TaskUs, Inc.

Good morning, and welcome to the Task Us Third Quarter 2022 Investor Call. My name is Shamali, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speaker's remarks, there will be a question and answer period. Please note this conference is being recorded. I would now like to introduce Alan Katz, Vice President of Investor Relations. Alan, you may begin.

Good afternoon, and thank you for joining us for the TASCF third quarter 2022 earnings call. Joining me on the call today are Bryce Maddock, 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.tascf.com. We have also posted supplemental information on our website, including an investor presentation and an Excel-based metrics file. Please note that this call is simultaneously being webcast on the IR section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding our future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. you should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from these forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 9, 2022. This filing is accessible on the SEC's website and on our website at ir.tasks.com and may be supplemented with subsequent periodic reports that we file with the SEC. Any forward-looking statements made in today's conference call, including responses to questions, are based on current expectations as of today, and TASC has assumed 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?

Thank you, Alan. Good afternoon, everyone, and thank you for joining us. In Q3, our revenue and adjusted EBITDA once again came in above the top end of our guidance ranges. Q3 revenue grew by 15.5% year-on-year to $232.1 million, above the top end of our guidance of $226 million. Adjusted EBITDA grew 15.3% year-on-year to $55.5 million for an adjusted EBITDA margin of 23.9%, also above our guidance of 22%. 2022 has been a challenging year as many of our clients have shifted their focus from growth to cost. I am very proud of how quickly our team has responded. After a pause in some client decision-making in Q2, our sales activity picked back up this corner. We also moved to drive additional efficiencies into our business. This quarter, we increased our margins compared with last quarter through our focus on G&A spending. We delivered our highest adjusted EBITDA margin and highest free cash flow for the year in spite of the top-line headwinds we faced. Over the next few quarters, we will navigate a volatile macro environment and a set of challenging comps from the first half of this year. But given our team's incredible performance over the past quarter, I remain confident in our ability to drive revenue growth and increase profitability and cash flow in 2023. After going through the details of our Q3 performance and briefly highlighting our updated full-year outlook, I'll discuss our current outlook for the start of 2023, given the recent strong sales performance, the current macro environment, and our clients' volume projections. Bology will then walk through the financials as well as our guidance for the remainder of 2022. Let's start with the third quarter. We delivered strong signings from both new and existing clients this past quarter and continue to move up the value chain with our clients. Starting with growth with our current clients, in Q3, our top 20 clients increased their spend year over year by more than 5%. This growth rate was materially impacted by the transition of work offshore at our largest client and the declines in volume at our largest crypto and equity trading clients. If we exclude those three clients, our largest 17 clients grew 26% year over year. Revenue from clients outside the top 20 grew at more than 46% year over year. this broad base growth has continued to reduce our client revenue concentration and improve the diversity and resilience of our client base. Looking at our service offerings, digital customer experience revenue grew 20.9% compared with Q3 of 2021 as a result of expansion with existing clients and new client signings. We're seeing strong signings activity from existing clients in the travel and on-demand transportation space, as well as with health tech and non-crypto fintech clients. In terms of new clients, our signings were weighted towards clients in the retail and e-commerce and travel verticals, as well as with one of the big tech clients I discussed on the Q2 call. The sequential quarterly revenue decline in the service offering was primarily driven by the continued decline in volumes from our crypto and equity trading clients. In Q2, these clients accounted for about 12% of revenue. In Q3, they represented about 6% of our revenue, and we now expect them to represent about 4% of Q4 revenues. In terms of major DCX signings, we signed a significant expansion with a smart home technology client. This client has asked Taskus to take on their most complex customer support interactions and escalations. We are also now leading user retention efforts when one of their customers moves or considers canceling their service. This is a client who we began working with at the end of 2019. At the time, they had a large, diverse global vendor network. Our performance and strategic relationship has consistently led to us taking share from these competitors, and we have a clear path to become this client's largest vendor in 2023. We also signed a DCX engagement with a rapidly growing app in the mental health space. This is a great example of the growth we're seeing in health tech. Here, we're providing digital customer experience to support their patients. The client chose us as their first vendor partner, in large part due to our focus on health and wellness for our frontline teammates and our learning experience expertise. Finally, we signed a new digital customer experience contract with one of the largest global retailers to provide support for their e-commerce offerings. We'll be ramping up with this client during the holiday season and see the potential for significant expansion with them