phantom share bonus and non-recurring teammate bonuses associated with the IPO of $133.7 million. Stock compensation expenses in the quarter were $18.1 million relating to equity grants compared with $5.7 million in Q2 of 2021. Given the timing of the IPO in Q2 of last year, we only had the impact of a partial quarter of stock compensation and public company expenses during that quarter. In the second quarter of 2022, we earned adjusted EBITDA of $55.7 million and a 22.6% margin compared to $44.1 million and a 24.5% margin earned in the second quarter of 2021. The reduction in our adjusted EBITDA margin was primarily driven by ongoing costs associated with our return to office and the full quarter of public company costs. We expect adjusted EBITDA to be impacted by the slower revenue growth for the balance of this year. We will also continue to invest to drive growth, which will partially be offset by our GNA cost optimization initiative and our higher margins offshore due to the mixed change. Adjusted net income for the quarter was $38.7 million and adjusted earnings per share was 38 cents. By comparison, in the year-ago period, we earned adjusted net income of $31.4 million and adjusted EPS of 32 cents. Now moving on to the balance sheet. Cash and cash equivalents were $104.7 million as of June 30, 2022, compared with the March 31, 2022 balance of $77.1 million. Cash generated from operations was $36.1 million for the second quarter of 2022, as compared to cash generation of $5.8 million in Q2 of 2021. Our DSO was 66 days in the current quarter. Our capital expenditure decreased in the second quarter of 2022 to $11.6 million compared to $13.3 million in Q2 of 2021. The decrease was primarily driven by teammate-related equipment purchases in Q2 of 2021, which was lower this year. Peak cash flow was $24.5 million or 44% of adjusted EBITDA. As Bryce discussed, we have always been a business that prioritizes free cash flow, and we continue to see this as an area of focus going forward. In terms of our financial outlook for the remainder of the year, we have updated our guidance as follows. We now anticipate full year 2022 total revenues to be in the range of $930 million to $950 million, representing year-over-year growth rate of 23.6% at the midpoint. In addition, we expect to earn a full-year 2022 adjusted EBITDA margin of approximately 22.3%. Lastly, we've added free cash flow, which we define as cash flow from operations less capex as an annual guidance metric this quarter. We expect our 2022 full-year free cash flow to be approximately $100 million. For the third quarter of 2022, we anticipate revenues to be in the range of $224 million to $226 million, representing year-over-year growth rate of approximately 12% at the midpoint. And we expect to earn a Q3 2022 adjusted EBITDA margin of approximately 22%. Our outlook implies that we will exit 2022 with flat to low single digit top line growth. While we aren't providing guidance for 2023 on this call, we recognize that we will face challenging revenue problems in the first half of next year. We are confident that our growth rate will increase throughout the course of 2023, driven by the opportunities that Bryce outlined. I will now hand it back to Bryce before we take your questions.
spk02: Thank you, Balaji. Before we get to Q&A, I want to share another Taskus teammate story, this time from Yanlis, one of our teammates in Colombia. Yanlis moved to Colombia from Venezuela in 2020 as a result of the economic situation in her home country. This woman, who trained as an engineer in Venezuela, suddenly found herself unemployed in a new city. She began looking for opportunities in the BPO industry, hoping that she could apply her leadership skills to a new role. But she heard time and time again that while her background was impressive, her English was not yet strong enough for a customer service position. After some research, she set her sights on landing a role at Taskus because of our culture and unique benefits. She applied to TaskUs in January and our recruitment team instantly saw her potential. We invited her to join our Art of Fluency program, an English language training program that we've developed to rapidly improve English proficiency for customer support. Within a few months, she was hired as a teammate. Yamlis has grown quickly at TaskUs. She supports one of our challenger bank clients and is delivering top quartile customer satisfaction scores. In less than a year, Daumlitz has gone from being an unemployed refugee with limited English proficiency to a top-performing teammate supporting a global fintech firm. It's these stories that inspire us. Our investment in our people continues to deliver for our teammates and our clients. And the Art of Fluency program is an amazing example of this. With that, I'll ask the operator to open the line for our question and answer session. Operator?
