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Operator
Good afternoon and welcome to Betasca's fourth quarter and full year 2023 earnings call. My name is Liz and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speaker's remarks, there will be a question and answer period. To ask a question during this session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. I would now like to introduce Trent Thrash, Senior Vice President of Corporate Development and Investor Relations. Trent, you may begin.
Betasca
Good afternoon, and thank you for joining us for the TASCUS fourth quarter and full year of 2023 earnings call. Joining me on today's call are Bryce Maddock, our co-founder and chief executive officer, and Balaji Shekhar, our chief financial officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the investor relations section of the website at ir.taskus.com. We have also posted supplemental information on our website, including an investor presentation and an Excel-based financial metrics file. Please note, this call is being simultaneously webcast on the investor relations section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding our future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from these forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 6, 2023. This filing is accessible on the SEC's website and our website at ir.tascus.com and may be supplemented with subsequent periodic reports we file with the SEC. We expect our 2023 10-K to be filed with the SEC no later than March 15th of 2024. Any forward-looking statements made on today's conference call, including responses to questions, are based on current expectations as of today, and TASCUS assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. The following discussion contains non-GAAP financial measures for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP metric. Please see our earnings press release, which is available in the IR section of our website. Now, I will turn the call over to Bryce Maddock, our co-founder and chief executive officer. Bryce?
Bryce Maddock
Thank you, Trent. Good afternoon, everyone, and thank you for joining us. I want to start by expressing my deep gratitude for our Taskus teammates around the globe who have worked tirelessly over the holidays and into the new year to deliver for our clients and our shareholders. As a result of their efforts, we outperformed the top end of our revenue and adjusted EBITDA guidance for the fourth quarter. We delivered $234.3 million in revenue compared to guidance of between $225 and $227 million. In terms of profitability, we delivered $59 million in adjusted EBITDA for an adjusted EBITDA margin of 25.2%, 270 basis points above our guidance of 22.5%. For the calendar year 2023, we delivered $924.4 million in revenue and $220.8 million in adjusted EBITDA, representing an adjusted EBITDA margin of 23.9%, compared to guidance of 23.3%. Finally, we delivered $131 million in free cash flow in 2023, excluding acquisition-related payments, well above our guidance, of more than $115 million. While I'm pleased with our team's efforts and results, we are not satisfied. 2023 was a challenging year, and we did not deliver anywhere near the top line growth rates that we have historically. In 2024, we're determined to do better and to return to consistent year-over-year revenue growth. While it is still early in the year, 2024 is off to a solid start. Despite a macro backdrop that remains challenging, we've continued making investments in technology, sales, and marketing. We're pleased with the dividends that those investments are producing and have seen increasingly strong demand over the first quarter of the year. I'll recap some of the highlights from our Q4 and full year 2023 performance before discussing our 2024 outlook. Bology will then walk through our financials and 2024 guidance in greater detail. Q4 revenues were $234.3 million, a 3.3% decline on a year-over-year basis, consistent with Q3's rate of decline and ahead of our expectations. On a sequential basis, Q4 revenue increased by 3.8%, largely as a result of seasonal volumes. As anticipated, Revenue from our top 20 clients declined 10% year-over-year in Q4 as a result of certain clients' cost optimization and offshore migration efforts, including those by our largest client. These top 20 revenue headwinds were partially offset by growth from new and existing clients that moved into our top 20 for 2023. Year-over-year revenue growth from customers outside the top 20 accelerated to 13% in Q4 versus 8% in Q3. We expect to continue to grow clients outside of our top 20 at a faster rate than our largest clients in 2024 as we continue to diversify our client base and expand our business in new areas like healthcare and banking and financial services. In terms of delivery geographies, on a year-over-year basis, revenues from U.S. delivery declined 35% in Q4, while revenue from all other geographies grew by 5%, demonstrating the strength of our global delivery model. Q4 again saw rapid growth in Latin America. Revenue from the region grew approximately 78% year-over-year. At the end of 2023, approximately 96% of our total headcount was outside the United States. We ended the year with approximately 48,200 global teammates, an increase of approximately 1,200 teammates quarter over quarter. As noted in Q3, we continue to make progress on our strategy of cross-selling our specialized services. In Q4, we saw a 30% year-over-year increase in clients utilizing more than one of our service lines. We also continued expanding our presence in new markets, including adding notable use cases for enterprise clients in the healthcare and banking and financial services spaces, as well as fast-growing technology clients in the autonomous vehicle and generative AI markets. In addition to supporting clients in the generative AI space, on the development and support of their technology, we are integrating generative AI into our core service offerings. In 2023, we launched PassGPT, our GenAI platform, with multiple clients. We continue to believe that these tools will yield the greatest returns when they're trained on client-specific data and utilized by talented teammates to ensure efficient, consistent, and secure results. In line with this, we're excited to announce Assist AI, our knowledge assistant built on the TaskGPT platform. Assist AI is custom trained on our clients' knowledge bases, training materials, and historical customer interactions. Our teammates chat with Assist AI to answer customer questions more efficiently and accurately in our digital CX business, or to ensure they're utilizing the latest policy when taking action on a piece of content in our trust and safety business. We are offering Assist AI to all TaskUs clients as an integrated part of our service offering. Going forward, we will deliver a well-trained combination of technology and talent to support our clients, protect their brands, and deliver for their customers. During 2023, We also made continued progress on our internal cost efficiency programs in order to maintain our strong margin and free cash flow performance in the face of our clients own cost optimization efforts. We remain vigilant on cost in the business, not as a one-time optimization program, but as an ongoing fundamental discipline to ensure we remain competitive. Shifting to sales, 2023 was characterized by slower decision-making and an intensified focus on cost reduction compared to prior years. Despite this, our sales team delivered. We added 47 new clients, the most in any year since 2018. Partially as a result of this success, we have further improved our client concentration. In Q4, clients outside the top 20 drove 34% of our revenue versus 29% in Q4 of 2022. We ended 2023 with 97 clients who we billed $1 million or more for services up from 86 in 2022. In Q4, sales were again driven largely by bookings from existing clients, which accounted for approximately 70% of total new business signings. we ended the year with a strong pipeline of opportunities with both new and existing clients. We're encouraged by the size, quality, and depth of pipeline opportunities across our service lines at the end of 2023, and we continue to see improved sales momentum in 2024. Turning to our service lines, in Q4, digital customer experience revenue declined by 4.4% compared with Q4 of 2022. Consistent with prior quarters, expansion with existing clients and new client signings was offset by the decline in revenues from our largest client, as well as cost optimization and volume declines in other clients. On a sequential basis, our DCX revenues were up by 4.1%, inclusive of seasonal revenues. In Q4, we saw strong signings activity from existing DCX clients in the technology and on-demand travel and transportation spaces, as well as with non-crypto fintech and enterprise financial services clients. We also continue to be encouraged by the increase in opportunities we're seeing to provide sales and customer acquisition services to clients across multiple vertical markets. We signed a DCX contract leveraging the capabilities of our HALU team to support a European-based financial services client. We also won a competitive bid process to provide support from our U.S. operations for a leading credit union. This win is a direct result of the 2023 investments we made in banking and financial services expertise in order to provide balance to our core fast-growing technology client. This type of work in regulated industries is a great example of U.S.