over time. This client is another step forward in our engagement with the Fortune 100 and some of the world's most prominent brands. We're increasingly partnering with these global enterprises to support their digital transformations and customer engagement efforts. Moving on to content security, revenues in this service offering declined 3.2% compared with Q3 of 2021. driven by the impact from our largest client moving work to our locations in the Philippines and India. Our relationship with our largest client remains very strong. We're taking significant share from competitors and continue to see both sequential and year-over-year volume growth. In fact, the number of teammates supporting this client have increased by 30% from the start of this year to the end of Q3. This significant volume growth was offset by the shift of business from the US, which is the geography with the highest bill rates, to the Philippines and India. This shift led to the revenue decline for this service offering this quarter. Despite these challenges, we expect more revenue from our largest client this year than last year. We also expect to add hundreds more teammates to support them over the next few quarters as we continue to take share. Globally, they continue to move work from high cost delivery locations to lower cost geographies. We are benefiting from this shift due to our strong capabilities in the Philippines and India. We will see another smaller transition of less than 100 roles that remain in the U.S. for this client at the end of this year. We expect this to net out to revenues from our largest client being roughly flat from 2022 to 2023. If we excluded the impact from our largest client, this quarter's content security revenues would have grown 26% compared with Q3 of 2021. We're seeing even faster volume growth as overall content security teammates increased by 44% year over year. As I mentioned last quarter, we expect to show sequential growth in content security moving forward. We expanded our content security services with a global music streaming app. Here, we provide trust and safety for a diverse set of music and podcasts posted to the platform by global creators. We also moderate user comments on the platform. We're taking action on privacy violations, harassment, and the posting of illegal or copyrighted content. We are the sole provider at this client and won this expansion from their in-house team against several competitors. We continue to expand our risk and response offering with any money laundering, know your customer, and identity verification inquiries in cases involving unauthorized payments or account issues. We began working with the B2B FinTech software platform that is used by global brands to manage disputes and chargebacks with a particular focus on fraud associated with this type of activity. This client turned to us to provide live support outside of their automated platform. This type of engagement is especially interesting, pairing our risk and response capabilities with our client software. Finally, we launched a risk and response engagement with one of our large food delivery clients. Here, we're leading fraud investigations. AI services revenues grew 21% in Q3 compared with 2021. driven primarily by expansions with existing clients in the social media and autonomous vehicle spaces and new client signings. We sign new engagements with the leading global provider of generative AI technology, a collectibles marketplace, and one of the largest global technology companies in the world. Our AI services engagements continue to be supported by a combination of our dedicated teams and task versus gig workers that we call taskers. We continue to invest aggressively in the Taskverse and have signed up over 70,000 global taskers to the platform, surpassing the number of Taskus teammates for the first time. We are seeing Taskverse deals utilizing thousands of taskers focused on areas such as data collection, annotation, and online research. In addition to image, video, and audio annotation, we engaged with a global technology company who leveraged our platform to collect competitive benchmarking data from a demographically diverse community of taskers. We are also seeing demand for our crowd outside of AI services. We engaged with one of the largest e-commerce marketplaces, leveraging thousands of taskers to perform online research tasks to support this client sales team. These are just a few examples of the type of creative engagements that we've seen on the taskburst thus far. Looking at overall signings, our engagements this quarter were again driven largely by growth from existing clients, which accounted for over 70% of total new business signings in Q3. Turning to revenue growth within our industry verticals, we're seeing particular strength from entertainment and gaming, high tech, and on-demand travel and transportation, which includes our food delivery clients. Each of these verticals grew by approximately 40% this quarter compared with Q3 of 2021. Throughout this year, we've discussed the trend of client shifting work that they were previously doing in higher cost locations to our offshore teams. This has been particularly true of higher value services that clients may not have looked to outsource in the past. We saw this trend continue this past quarter with several clients, including a digital media company in the entertainment and gaming space. As the streaming media industry is increasingly driving revenue from advertisements, the support needed to insert ads into shows has increased. We were able to engage with our client to transition this entire workflow to our teams in the Philippines. We're providing the same quality as their internal U.S.