spk09: Thank you. And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. We also ask all participants asking questions to limit themselves to only one question and one follow-up question. One moment, please, as we poll for questions. Our first question comes from the line of Dave Coning with Bayard. Please proceed with your question.
spk06: Yeah. Hey guys. And, you know, nice job on the second quarter and thanks for all the guidance on the back half. And, you know, maybe to kind of kick it off, just if we look at the back half and kind of compare it to even last year, if you'd exclude crypto and, you know, maybe anything else, maybe talk through a little more on whether it's crypto and one or two other things, maybe would the back half actually be quite good growth? And then the second from that is, is Q4 really the base now when we kind of have numbers from Q4 to just kind of grow more normalized sequentially going forward? I'll leave it there, let you kind of talk through some of those.
spk02: Yeah, I'll jump in here, Dave. Thanks so much for the question. So obviously, since our last call, we've seen our clients shift their focus to cost reductions. Some of them have done this by moving some of the work we're doing onshore to our offshore teams, and others have done this by simply reducing vendor spend, looking for immediate savings. Across our entire client base, this has been most acute amongst our crypto and equity trading clients. So I want to make a few points about what we're seeing happen in the crypto and equity trading space. Taskus has a low double digit number of clients whose products feature a crypto or equity trading feature. These could be businesses that are entirely dedicated to trading equities or crypto, or they could be a broader financial platform that offer crypto or equity trading as part of their offering. These clients made up 15%, in fact, over 15% of our revenues in Q1 and And we now expect that they will be 5% of our revenues in Q4. With that said, we have not lost a single client in this space. We remain the preferred provider of high growth tech companies, including those in the crypto and equity trading spaces. Despite these challenges, we remain confident in our growth trajectory as we continue to have very, very strong relationships with all of our clients, and in particular, our largest clients. So we previously discussed that at our largest client, we've been shifting a large portion of the work we're doing there from higher revenue onshore locations to lower revenue offshore locations, which is a transition that we completed in Q2. But we've seen very strong overall volume growth with this client. We're adding over 1,000 additional roles for them in the back half of this year. Given this headcount growth, and our current pipeline of opportunities, we'd expect that we'll grow revenues with our largest client year on year in both 2022 and 2023, and hopefully beyond that as well. We also have seen continued growth at our largest on-demand transportation and food delivery clients. On the call, I mentioned that our revenues with our largest on-demand transportation clients has more than tripled year over year in Q2. We're taking significant share from our competitors and are now supporting this client from four different countries. Finally, we just signed pilots with three big tech companies that we believe have the potential to contribute meaningfully to our growth in 2023 and beyond. So strategically, we remain focused on supporting technology companies, and this is a space that is clearly experiencing some volatility today, but we believe it's going to outgrow the market over the long term. For now, we've shifted our focus from selling onshore teams to selling offshore teams to increasingly selling our automation solutions to help these clients reduce their costs. We've also expanded our addressable market by pursuing digital transformation deals with enterprise clients and signing the big tech deals that I just mentioned. So while we've encountered some significant challenges in the first half of the year, we do feel like our base has been reset and we're very optimistic about our ability to continue to grow faster than the industry.
spk06: Gotcha. No, thanks for all that color. And maybe just a quick follow-up. When we look at 2023, and I know you haven't given any sort of formal guidance, but it's fair to say the first half has a pretty tough comp, and we could expect you to grow slower than normal just because of that. And then the 22% margin in the back half, is that a good place to kind of think about next year? Are there any puts and takes that would change that?
spk10: Apology, do you want to take that question?
spk04: Yeah, so, hey, thanks, Dave. So from a EBITDA for 2023 perspective, like Bryce mentioned, we will see our growth rates improve in the back half of 2023. And we'd expect to see, begin to see margin expand as well. And we'd also start seeing the positive impact of offshoring getting into 2023. And like I said earlier, we'll continue to monitor our G&A spend while continuing to invest in growth. Hence, we expect adjusted EBITDA margin to be above 2022 margin getting into 2023.
spk06: Gotcha. Now, thanks, guys. Thanks for all the color.
spk09: Our next question comes from the line of Puneet Jain with JPMorgan. Please proceed with your question.