-based delivery services that we believe are likely to remain onshore regardless of the economic environment. We also see the U.S. continuing to be a key geography for delivering specialized services to healthcare clients. Our trust and safety service line continued to perform well in Q4. Trust and safety growth further accelerated in the quarter growing 23.5% year-over-year and 7.3% quarter-over-quarter. Q4's growth was largely driven by the continued growth in our large on-demand travel and transportation clients, as well as certain clients in the social media, technology, and fintech verticals. This growth, again, more than offset the volume declines we saw from our largest equity trading client, which will cease to provide difficult year-over-year growth comparisons after Q2 2024. Our trust and safety service line includes both our content moderation offerings and the work of our risk and response teams, which deliver financial compliance, risk, and fraud detection services. While we don't separately report this offering, we're pleased that our Q4 risk and response revenue growth was again accretive to the overall growth rate of the trust and safety service line. Speaking of our risk and response team, I'm proud to announce that we were named a leader in Everest Group's financial crime and compliance operations services peak matrix for 2024. Demand for all of our trust and safety services continues to grow. In Q4, we saw a notable win with a DecaCorn startup in the graphic design space. We now provide multilingual content moderation to this client. We also began supporting a provider of consumer credit building and financial education solutions with both our DCX and risk and response service line. This is another clear demonstration of our success in cross-selling highly specialized services to both new and existing clients. AI service revenues declined 26.5% in Q4 compared with Q4 of 2022, driven primarily by a mid-2023 decision to offer certain U.S.-based work by our largest autonomous vehicle client and a reduction in U.S.-based delivery at our largest client. As discussed in Q3, the health of these two large client relationships remains very strong. In fact, we won exciting new projects at both clients in Q4 and early Q1 that will ramp in 2024. We anticipate existing AI services revenues from these clients to stabilize on a sequential basis in 2024 and the difficult year over year comparisons within our AI service line to lapse by year end. Despite the revenue decline, we're selling our AI services to a greater number of clients. The number of clients using our AI services grew by a double digit percentage year over year in 2023. In line with this, We're seeing growing demand for AI services from large language model and multimodal generative AI providers. Here our teams are performing expert response writing, ranking and scoring, prompt review, adversarial testing, and trust and safety evaluations. We expect these clients and new opportunities to become an increasingly larger portion of our AI services revenue over the course of 2024. Speaking of 2024, let's move to our Q1 and full year 2024 revenue outlook and growth strategy. In Q1, we expect to deliver revenues between $222.5 million and $224.5 million, a decline of approximately 5% year over year and quarter over quarter. The year-over-year decline is primarily driven by U.S.-based projects that concluded at the end of Q1 2023 for our largest client and other client cost optimization decisions made throughout 2023, while the quarter-over-quarter decline is primarily driven by Q4 seasonal revenues. We expect to deliver full-year 2024 revenue of approximately $925 million at the midpoint of our guidance range of between $900 million and $950 million in revenue. The improved momentum we saw in Q4 and early Q1 gives us confidence that we can return to year-over-year growth in the back half of 2024, delivering revenues that are roughly flat to 2023 for the full year and accelerating growth rates as we exit 2024. We now believe that the material revenue headwinds created by 2022 and 2023's onshore to offshore shifts are largely behind us. As noted last year, we work closely with our clients as part of their annual budgeting processes. As a result of these conversations, our strong Q4 results, and the progress made in early Q1 across sales, hiring, and new program ramps, we are cautiously optimistic. While revenue declined in 2023 at a few of our largest clients, we expect revenues at these same clients to be flat to slightly up year over year in 2024. However, clients continue to look for ways to reduce costs by leveraging automation technologies and global delivery models. We believe this will continue in 2024, but that for a variety of reasons, including regulatory and privacy concerns and the complexity of certain work, approximately 10% of our revenue will be derived from the U.S. for the long term. As a frame of reference, we delivered approximately 14% of our revenue from U.S. delivery in Q4 of 2023, down from 21% in Q4 of 2022. As our U.S. revenues stabilize, we believe that our international footprint will continue to be a driver of future revenue growth. For 2024, we're focused on four initiatives to accelerate revenue growth. First, we will take share from our competitors. Whether it's an existing or new client, we continue to see meaningful opportunities where we are under-penetrated from a wallet share perspective. This includes an increased focus on some of the biggest technology companies in the world, as well as traditional enterprise clients. Many of these clients and prospects who have annual outsourcing budgets in the hundreds of millions of dollars are only spending a few million dollars with TaskUs today. Recent large-scale industry consolidation has created opportunities for Taskus to capture incremental share to help clients better diversify their partner networks. So we are doubling down on our investments in sales and client services to grow these relationships. Our solid performance in the second half of 2023 in the face of significant challenges gives us confidence that our team can compete with anyone and win. Next, we will continue to focus on diversifying our client base by landing enterprise clients in the banking and financial services and healthcare spaces. These clients' more consistent spending patterns will create a stable ballast of revenues, while our continued leadership in servicing high-growth technology clients will enable rapid growth in the years to come. We've built teams of experts in both enterprise verticals and have seen solid early progress. Third, we will continue to successfully cross-sell our specialized services for our client base. Whether it's a trust and safety client utilizing our AI services to help develop their latest generated AI tool, or a risk and response client bringing in our instructional designers to overhaul their training curriculum, we will continue to expand our client relationships by selling more of our specialized services to our existing clients. And finally, We aim to lead the industry on the deployment of generative AI tools to support the delivery of services to our clients and their customers. We are very excited to offer our Assist AI tool to all TaskUs clients. This tool improves the accuracy and efficiency of our teammates across digital customer experience, trust and safety, and risk and response workflows. We believe the future of this industry will require companies to deliver well-trained teammates and technologies to solve client challenges, and with the launch of Assist AI, we're making strong progress towards this vision. By executing on these initiatives, I believe that we will achieve our 2024 goals and return to accelerating year-over-year growth in the back half of the year while maintaining industry-leading adjusted EBITDA margins and free cash flow generation. With that, I'll hand it over to Balaji to go through the Q4 financials and our 2024 guidance in more detail.