-based teams at a lower cost. We expect this type of work to increase in the quarters to come. Last quarter, I also highlighted signings with three of the world's largest tech firms. We've had strong traction on our initial engagements and are actively engaged in other opportunities as part of their 2023 budget planning process. Our global model is perfectly positioned to support these firms as they increasingly focus on reducing their operating expenditures. We see the potential for significant growth with these clients. I'll spend a few minutes discussing our teammates and the environment for talent. In Q3, we added 3,400 net new teammates to task us, bringing our global employee population to 48,700. In the quarter, we added teammates in every geography we operate in, except Ireland and the United States. Year over year, our combined teammate population in the Philippines and India has grown by over 40%, while our teammate population in the U.S. has declined by approximately 25% in the same period as a result of the shift at our largest client and the volume reductions seen in the crypto and equity trading space. In terms of the environment for talent, we've seen an improvement in the market for talent compared to what we were seeing in the first half of the year. We've continued to meet our clients' aggressive hiring targets by being the employer of choice in each of our delivery markets. We've also seen employee retention improve meaningfully in Q3 as we have worked hard to create a world-class employee experience for both our in-office and work-from-home employees. At the end of the quarter, approximately 40% of our teammates were working safely from Taskus offices around the globe. Clients are increasingly choosing to permanently adopt our work-from-home platform to drive cost savings and improve teammate retention. We now believe that our global teammate population will settle somewhere around 50-50 in office and work from home for the foreseeable future. This balanced model drives cost savings for our clients, reduces our CapEx, and improves our teammate retention. The savings achieved from lower recruitment and training expenses will also improve our margins over time. Lastly, Tasca's teammates continue to be amongst the happiest in the industry, rating us at 4.6 stars on Glassdoor as of the end of the quarter. Now let's move to our outlook for the remainder of 2022 and our initial view of 2023. Given the strong performance in Q3, we've raised our outlook for both our revenue and adjusted EBITDA for the remainder of the year. We now expect to achieve $950 million in revenue at the midpoint for the full year, up from the $940 million outlook that we gave on our Q2 earnings call. We anticipate our adjusted EBITDA margins to be 23.1% for the full year above the initial guidance we provided for 2022. Consistent with past practice, we will provide formal 2023 guidance on our Q4 earnings call. However, let me spend a few minutes on what we're initially seeing for next year, given the current macroeconomic backdrop. We've been working closely with each of our clients as part of their 2023 budget planning processes. We are seeing two trends across much of our client base. First, we're seeing significant sales success among clients who are looking to ship expensive in-house resources to our efficient offshore teams. We're also benefiting greatly from an increase in vendor consolidation efforts. We've taken over more critical processes and are moving up the value chain with both long-term and newer clients as they look to improve the efficiency of every aspect of their operations. At the same time, we've seen some clients lower their overall growth and volume forecast for 2023. This, combined with the cost-focused shifts our clients continue to undertake by moving work from our onshore operations to our offshore delivery centers, will continue to weigh on revenue for the next few quarters. Our guidance implies low single-digit year-on-year revenue growth in Q4, which includes the benefit of some seasonal volumes. In Q1, we will see some reduction from these Q4 seasonal volumes and the small transition of work offshore at our largest clients. but we expect to offset this reduction through strong sales performance. We expect to return to sequential quarterly revenue growth in Q2 of 2023. After we laugh at the challenging comps we faced in the first half of next year, we expect to return to double-digit year-on-year revenue growth for the second half of 2023. We've used this period as an opportunity to drive additional efficiency into our own business. significantly improving our margins and cash flows. We now expect our 2023 adjusted EBITDA margins to be at or above this year's performance of 23.1%. These improvements are driven by expanded gross margins and the reduced GMA spending our team achieved in the past 90 days. Last quarter, we also set a goal of achieving $100 million in free cash flow in 2022. We remain confident in our ability to deliver on this goal, and we expect to increase free cash flow in 2023. We remain focused on creating long-term shareholder value with the cash we generate. We've continued to invest in the business to drive growth in new geographies and new service offerings. At the same time, in September, our board approved a share repurchase program, and we repurchased approximately 739,000 shares in the quarter. successfully returning capital to our investors. We will continue to allocate capital to our buyback program opportunistically. While this year has been challenging, I am extremely proud of how quickly our team has responded. We've driven significant growth in all of our offshore delivery locations, signed engagements with three of the biggest technology companies in the world, and expanded our addressable market by providing digital transformation to more stable enterprise clients. all while continuing to take share in our core high-growth technology client base. We made the tough choices quickly, improving our adjusted EBITDA margins and free cash flow conversion. As a result, we are well-positioned to drive growth and profitability in 2023. With that, I'll hand it over to Balaji to go through our Q3 financial results and provide more details on our 2022 guidance.