spk01: Hey, thanks for taking my question. I want to ask about the three large tech companies, the new contracts you signed there. Can you talk about the type of work you do for some of those clients? and also the potential opportunity. Can any one of those potentially be your 10% client over time? And should we expect that work to be relatively more stable than the work you do for small, medium-sized clients, given possibly the volume there at those accounts?
spk02: Tony, thanks so much for the question. So we're very excited to have closed these deals. These are Clients that we have pursued for many years. And this opens up a huge area of addressable spend and outsourcing budgets that run into the billions of dollars. So the best way to think about the potential here is to look back at our relationship with our largest client. With our largest client, we initially signed a very small deal. In fact, in our first year, I think we did about a million dollars in revenue, but we worked really hard and we proved our value and we started to win RFP after RFP. So we grew in the second year to $50 million in revenue. and have continued working together. And today, we have over $200 million from that client. So we're optimistic about the potential with all three of these clients. It's going to take a lot of hard work. We want to continue to diversify our revenue base. And when we think about smaller clients versus larger clients, we always want to keep a healthy mix of both. But The revenue growth that we're trying to drive into 2023, 2024, and beyond will be greatly helped by upside at these big tech clients.
spk01: I appreciate the color. And then another question on the guidance cut for this year. So it looks like you have assumed significant reductions at the crypto and equity trading clients. But what drives confidence that the other accounts have been de-risked enough in the guidance and should not be a source of incremental surprise given the macro environment is still uncertain?
spk02: Yeah. We're taking a very cautious approach to our outlook for the remainder of 2023, given the macro environment. Sorry, the outlook for the remainder of 2022, given the macro environment. We have a very robust forecasting process that goes client by client and looks at the conversations we're having with those clients in committed volumes. We have listened attentively to the earnings calls of all of our public clients, and we're hearing quite a lot of optimism. Amongst our largest clients, clients in the social media, ride-sharing, and food delivery space, we continue to have very strong relationships and very strong growth trajectories. And so that's where we drive our confidence for the guidance that we're providing today.
spk10: Got you. Thank you.
spk09: Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
spk00: Thank you.
spk07: Maybe to ask that question in a slightly different way, can you expand a little bit on the nature of work that you're doing for the equity trading and crypto clients that was particularly sensitive to those client budget cuts? And then is that work pervasive in any of your other segments as we think about how a weaker macro could affect other segments from here?
spk02: Yeah, in the FinTech space, across FinTech clients, we provide two primary areas of service. We provide digital customer experience services. So that's supporting their customers, answering their questions, solving account issues. We also provide a significant amount of risk and response services. This could be any money laundering, know your customer, fraud investigations work. Both of those service lines were impacted by overall trading reductions. So trading volumes came down, contacts and investigation demand came down. And given the just broader pressure in the space, there has also been an increased focus on reaching OPEX in order to get to profitability. When we look across the rest of our verticals, We offer a range of specialized services that we've discussed. Digital customer experience is our biggest service line. We have not seen anywhere near the same volume impact across any other vertical than we've seen in the fintech vertical as it relates to crypto and equity trading clients over the course of the last quarter.
spk07: That's helpful. Thank you. And then as we think about You know, your ability to service offshore or onshore, can you comment a little bit on where you're seeing demand currently? It seems like some of the new signings may have an onshore component off the bat. Is that still the preferred way to start engagements, or are you starting to see more clients willing to embrace offshore from the get-go?
spk02: Broadly, we've seen an uptick in interest in offshore. our offshore delivery locations. We've seen clients who have a presence in our onshore locations ask us about supplementing their teams with offshore locations to help bring down costs We've also seen a lot more interest in our new logo clients in our offshore offerings. I think this is to be expected given the macro environment. People are looking for ways to operate more efficiently. But that doesn't mean that we're not seeing any new clients in our domestic operations. As I mentioned, we signed a brand new travel client. who turned to task us to build a center of excellence in Texas. We're going to be hiring hundreds of teammates to support that client between now and the back half of the year. We've also signed multiple smaller deals in the last quarter in our U.S. operations. So while overall we've seen a decline in our U.S. operations in Q2, we do see continued interest from some of our new logos.