Taskus
Thank you, Bryce, and good afternoon, everyone. I'm going to focus my remarks primarily on our fourth quarter, but will reference a few key full year metrics. Please note that some of these items are non-GAAP measures, and the relevant reconciliations are attached to the press release we issued earlier today. The fourth quarter was another quarter of both top line and bottom line performance that exceeded expectations. While revenue declined by 3.3% year over year to $234.3 million, we came in higher than the midpoint of our guidance of $226 million. Adjusted EBITDA of $59 million and adjusted EBITDA margin of 25.2% came in higher than our guidance of 22.5%, primarily due to better than forecasted revenues, as well as lower than expected seasonal costs. Adjusted EBITDA margins improved by 130 basis points compared to Q4 of the previous year. For full year 2023, revenue declined by 3.8% to $924.4 million, but came in above the top end of our guidance range of $917 million. We achieved adjusted EBITDA of $220.8 million for an adjusted EBITDA margin of 23.9%, again, above our guidance of 23.3%. The strong revenue performance in the fourth quarter compared with guidance was driven primarily by volume risks that we expected not materializing along with strong seasonal revenues that we discussed in our Q3 call. The stronger than expected results also reflected our ability to ramp and consistently deliver on key metrics for our clients. Moving on to our service offerings. In the fourth quarter, our digital customer experience offering generated $151.9 million for a decline of 4.4%. Our trust and safety business grew 23.5% to $52.2 million. And AI services declined 26.5% to $30.1 million. In Q4, We continue to see the diversification of our revenue base. Our revenue concentration with our largest client was 19%, consistent with Q3, but down from 22% in Q4 of 2022. Our top 10 and top 20 clients accounted for 55% and 66% of our revenue, respectively. compared to 58% and 71% in the prior year, as our consistent march towards a more diversified revenue base continues. In the fourth quarter, we generated 56% of our revenues in the Philippines, 14% of our revenues in the United States, and 12% of our revenues from India, and 18% of our revenues from the rest of the world, mainly driven by our operations in Latin America and Europe. Cost of service as a percentage of revenue was 58.6% in the fourth quarter, compared to 57.5% in the prior year. The year-over-year increase was driven by depreciation of the U.S. dollar against some of the currencies in our major delivery geographies, wage inflation, and expenses associated with our return to the office, which was partially offset by the geographic mix of revenues and operational efficiency gains. In the fourth quarter, SG&E expenses were $48.9 million, or 20.9% of revenue, compared to $64.5 million, or 26.6% of revenue, in the prior year. This decrease was driven by our disciplined cost efficiency program, as well as a $4.8 million reduction in our earn-out expense associated with the HILU acquisition and a decrease in stock compensation expense from $13.3 million in Q4 of 2022 to $9.8 million in Q4 of 2023. We earned adjusted EBITDA of $59 million and a 25.2% margin in Q4 compared to $57.9 million and 23.9% margin in the fourth quarter of last year. The reduction in revenue and increased cost of service was more than offset by savings in SG&E. For the full year, we achieved $220.8 million in adjusted EBITDA and an adjusted EBITDA margin of 23.9% above our guidance range. Adjusted net income for the quarter was $32.2 million. and adjusted EPS was 35 cents. For the full year adjusted net income was 126.5 million dollars and adjusted EPS was one dollar and 32 cents. This compares to adjusted net income of 33.3 million dollars and adjusted EPS of 33 cents for the fourth quarter of 2022 and $142.8 million in adjusted net income and $1.39 of adjusted EPS for full year 2022. Adjusted EPS in 2023 benefited from a lower number of weighted average shares outstanding as a result of our share repurchases. Now moving on to our cash flow and balance sheet. Free cash flow was $31.7 million in Q4. For the full year, free cash flow excluding payments for earner consideration was $131 million, exceeding our guidance of greater than $115 million. This represents a conversion rate of 59.3% of adjusted EBITDA for the full year. Cash and cash equivalents were $125.8 million as of December 31, 2023, compared with the September 30th balance of $114.6 million. Our capital expenditures increased in the fourth quarter to $8.1 million, or 3.5% of revenue, compared to $7.7 million, or 3.2% of revenue, in the prior year. For the full year, CapEx was $31 million, or 3.4% of revenue, compared with $43.8 million, or 4.6% of revenue, in 2022. This full year decrease was driven largely by optimizing CapEx spend and better utilization of existing investments. We maintained our disciplined capital allocation program. As you will remember, this year we allocated an additional $100 million towards our buyback program, bringing the total authorization to $200 million. In the quarter, we bought 2 million shares at an average cost of $9.66 per share for $19.2 million. For the year, we repurchased 10.1 million shares at an average cost of $11.02 per share for $111.8 million. Over the life of the program, we bought back 11.8 million shares and spent $142.7 million at an average cost of $12.10 per share. We will continue to allocate capital to our buyback program on a programmatic basis in accordance with our plan. We maintain low leverage, ending the year with 0.6 times net debt to adjusted EBITDA leverage ratio. Our priority remains investing for growth. To this end, we are increasing our investments in sales and marketing. Given the strength of our balance sheet, we have ample capacity for these growth investments while preserving our ability to take action on any M&A opportunity that meets our investment criteria or to return capital in the form of shared repurchases. In summary, we built more efficiency into our global operating model and leveraged automation and shared services resulting in millions of dollars of savings while letting us invest in strategic growth areas like sales, marketing, and technology. As a result, In 2023, we delivered adjusted EBITDA margins and free cash flows that we believe are among the best in the industry. At this point, I will outline our financial outlook for the full year and first quarter of 2024. We anticipate full year 2024 total revenues to be in the range of $900 to $950 million. We expect to earn a full year 2024 adjusted EBITDA margin of approximately 22% to 23%, and we expect to achieve $120 to $130 million in free cash flow for 2024. Our profitability guidance takes into account the impact of typical wage inflation that we see on an annual basis and the investments that we are making in strategic growth areas. As a result, in the first quarter of 2024, we anticipate revenues to be in the range of $222.5 million to $224.5 million, and we expect to earn an adjusted EBITDA margin of approximately 22%. The adjusted EBITDA margin for Q1 will be impacted by lower revenues, the partial quarter impact of annual wage increases, and our investments in sales, marketing, and technology. This adjusted EBITDA margin guidance for the quarter and full year is based on current Forex rates, so any change to currency rates would impact our margins. As a reminder, the majority of our revenue is billed and collected in U.S. dollars, so we do not see the impact of U.S. dollar fluctuation in our revenue. I will now hand it back to Bryce before we take your questions. Thank you.
Bryce Maddock
Thank you, Balaji. Before we open for questions, I want to share another Taskus teammate story. At the end of last year, Taskus' senior leaders gathered in the Philippines for our 2024 strategy session. In addition to planning, it was critical to me to bring leaders together from across the globe so that everyone could experience the magic of our sites, and the culture of our people in the Philippines. During one of our site visits, we met with Desiree Omiles. I know Desiree well because she started with TaskUs 12 years ago as a transcriptionist when we were still a very small operation. Back then, I still knew everyone's first name. Desiree originally trained to become a nurse. However, when she graduated, the Philippines job market for nurses was very tough. So she took a job with TaskUs instead. Today, Desiree is a senior wellness and resiliency coach working directly with our content moderators. She received extensive training from Task Us and now teaches teammates everything from the importance of positive self-talk to the power of music, how to better regulate their emotions. Thanks, Task Us, says Desiree. You've changed my life. I get to make a difference one wellness session at a time, end quote. Reconnecting with Desiree was a powerful reminder for me and our senior leaders of the positive impact Haskus has on the lives of our teammates across the globe. With that, I'll ask the operator to open the line for our question and answer session. Operator?
Operator
As a reminder to ask a question that is star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Puneet Jain with JP Morgan.
Morgan
Hey, thanks for taking my question. So I wanted to ask, for 2024, what could be the incremental headwinds that you expect? relative to Q4 of this year. I know there is seasonality in the fourth quarter, but adjusted for that, are there any incremental headwinds that you expect? I'm asking this because the guidance implies the exit rate of around mid-single digits, high-single digits based on where you end. In the guidance, in that range for the full year, So how should we think about like the long-term growth beyond this year for the company?
Bryce Maddock
Yeah, thanks, Puneet. So this year, our number one goal is to return to year-over-year growth. And given the strong performance in Q4 and the performance we've seen at this point to Q1, we're cautiously optimistic that we're going to be able to do that. So essentially, you know, I think the numbers you're outlining there are happen at the midpoint of our guidance range. And our goal was to try to drive revenues towards the top end of our guidance range. And to do that, we need to execute on the four elements of our growth strategy. We need to get aggressive and take share from our competitors. We need to continue to grow our relationships with enterprise, healthcare, and banking and financial services clients. And we need to successfully cross-sell our specialized services. And finally, we have to leave the industry on the deployment of generative AI tools. in our service delivery. At this stage, things are trending well on all of these fronts. We've seen increased sales velocity and a reduction in cost optimization discussions that may lead to reduced volumes. And we successfully targeted and taken share from our competitors. And so we're very, very excited about what is going to come in 2024. As we look ahead Obviously, we're not providing guidance, but at this stage, we believe we will be able to return to year-over-year revenue growth in the back half of 2024, and we would hope to sustain that into 2025.
Morgan
Got it. Got it. And then your free cash flow guidance, so despite the revenue headwinds, margin headwinds this year, the free cash flow remains solid, even like revenues down relative to two years ago, but free cash flow is not. So going forward, like if for there are like continued revenue headwinds, what should we expect for free cash flow? Are there more levers that you have to protect free cash flow to continue to grow free cash flow?
Taskus
Yeah, so hey, thanks for the question. So like I said, we delivered very strong free cash flows despite a very challenging macro environment in 2023. And as a reminder, we delivered $131 million, close to about 60% adjusted EBITDA conversion, which excludes payment for the Hallyu acquisition. And the way we did this is due to the proactive multi-year efficiency effort that we announced pretty early in 2023. And we kind of reacted pretty early in terms of the changes that we saw from a macroeconomic perspective. We continue to optimize capex spend by leveraging existing investments. And we also actually started to manage our working capital, including like a new invoicing process. So like Bryce said earlier, this is an ongoing activity, which is now part of the DNA of the business. So it is not like one time project, it's something that we're going to continue to do. So we are confident that we'll continue to generate strong free cash flows despite any changes that we might see in the business environment.
Bryce
Got it, thank you.
spk13
Our next question will come from the line of Maggie Nolan with William Blair.
William Blair
Hi, thank you for taking my question.
spk11
I wanted to expand on something that, Bryce, you briefly touched in your prepared remarks. You mentioned the focus on enterprise clients, and I wanted to kind of understand your progress there, maybe how you've adjusted the go-to market versus when you were more historically focused on maybe tech clients or more kind of emerging disruptive clients.
Bryce Maddock
Yeah, thanks so much for the question, Maggie. So we continue to expand our sales and client service teams. Over the course of 2023, we've recruited a number of industry veterans who've got deep experience selling into the enterprise space. I mentioned on the call that we successfully signed a leading credit union in Q4, and I think That's one of many examples of the success we've seen selling both into banking and financial service clients and more traditional enterprise healthcare clients. This is obviously one of the four important growth levers for us as we continue into 2024. And we really see the enterprise as forming a much more stable ballast of revenues that, you know, there may not be ripe for exponential growth, but they're also not going to see the decline that we've seen in certain pockets of the high-growth tech space. So we'll pair that strategy with continuing to be a leading provider in the high-growth technology space, and the combination of those two things will lead us back to growth.
Maggie
Okay, that's helpful. Thanks.
spk11
And then can you just talk a little bit more about, within that context of that last comment you made, leading you back to growth, The second half in particular, it seems like you feel a little bit more optimistic about. Can you talk about your visibility levels into the second half? Maybe talk about what level of optimism is just driven by year-over-year comp versus some of the initiatives you were just outlining and any others. Thank you.
Bryce Maddock
Yeah, thanks, Maggie. The first half of the year, we've got very strong visibility into. Historically, we've always demonstrated an ability to accurately forecast our quarterly revenues. And this is based on the strength of our relationships with our clients and the contractual terms that we've got in place to protect us against any major volume fluctuations. As we look into the second half of the year, our confidence is really based on the budget conversations that we've been having with our clients. And I'll give you just an example of our top three clients. Last year, our top three clients' revenue declined by a double-digit percentage when you combine the three of them. And this is led by our largest client where we saw massive shifts of volume from onshore to offshore. And This year, we are forecasting that that group will grow by a single digit percentage. So we're going from a pretty substantial decline back to fairly modest growth. That gives us confidence that the base of the business is a lot more secure in 2024 and that the strong sales momentum that we've seen in the first quarter will get us back to growth.
Maggie
That was really helpful. Thank you.
spk13
Our next question will come from the line of Dave Koenig with Baird.
Dave Koenig
Yeah. Hey, guys. Thank you. I guess my first question, your margins have held up extremely well despite some volatility in revenue, and I know part of that is the offshore shift. Now that you're pretty fully out of the U.S., you won't get the kind of the incremental benefit to margins, but you know, is there some other offset or I mean, could margins come down or how do you see that now that you might not get that kind of incremental, um, uh, kind of benefit from the shift?
Taskus
Yeah. So, Hey Dave, I'll take the question and I'll have, uh, I'll have Bryce to add more color if required. So we did see benefit from an offshore mix shift in 2023, but some of the drivers that we've been focused on is one is we started the optimization and efficiency building process sometime late part of 2022. And like I said earlier, that's kind of part of the business now. So we'll continue to find efficiencies from an operational perspective, from a GNA perspective. So that's something that we'll continue to try. Second is, as Bryce spoke about growth rates, especially in the second half of the year. So as we start seeing growth rates improve, we will begin to see that margins also will start to expand. And then we'd also continue to see that the growth is happening more in offshore locations. And like we have spoken about this before, those are margin-attractive. So again, that's going to help from a margin perspective. And then as we continue to grow some of our specialized service lines, we've seen that these are higher margins. So, again, that's going to be a focus area from a business perspective. So those are some of the things that we are thinking about as how to deliver margins that we are getting into 2024. Gotcha.
Dave Koenig
Okay. No, that's really helpful. And I guess the second question, you know, you guys are signing new clients at a pretty amazing pace still. And, you know, it wasn't long ago, you were probably around a hundred, you're probably around 200 clients now, give or take. But given the, you know, given revenue hasn't grown a ton lately, the average size client is, is smaller. Is, you know, maybe what are the dynamics there? Are you just doing smaller deals or is that just the incremental client that comes on just doesn't need as much service or, How should we think about that dynamic over time?
Bryce Maddock
It's a great question, Dave. The number of clients that we closed in 2023 was the highest that we've seen since we started keeping track of this number back in 2018. So we were very pleased to see that. But you're right that the initial deal size was smaller than we've seen historically and Part of that is because we're seeing more interest for offshore deals. So while the volume of work may be the same, the dollar value associated with that work is lower in an offshore environment than in the United States. And as we think about this going forward, I think it's just important that we continue to maintain our sales velocity and bring on more clients because each one of these clients has the opportunity to scale exponentially if their business model begins to grow. So that's really what we've seen there. The other thing I'll just say is some of the challenges we faced in 2023 were more to do with our large clients optimizing their spend As I already said, our top three clients' revenue declined by a double-digit percentage in 2023, and we've now seen that stabilize. That number will increase by a single-digit percentage in 2024.
Dave
Gotcha. Well, thank you.
Operator
Our next question comes from the line of Matthew Roswell with RBC Capital Markets.
Matthew Roswell
Yes, good afternoon. This is Matt Roswell, one for Dan Perlin. A question on the AI Assist. How do you think about balancing pricing and investment in internal solutions like AI Assist against helping companies that are investing in their own solutions? What's the dynamic between those two?