spk07: Thank you.
spk09: Our next question comes from the line of Ryan Potter with Citi. Please proceed with your question.
spk13: Hey, thanks for taking my question. I just wanted to continue on that topic. I know you mentioned that you signed a travel client and you've seen some increased interest from traditional enterprise clients. So I was wondering how you go about kind of assessing those inbounds. Are you trying to only work with kind of the highest growth, highest margin opportunities that come in? And to what extent can some of this kind of traditional enterprise interests be used to offset some of the clients to the pressures you're seeing in areas like FinTech?
spk02: Thanks, Ryan. So we had some concerns after last call and our discussion about the digital transformation deal that we signed with an airline. I think some people thought that was a sign that we were turning to traditional call center work. It is not. We're working with these clients on their digital transformations. Most of these deals are being done at margins that are actually accretive to the rest of our business. So broadly, we're really excited about the enterprise deals that we've closed. We I think that there's massive upside as we expand our addressable market and see an increased interest from clients in this space. And as I mentioned on the call, we're finding that most of the interest for our domestic delivery capability today is coming from enterprise clients. So we think that these clients have the ability to drive a disproportionate amount of our revenue growth in the quarters to come. Got it.
spk13: And then one question on your AI services offering. With your Taskverse platform launching last quarter, I was just wondering if you could give some color on the kind of adoption you've seen on it so far and how you're kind of going about to attract freelancers to the platform. Could M&A be used potentially to help scale its offering and broadly kind of how do you view kind of growth there?
spk02: Yeah, so it's obviously early days for us and the task force, but we've seen great interest in this product from our clients. There aren't a ton of scaled offerings that can do crowdsourced data labeling and AI services. And there's huge appetite amongst our innovative clients for disruptors in this space. As I said on the call, we've signed a few really exciting deals to big tech clients, one of which is brand new to task us. One of our top 10 clients in the e-commerce space has also become a user of the task force platform. So there's huge upside here. And we're starting from zero. Right. So there's the sky's kind of a limit. When I think about freelancer onboarding, we're trying to be the best platform for freelancers in the way that we feel we're the best company in the BPS space for our teammates. We've actively recruited freelancers from all over the world. We're working hard to ensure that they're paid promptly and that they have a healthy flow of tasks to do to keep them busy. So we're really excited about that as well. We are very interested in continuing to pursue M&A across all of our specialized service lines, and we do think that buying other businesses in this space could be a way to supplement not only the crowd that we're building, but also the underlying platform. Great.
spk09: Thanks. Our next question comes from the line of Jason Kupferberg with Bank of America. Please proceed with your question.
spk00: Hey guys, this is Cassie on for Jason. I wanted to ask, what's baked into the low end of your full year revenue outlook? So, you know, is it that additional clients are going to shift offshore? Is it that crypto and equity revenue and volumes like decline significantly further? I know you talked about that like 5%. Attrition continues to worsen and therefore headcount growth kind of contracts in the second half. And then, you know, specifically kind of wanted to ask what you guys are baking in or assuming for volumes specifically from ride sharing and food delivery. Thanks.
spk02: Thanks so much, Kathy. So we've updated our guidance and taken into consideration a range of scenarios. Given the visibility that we've got into Q3 revenues and the confirmed growth for many of our largest clients, we are very confident in our ability to deliver upon the guidance that we're providing today. When we look out into 2023 and beyond, we're very confident in the underlying fundamentals of our clients. There's some volatility. in the crypto and equity trading spaces in particular, but we've listened to the calls of many of our clients in the on-demand transportation, food delivery, and social media spaces, and those give us optimism that we're going to continue to see a healthy level of growth across all customers. Beyond that, we continue to take share within most of our largest client relationships. So at this stage, those are the things that are giving us a high degree of confidence about our ability to continue to grow faster than the industry in 2023 and beyond.
spk00: Okay. And I guess switching gears a little bit. So I see that your free cash flow, you know, if my math is right, I think you guys actually raised it. So it's maybe 45, 50% of adjusted EBITDA for 2022 versus I think it was 30 to 40% of a conversion rate prior. If I, if I, you know, remember that correctly. Can you just talk a little bit more about what are the key drivers of this and what kind of cadence we should expect in 3Q, 4Q, and is this kind of the sustainable level we should expect in 2023? Thanks.