Bryce Maddock
Yeah, thanks for the question. Assist AI is a platform that our teammates use to improve their productivity and the accuracy or quality of the responses or actions that they take. And this is a technology that we're actually baking into our service free of charge to our clients. We think that the future of our industry is going to require service providers to bring a well-trained combination of both teammates and technologies to solve client problems. And, you know, we've been wrestling quite a bit with, OK, how do we do this in a way that is margin accretive and protects our underlying revenue? And where we've gotten is we need to be the best and most efficient and most high quality provider in terms of services. And that in the cases in which we're able to do that, to take the number one spot amongst all the vendors that we're competing against, we capture more share. of the client spend and where we can demonstrate service excellence, clients tend to also give us more work that they may have been doing historically inside their own operations. The second part of your question is that the entire industry that's being created in front of our eyes, the generative AI industry, requires a huge amount of services. Everything from expert prompt writing, to red teaming the various generative AI tools to kind of provoke them to create illicit content. to some of our more traditional trust and safety services. And so we've seen an uptick in demand from Gen A companies for our core trust and safety and AI services. And as companies continue to invest more and more in those services, we think that we will benefit from that. That being said, we're not seeing that many examples of clients building their own generative AI technology for our core workflows, things like customer service. There are definitely a few. There were some interesting headlines today. But for the most part, we're seeing clients are interested in either using a third-party technology or on partnering with a company like Taskus, who has assist AI as a core solution that we bake into our services.
Matthew Roswell
Okay, thank you. And as a follow-up, should we anticipate any changes to capital allocation now that sort of the revenue growth seems like it's coming back?
Bryce Maddock
Well, I can start and follow you. Maybe you can jump in there. You know, we are going to be investing more in sales and marketing as well as technology. And so right now, the number one use of capital is going to be funding the expansion of our growth teams. We expect that those investments will pay off here in the near term, as we said, getting back to growth in the back half of the year as well within our sites. Beyond that, we continue to look at the uses of capital for everything from CapEx to potentially share repurchases at the right prices and also considering the potential of M&A.
Bryce
Okay, thank you very much.
Operator
Our next question comes from the line of Matthew Van Bliet with BTIG.
Matthew Van Bliet
Hi, good afternoon. Thanks for taking the question. I guess first was where do we stand at in terms of the progress of I guess, the offshoring initiatives of a number of clients, especially the larger ones. Are we pretty much through all of that now, or are there still some sort of in-process movement there? And then sort of natural follow-up there is, how much do you anticipate other clients looking to further offshore maybe any U.S. revenues that are still here today?
Bryce Maddock
Yeah, great question. So in 2023, we saw U.S. revenues decline by more than $100 million from 2022. U.S. revenues ended up about $148 million in 2023. So it was the only region that we report on that declined. All of our other regions, Philippines, India, and the rest of the world, grew year over year in 2023. So as we look at the future here, clearly with almost $150 million in revenue in the U.S., there is some risk. We've said for a while that we don't expect the percentage of our overall revenue to ever dip below 10%. It was at 14% of revenues coming from the U.S. in Q4 of 2023. So there is a possibility of some risk. incremental onshore to offshore shifts, but those will not be anywhere near the size of the onshore to offshore shifts that we saw in 2022 and 2023.
Matthew Van Bliet
Okay, very helpful. And then when you talk about a greater focus on some of the specialty services, especially being sold back into the existing client base, you know, I guess at what point during the year do you expect that to show sort of an inflection point higher? And, you know, I guess how many of the clients that have gone through, you know, a pretty detailed offshoring initiatives over the last year plus are now ready to sort of come back and look for more opportunities to use Task Us, especially for those specialty services?
Bryce Maddock
Yeah, I mean, we're seeing a real increase in demand for our specialized services. As I said, you know, the number of clients who are using I should say two or more of our specialized services has increased quite substantially in 2023 over 2022. The growth in our trust and safety offering, which also includes all the risk and response work that we do for financial crimes and compliance, is really, really encouraging. I think the decline that we saw in our AI services revenues is really driven by two simultaneous impacts. The first is that over the course of 2023, our largest client cut spending on certain AIS-related R&D investments. And the second is that our largest autonomous vehicle client has It did a huge onshore to offshore shift in 2023. So we expect to lap the impact of those towards the back half of 2024. And we're continuing to see an uptick in the number of customers who are using our AI services. A lot of these clients are coming from the generative AI space. And while the projects themselves may be starting small, I think there's massive potential upside. So we're excited and encouraged to see a continued increase in demand for our specialized services.
Bryce
Great. Thank you.
spk13
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. you Bye.
spk07
Thank you. Thank you.
Operator
Good afternoon, and welcome to Betasca's fourth quarter and full year 2023 earnings call. My name is Liz, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speaker's remarks, there will be a question and answer period. To ask a question during this session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. I would now like to introduce Trent Thrash, Senior Vice President of Corporate Development and Investor Relations. Trent, you may begin.
Betasca
Good afternoon, and thank you for joining us for the TASCUS fourth quarter and full year of 2023 earnings call. Joining me on today's call are Bryce Maddock, our co-founder and chief executive officer, and Balaji Shekhar, our chief financial officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the investor relations section of the website at ir.taskus.com. We have also posted supplemental information on our website, including an investor presentation and an Excel-based financial metrics file. Please note, this call is being simultaneously webcast on the investor relations section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements regarding our future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. you should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from these forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 6, 2023. This filing is accessible on the SEC's website and our website at ir.tascus.com and may be supplemented with subsequent periodic reports we file with the SEC. We expect our 2023 10-K to be filed with the SEC no later than March 15th of 2024. Any forward-looking statements made on today's conference call, including responses to questions, are based on current expectations as of today, and TASCUS 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 or a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP metric. Please see our earnings press release, which is available in the IR section of our website. Now, I will turn the call over to Bryce Maddock, our co-founder and chief executive officer.
Bryce Maddock
Bryce? Thank you, Trent. Good afternoon, everyone, and thank you for joining us. I want to start by expressing my deep gratitude for our Taskus teammates around the globe who have worked tirelessly over the holidays and into the new year to deliver for our clients and our shareholders. As a result of their efforts, we outperformed the top end of our revenue and adjusted EBITDA guidance for the fourth quarter. We delivered $234.3 million in revenue compared to guidance of between $225 and $227 million. In terms of profitability, we delivered $59 million in adjusted EBITDA for an adjusted EBITDA margin of 25.2%, 270 basis points above our guidance of 22.5%. For the calendar year 2023, we delivered $924.4 million in revenue and $220.8 million in adjusted EBITDA, representing an adjusted EBITDA margin of 23.9% compared to guidance of 23.3%. Finally, we delivered $131 million in free cash flow in 2023, excluding acquisition-related payments, well above our guidance of more than $115 million. While I'm pleased with our team's efforts and results, we are not satisfied. 2023 was a challenging year, and we did not deliver anywhere near the top line growth rates that we have historically. In 2024, we're determined to do better and to return to consistent year-over-year revenue growth. While it is still early in the year, 2024 is off to a solid start. Despite a macro backdrop that remains challenging, we've continued making investments in technology, sales, and marketing. We're pleased with the dividends that those investments are producing and have seen increasingly strong demand over the first quarter of the year. I'll recap some of the highlights from our Q4 and full year 2023 performance before discussing our 2024 outlook. Bology will then walk through our financials and 2024 guidance in greater detail. Q4 revenues were $234.3 million, a 3.3% decline on a year-over-year basis, consistent with Q3's rate of decline and ahead of our expectations. On a sequential basis, Q4 revenue increased by 3.8%, largely as a result of seasonal volumes. As anticipated, Revenue from our top 20 clients declined 10% year-over-year in Q4 as a result of certain clients' cost optimization and offshore migration efforts, including those by our largest client. These top 20 revenue headwinds were partially offset by growth from new and existing clients that moved into our top 20 for 2023. Year-over-year revenue growth from customers outside the top 20 accelerated to 13% in Q4 versus 8% in Q3. We expect to continue to grow clients outside of our top 20 at a faster rate than our largest clients in 2024 as we continue to diversify our client base and expand our business in new areas like healthcare and banking and financial services. In terms of delivery geographies, on a year-over-year basis, revenues from U.S. delivery declined 35% in Q4, while revenue from all other geographies grew by 5%, demonstrating the strength of our global delivery model. Q4 again saw rapid growth in Latin America. Revenue from the region grew approximately 78% year-over-year. At the end of 2023, approximately 96% of our total headcount was outside the United States. We ended the year with approximately 48,200 global teammates, an increase of approximately 1,200 teammates quarter over quarter. As noted in Q3, we continue to make progress on our strategy of cross-selling our specialized services. In Q4, we saw a 30% year-over-year increase in clients utilizing more than one of our service lines. We also continued expanding our presence in new markets, including adding notable use cases for enterprise clients in the healthcare and banking and financial services spaces, as well as fast-growing technology clients in the autonomous vehicle and generative AI markets. In addition to supporting clients in the generative AI space, on the development and support of their technology, we are integrating generative AI into our core service offerings. In 2023, we launched PassGPT, our GenAI platform, with multiple clients. We continue to believe that these tools will yield the greatest returns when they're trained on client-specific data and utilized by talented teammates to ensure efficient, consistent, and secure results. In line with this, we're excited to announce Assist AI, our knowledge assistant built on the TaskGPT platform. Assist AI is custom trained on our clients' knowledge bases, training materials, and historical customer interactions. Our teammates chat with Assist AI to answer customer questions more efficiently and accurately in our digital CX business, or to ensure they're utilizing the latest policy when taking action on a piece of content in our trust and safety business. We are offering Assist AI to all Taskus clients as an integrated part of our service offering. Going forward, we will deliver a well-trained combination of technology and talent to support our clients, protect their brands, and deliver for their customers. During 2023, We also made continued progress on our internal cost efficiency programs in order to maintain our strong margin and free cash flow performance in the face of our clients' own cost optimization efforts. We remain vigilant on cost in the business, not as a one-time optimization program, but as an ongoing fundamental discipline to ensure we remain competitive. Shifting to sales, 2023 was characterized by slower decision-making and an intensified focus on cost reduction compared to prior years. Despite this, our sales team delivered. We added 47 new clients, the most in any year since 2018. Partially as a result of this success, we have further improved our client concentration. In Q4, clients outside the top 20 drove 34% of our revenue versus 29% in Q4 of 2022. We ended 2023 with 97 clients who we billed $1 million or more for services up from 86 in 2022. In Q4, sales were again driven largely by bookings from existing clients, which accounted for approximately 70% of total new business signings. we ended the year with a strong pipeline of opportunities with both new and existing clients. We're encouraged by the size, quality, and depth of pipeline opportunities across our service lines at the end of 2023, and we continue to see improved sales momentum in 2024. Turning to our service lines, in Q4, digital customer experience revenue declined by 4.4% compared with Q4 of 2022. Consistent with prior quarters, expansion with existing clients and new client signings was offset by the decline in revenues from our largest client, as well as cost optimization and volume declines in other clients. On a sequential basis, our DCX revenues were up by 4.1%, inclusive of seasonal revenues. In Q4, we saw strong signings activity from existing DCX clients in the technology and on-demand travel and transportation spaces, as well as with non-crypto fintech and enterprise financial services clients. We also continue to be encouraged by the increase in opportunities we're seeing to provide sales and customer acquisition services to clients across multiple vertical markets. We signed a DCX contract leveraging the capabilities of our HALU team to support a European-based financial services client. We also won a competitive bid process to provide support from our U.S. operations for a leading credit union. This win is a direct result of the 2023 investments we made in banking and financial services expertise in order to provide balance to our core fast-growing technology clients. This type of work in regulated industries is a great example of U.S.-based delivery services that we believe are likely to remain onshore regardless of the economic environment. We also see the U.S. continuing to be a key geography for delivering specialized services to healthcare clients. Our trust and safety service line continued to perform well in Q4. Trust and safety growth further accelerated in the quarter growing 23.5% year-over-year and 7.3% quarter-over-quarter. Q4's growth was largely driven by the continued growth in our large on-demand travel and transportation clients, as well as certain clients in the social media, technology, and fintech verticals. This growth, again, more than offset the volume declines we saw from our largest equity trading client, which will cease to provide difficult year-over-year growth comparisons after Q2 2024. Our trust and safety service line includes both our content moderation offerings and the work of our risk and response teams, which deliver financial compliance, risk, and fraud detection services. While we don't separately report this offering, we're pleased that our Q4 risk and response revenue growth was again accretive to the overall growth rate of the trust and safety service line. Speaking of our risk and response team, I'm proud to announce that we were named a leader in Everest Group's financial crime and compliance operations services peak matrix for 2024. Demand for all of our trust and safety services continues to grow. In Q4, we saw a notable win with a Decacorn startup in the graphic design space. We now provide multilingual content moderation to this client. We also began supporting a provider of consumer credit building and financial education solutions with both our DCX and risk and response service line. This is another clear demonstration of our success in cross-selling highly specialized services to both new and existing clients. AI service revenues declined 26.5% in Q4 compared with Q4 of 2022, driven primarily by a mid-2023 decision to offer certain U.S.-based work by our largest autonomous vehicle client and a reduction in U.S.