spk04: Yeah, so hey, Casey, this is Balaji. So from a free cash flow perspective, like I mentioned before, it's always been important to us, but in the current market environment, it is even more important. We've added free cash flow as an annual guidance metric now, which for 2022, like you said, it's $100 million and almost 50% from a free cash flow conversion to adjusted EBITDA. And a couple of factors that are going to be increasing it is obviously going to be the adjusted EBITDA margin. And second is the capex that we're going to be investing And one of the things that we have called those is that this year, we're going to be investing more in CapEx than other years because we have catch up CapEx, which is coming in from previous years. And we expect CapEx to be somewhere around 7.3 to 7.5% as a percentage of revenues. But an ongoing basis, at least in the medium term, we expect the conversion to be somewhere between 40% to 50% in the medium term. But in the long term, as we start optimizing CapEx through increasing work from home, and as we continue to grow offshore, one of the things that we have seen is that the seat utilization is better in offshore geographies. So from a long-term perspective, we would expect this conversion to be above 50% of adjusted data margins.
spk09: Our next question comes from the line of James Falsetti with Morgan Stanley. Please proceed with your question.
spk08: Thanks. You know, I'm a little surprised we've made it this far through the call without the macro question. Just wondering if you're seeing any changes to decision-making or decision cycles, particularly because of macro uncertainty right now, more so than what you're hearing from your customer state of the public.
spk02: James, thanks so much for the question. So, you know, our pipeline right now is as big as it's ever been, and it's filled with opportunities to support both our current clients and prospects to help reduce their operating expenditures. But the macro environment has slowed deal velocity somewhat. In the last quarter, there were two very large deals that were at the one yard line. And both of these companies launched internal hiring freezes and then went on to put our deal on hold. We're very confident that these deals will get done. I mean, we believe very strongly in the underlying value proposition of helping these companies to reduce OPEX in the midst of a more challenging macro environment. But obviously, that has a direct impact on revenue this year. So I think we probably will continue to see some hesitation, particularly in some of these larger deals in the high growth tech space. But over time, we think that there will be a broader based adoption of outsourcing as a way to reduce costs.
spk08: Thanks for that, Bryce. And then I guess as part of that, same conversation, you and some of your peers have talked about vendor consolidation. Can you talk about what you're seeing in the current environment and how that's contemplated in your outlook as your customers are looking to control costs, if that's part of the conversation?
spk02: It is, particularly amongst our larger clients. We've been the beneficiary of quite a bit of vendor consolidation over the last few quarters. I mentioned our largest ride-sharing client on the call as just one example of that. So as we look ahead, we think there are going to be continued opportunities for us to take share from our competitors by offering a better value proposition helping our clients to reduce their costs while delivering with the quality that TaskUs is known for.
spk10: Thanks for that, Bryce.
spk09: Our next question comes from the line of Matt Van Vliet with BTIG. Please proceed with your question.
spk03: Good afternoon. Thanks for taking the question. I guess thinking about some of the faster pace or maybe even very recently decided shift to offshoring from a number of your existing clients, curious how we should think about this impacting revenue, not just for the rest of the year, but into 23, especially framing it in the light of your largest customer who's obviously creating a headwind to growth this year, but was a much more planned out and you've already seen what sounds like upside to that initial plan as you move offshore and adding additional headcount and roles. Is that something that you anticipate could happen in 23 and beyond as these customers move offshore? Or does this feel more of a reactionary reduced costs and we'll have to wait and assess, you know, into next year or even 24? Thank you.
spk02: Yeah. When we think about the, the, the, impact on 23, we know that we face challenging revenue comps in the first half of 23 when compared to the first half of 22. And that's because of exactly what you just said, the shift at our largest client, the reductions that we've seen to our U.S. business from crypto and equity trading clients. But we remain very optimistic about our ability to continue to grow faster than the industry in 2023, given what we're seeing in the pipeline, given the deals that we've signed with big tech firms, given the interest from enterprise clients. So I think that right now the market is volatile, but that volatility should benefit us over time. Now, I want to talk a little bit about the domestic operations more specifically. At the start of this year, 33% of our revenues came from the U.S., and given the reductions we've seen in Q4, we will derive about 20% of our revenues now from the U.S. A question that could follow from that is, well, what will happen in the remainder of that 20%? Over half of that revenue has to stay in our domestic business for regulatory reasons or strong client preferences. And we are continuing to see growth outside of that revenue in the form of the travel deal that we just signed for hundreds of additional roles in the U.S. and a number of other clients who've approached us about launching domestic operations. So while we're seeing reductions in our domestic business at the moment, we remain confident about the importance of our domestic operations to task us long term.
spk03: Okay. And then I guess looking at the AI services, this quarter is a slight quarter-over-quarter decline after being a very strong grower the last several. Curious if that is specific to any of the industries you have called out or their particular projects that just sort of wind down and haven't necessarily been filled through the pipeline yet. How should we think about the AI services group for not only the rest of the year, but sort of overall demand, understanding that the freelance and gig program maybe offset some of that?
spk02: Yeah. So in the AI services area, we had a large portion of that work being done domestically with our largest client. Given the transition, we've seen a slight sequential quarter over quarter decline while continuing to grow AI services revenue at a pretty healthy rate year over year. Given the full quarter impact, we will see that again in Q3. But when we look at the total number of clients who are using our AI services, the total number of geographies that we're delivering these services from, both of those things continue to grow quarter over quarter. So we remain very, very optimistic about it, the service line. All right, great. Thank you.
spk09: And our last question comes from the line of Brian Essex with Goldman Sachs. Please proceed with your question.
spk12: Great. Thanks. Good afternoon, and thank you for taking the question. Bryce, I was wondering if you could hit on, you know, I totally understand the, I guess, the reduced revenue from volume-driven business. But if I look out over, you know, what we see in the private company space, particularly in technology, a lot of these emerging companies have been asked by their investors to reduce spend. So, I guess with regard to the topic of companies looking to reduce spend overall outside the volume driven business, what are those conversations usually look like? And are there other ways that they're trimming, you know, again, outside of that volume driven business?
spk02: Thanks so much for the question, Brian. So to start 15 of our top 20 clients are public. It's an amazing transformation from just a few years ago when the number was almost inverse. So we have a very large client base that has already gone public and are large enterprises. But when we look at the long tail of our clients, we do have a tremendous number of high growth innovators and many of them are venture funded. And there we're seeing similar trends to what we've seen in our largest customers. They're all being asked to find a way to get to profitability. And Task Us is part of that solution. We have helped a number of our venture-funded clients shift work that they were doing in-house to our offshore delivery locations. integrate our automation solutions into their operations as a means of reducing operating expenditures and achieving profitability. So, you know, it's a similar tale. While there's some hesitation amongst new clients, we think that over time, this situation will actually drive additional growth in that space.
spk12: Got it. Got it. That's helpful. Maybe, maybe, To follow up Balaji, if we think about some of the fluctuations we've seen in FX, could you remind me, are you billing 100% in domestic currency? How much might be billed in local currencies outside of the US? And how do we think about the impact FX to the customer's ability to afford your solution as well as maybe impact in margins to the extent that you're paying for labor and offshore locations?
spk04: Yeah, and thanks for the question. So the majority of our revenues are with clients that pay us in U.S. dollars and are built in U.S. dollars. The small portion of revenues that would be built in euros is coming through the recent acquisition that we made with Hello. So the exposure is more in our cost that we incur outside of the U.S. in local currency. So with Philippines being our largest exposure and India being next, So in terms of forex hedging, our approach has been to do a rolling four-quarter hedging program that covers about 50% of our forecasted expenses in the Philippines. We are currently looking at establishing a hedging program for India as well, given the growth in the geography for the last two years. But the appreciation of the dollar versus the rupee and the Filipino peso has been helpful this year, especially to offset some of the base inflation that we have seen in those geographies.
spk12: That's super helpful. Thank you very much.
spk09: And we have reached the end of the question and answer session, which also concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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