-based delivery at our largest client. As discussed in Q3, the health of these two large client relationships remains very strong. In fact, we won exciting new projects at both clients in Q4 and early Q1 that will ramp in 2024. We anticipate existing AI services revenues from these clients to stabilize on a sequential basis in 2024 and the difficult year-over-year comparisons within our AI service line to lapse by year-end. Despite the revenue decline, we're selling our AI services to a greater number of clients. The number of clients using our AI services grew by a double-digit percentage year over year in 2023. In line with this, we're seeing growing demand for AI services from large language model and multimodal generative AI providers. Here, our teams are performing expert response writing, ranking and scoring, prompt review, adversarial testing, and trust and safety evaluations. We expect these clients and new opportunities to become an increasingly larger portion of our AI services revenue over the course of 2024. Speaking of 2024, let's move to our Q1 and full year 2024 revenue outlook and growth strategy. In Q1, we expect to deliver revenues between $222.5 million and $224.5 million. a decline of approximately 5% year-over-year and quarter-over-quarter. The year-over-year decline is primarily driven by U.S.-based projects that concluded at the end of Q1 2023 for our largest client and other client cost optimization decisions made throughout 2023, while the quarter-over-quarter decline is primarily driven by Q4 seasonal revenues. We expect to deliver full year 2024 revenue of approximately $925 million at the midpoint of our guidance range of between $900 million and $950 million in revenue. The improved momentum we saw in Q4 and early Q1 gives us confidence that we can return to year-over-year growth in the back half of 2024, delivering revenues that are roughly flat to 2023 for the full year, and accelerating growth rates as we exit 2024. We now believe that the material revenue headwinds created by 2022 and 2023's onshore to offshore shifts are largely behind us. As noted last year, we work closely with our clients as part of their annual budgeting processes. As a result of these conversations, our strong Q4 results and the progress made in early Q1 across sales, hiring, and new program ramps we are cautiously optimistic. While revenue declined in 2023 at a few of our largest clients, we expect revenues at these same clients to be flat to slightly up year over year in 2024. However, clients continue to look for ways to reduce costs by leveraging automation technologies and global delivery models. We believe this will continue in 2024, but that for a variety of reasons, including regulatory and privacy concerns, and the complexity of certain work, approximately 10% of our revenue will be derived from the U.S. for the long term. As a frame of reference, we delivered approximately 14% of our revenue from U.S. delivery in Q4 of 2023, down from 21% in Q4 of 2022. As our U.S. revenues stabilize, we believe that our international footprint will continue to be a driver of future revenue growth. For 2024, we're focused on four initiatives to accelerate revenue growth. First, we will take share from our competitors. Whether it's an existing or new client, we continue to see meaningful opportunities where we are underpenetrated from a wallet share perspective. This includes an increased focus on some of the biggest technology companies in the world, as well as traditional enterprise clients. Many of these clients and prospects who have annual outsourcing budgets in the hundreds of millions of dollars are only spending a few million dollars with TaskUs today. Recent large-scale industry consolidation has created opportunities for TaskUs to capture incremental share to help clients better diversify their partner networks. So we are doubling down on our investments in sales and client services to grow these relationships. Our solid performance in the second half of 2023 in the face of significant challenges gives us confidence that our team can compete with anyone and win. Next, we will continue to focus on diversifying our client base by landing enterprise clients in the banking and financial services and healthcare spaces. These clients' more consistent spending patterns will create a stable ballast of revenues, while our continued leadership in servicing high-growth technology clients will enable rapid growth in the years to come. We've built teams of experts in both enterprise verticals and have seen solid early progress. Third, we will continue to successfully cross-sell our specialized services for our client base. Whether it's a trust and safety client utilizing our AI services to help develop their latest generated AI tool, or a risk and response client bringing in our instructional designers to overhaul their training curriculum, we will continue to expand our client relationships by selling more of our specialized services to our existing clients. And finally, we aim to lead the industry on the deployment of generative AI tools to support the delivery of services to our clients and their customers. We are very excited to offer our Assist AI tool to all TASCAS clients. This tool improves the accuracy and efficiency of our teammates across digital customer experience, trust and safety, and risk and response workflows. We believe the future of this industry will require companies to deliver well-trained teammates and technologies to solve client challenges. And with the launch of Assist AI, we're making strong progress towards this vision. By executing on these initiatives, I believe that we will achieve our 2024 goals and return to accelerating year-over-year growth in the back half of the year while maintaining industry-leading adjusted EBITDA margins and free cash flow generation. With that, I'll hand it over to Balaji to go through the Q4 financials and our 2024 guidance in more detail.
Taskus
Thank you, Bryce, and good afternoon, everyone. I'm going to focus my remarks primarily on our fourth quarter, but will reference a few key full year metrics. Please note that some of these items are non-GAAP measures, and the relevant reconciliations are attached to the press release we issued earlier today. The fourth quarter was another quarter of both top line and bottom line performance that exceeded expectations. While revenue declined by 3.3%, year over year to $234.3 million, we came in higher than the midpoint of our guidance of $226 million. Adjusted EBITDA of $59 million and adjusted EBITDA margin of 25.2% came in higher than our guidance of 22.5%, primarily due to better than forecasted revenues, as well as lower than expected seasonal costs. Adjusted EBITDA margins improved by 130 basis points compared to Q4 of the previous year. For full year 2023, revenue declined by 3.8% to $924.4 million, but came in above the top end of our guidance range of $917 million. We achieved adjusted EBITDA of $220.8 million for an adjusted EBITDA margin of 23.9%, again, above our guidance of 23.3%. The strong revenue performance in the fourth quarter compared with guidance was driven primarily by volume risks that we expected not materializing, along with strong seasonal revenues that we discussed in our Q3 calls. The stronger than expected results also reflected our ability to ramp and consistently deliver on key metrics for our clients. Moving on to our service offerings. In the fourth quarter, our digital customer experience offering generated $151.9 million for a decline of 4.4%. Our trust and safety business grew 23.5% to $52.2 million. and AI services declined 26.5% to $30.1 million. In Q4, we continued to see the diversification of our revenue base. Our revenue concentration with our largest client was 19%, consistent with Q3, but down from 22% in Q4 of 2022. Our top 10 and top 20 clients accounted for 55% and 66% of our revenue, respectively, compared to 58% and 71% in the prior year as our consistent march towards a more diversified revenue base continues. In the fourth quarter, we generated 56% of our revenues in the Philippines, 14% of our revenues in the United States, and 12% of our revenues from India and 18% of our revenues from the rest of the world, mainly driven by our operations in Latin America and Europe. Cost of service as a percentage of revenue was 58.6% in the fourth quarter, compared to 57.5% in the prior year. The year-over-year increase was driven by depreciation of the US dollar against some of the currencies in our major delivery geographies, wage inflation and expenses associated with our return to the office, which was partially offset by the geographic mix of revenues and operational efficiency gains. In the fourth quarter, SG&E expenses were $48.9 million, or 20.9% of revenue, compared to $64.5 million, or 26.6% of revenue, in the prior year. This decrease was driven by our disciplined cost efficiency program, as well as a $4.8 million reduction in our earn-out expense, associated with the HILU acquisition, and a decrease in stock compensation expense from $13.3 million in Q4 of 2022 to $9.8 million in Q4 of 2023. We earned adjusted EBITDA of $59 million and a 25.2% margin in Q4, compared to $57.9 million and 23.9% margin in the fourth quarter of last year. The reduction in revenue and increased cost of service was more than offset by savings in SG&A. For the full year, we achieved $220.8 million in adjusted EBITDA and an adjusted EBITDA margin of 23.9% above our guidance range. Adjusted net income for the quarter was $32.2 million. and adjusted EPS was 35 cents. For the full year adjusted net income was 126.5 million dollars and adjusted EPS was one dollar and 32 cents. This compares to adjusted net income of 33.3 million dollars and adjusted EPS of 33 cents for the fourth quarter of 2022 and $142.8 million in adjusted net income and $1.39 of adjusted EPS for full year 2022. Adjusted EPS in 2023 benefited from a lower number of weighted average shares outstanding as a result of our share repurchases. Now moving on to our cash flow and balance sheet. Free cash flow was $31.7 million in Q4. For the full year, free cash flow excluding payments for earner consideration was $131 million, exceeding our guidance of greater than $115 million. This represents a conversion rate of 59.3% of adjusted EBITDA for the full year. Cash and cash equivalents were $125.8 million as of December 31, 2023, compared with the September 30 balance of $114.6 million. Our capital expenditures increased in the fourth quarter to $8.1 million, or 3.5% of revenue, compared to $7.7 million, or 3.2% of revenue, in the prior year. For the full year, CapEx was $31 million, or 3.4% of revenue, compared with $43.8 million, or 4.6% of revenue, in 2022. This full year decrease was driven largely by optimizing CapEx spend and better utilization of existing investments. We maintained our disciplined capital allocation program. As you will remember, this year we allocated an additional $100 million towards our buyback program, bringing the total authorization to $200 million. In the quarter, we bought 2 million shares at an average cost of $9.66 per share for $19.2 million. For the year, we repurchased 10.1 million shares at an average cost of $11.02 per share for $111.8 million. Over the life of the program, we bought back 11.8 million shares and spent $142.7 million at an average cost of $12.10 per share. We will continue to allocate capital to our buyback program on a programmatic basis in accordance with our plan. We maintain low leverage, ending the year with 0.65 net debt to adjusted EBITDA leverage ratio. Our priority remains investing for growth. To this end, we are increasing our investments in sales and marketing. Given the strength of our balance sheet, we have ample capacity for these growth investments while preserving our ability to take action on any M&A opportunity that meets our investment criteria or to return capital in the form of shared repurchases. In summary, we built more efficiency into our global operating model and leveraged automation and shared services resulting in millions of dollars of savings while letting us invest in strategic growth areas like sales, marketing, and technology. As a result, In 2023, we delivered adjusted EBITDA margins and free cash flows that we believe are among the best in the industry. At this point, I will outline our financial outlook for the full year and first quarter of 2024. We anticipate full year 2024 total revenues to be in the range of $900 to $950 million. We expect to earn a full year 2024 adjusted EBITDA margin of approximately 22% to 23%, and we expect to achieve $120 to $130 million in free cash flow for 2024. Our profitability guidance takes into account the impact of typical day inflation that we see on an annual basis and the investments that we are making in strategic growth areas. As a result, in the first quarter of 2024, we anticipate revenues to be in the range of $222.5 million to $224.5 million. And we expect to earn an adjusted EBITDA margin of approximately 22%. The adjusted EBITDA margin for Q1 will be impacted by lower revenues. the partial quarter impact of annual wage increases, and our investments in sales, marketing, and technology. This adjusted EBITDA margin guidance for the quarter and full year is based on current Forex rates, so any change to currency rates would impact our margins. As a reminder, the majority of our revenue is billed and collected in U.S. dollars, so we do not see the impact of U.S. dollar fluctuation in our revenue. I will now hand it back to Bryce before we take your questions. Thank you.
Bryce Maddock
Thank you, Balaji. Before we open for questions, I want to share another Taskus teammate story. At the end of last year, Taskus' senior leaders gathered in the Philippines for our 2024 strategy session. In addition to planning, it was critical to me to bring leaders together from across the globe so that everyone could experience the magic of our sites, and the culture of our people in the Philippines. During one of our site visits, we met with Desiree Omiles. I know Desiree well because she started with Task Us 12 years ago as a transcriptionist when we were still a very small operation. Back then, I still knew everyone's first name. Desiree originally trained to become a nurse. However, when she graduated, the Philippines job market for nurses was very tough. So she took a job with Task Us instead. Today, Desiree is a senior wellness and resiliency coach working directly with our content moderators. She received extensive training from Task Us and now teaches teammates everything from the importance of positive self-talk to the power of music, how to better regulate their emotions. Thanks, Task Us, says Desiree. You've changed my life. I get to make a difference one wellness session at a time, end quote. Reconnecting with Desiree was a powerful reminder for me and our senior leaders of the positive impact TASCUS has on the lives of our teammates across the globe. With that, I'll ask the operator to open the line for our question and answer session. Operator?
Operator
As a reminder to ask a question that is star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question will come from the line of Puneet Jain with JP Morgan.
Morgan
Hey, thanks for taking my question.
Morgan
So I wanted to ask, for 2024, what could be the incremental headwinds that you expect? relative to Q4 of this year. I know there is seasonality in the fourth quarter, but adjusted for that, are there any incremental headwinds that you expect? Asking this because the guidance implies the exit rate of around mid-single digits, high-single digits based on where you end. In the guidance, in that range for the full year, So how should we think about like the long term growth beyond this year for the company?
Bryce Maddock
Yeah, thanks, Puneet. So this year, our number one goal is to return to year over year growth. And given the strong performance in Q4 and the performance we've seen at this point to Q1, we're cautiously optimistic that we're going to be able to do that. So essentially, you know, I think the numbers you're outlining there are happen at the midpoint of our guidance range. And our goal was to try to drive revenues towards the top end of our guidance range. And to do that, we need to execute on the four elements of our growth strategy. We need to get aggressive and take share from our competitors. We need to continue to grow our relationships with enterprise, healthcare and banking and financial service clients. And we need to successfully cross-sell our specialized services. And finally, we have to lead the industry on the deployment of generative AI tools. in our service delivery. At this stage, things are trending well on all of these fronts. We've seen increased sales velocity and a reduction in cost optimization discussions that may lead to reduced volumes. And we successfully targeted and taken share from our competitors. And so we're very, very excited about what is going to come in 2024. As we look ahead, Obviously, we're not providing guidance, but at this stage, we believe we will be able to return to year-over-year revenue growth in the back half of 2024, and we would hope to sustain that into 2025.
Morgan
Got it. Got it. And then your free cash flow guidance, so despite the revenue headwinds, margin headwinds this year, the free cash flow remains solid. Even like revenue is down relative two years ago, but free cash flow is not. So going forward, like if for there are like continued revenue headwinds, what should we expect for free cash flow? Are there more levers that you have to protect free cash flow to continue to grow free cash flow?
Taskus
Yeah, so hey, thanks for the question. So like I said, we delivered very strong free cash flows despite a very challenging macro environment in 2023. And as a reminder, we delivered $131 million, close to about 60% adjusted EBITDA conversion, which excludes payment for the Hallyu acquisition. And the way we did this is due to the proactive multi-year efficiency effort that we announced pretty early in 2023. And we kind of reacted pretty early in terms of the changes that we saw from a macroeconomic perspective. We continue to optimize capex spend by leveraging existing investments. And we also actively started to manage our working capital, including like a new invoicing process. So like Bryce said earlier, this is an ongoing activity, which is now part of the DNA of the business. So it is not like one time project, it's something that we're going to continue to do. So we are confident that we'll continue to generate strong free cash flows despite any changes that we might see in the business environment.
Bryce
Got it, thank you.
spk13
Our next question will come from the line of Maggie Nolan with William Blair.
William Blair
Hi, thank you for taking my question.
spk11
I wanted to expand on something that, Bryce, you briefly touched in your prepared remarks. You mentioned the focus on enterprise clients, and I wanted to kind of understand your progress there, maybe how you've adjusted the go-to market versus when you were more historically focused on maybe tech clients or more kind of emerging disruptive clients.
Bryce Maddock
Yeah, thanks so much for the question, Maggie. So we continue to expand our sales and client service teams. Over the course of 2023, we've recruited a number of industry veterans who've got deep experience selling into the enterprise space. I mentioned on the call that we successfully signed a leading credit union in Q4, and I think That's one of many examples of the success we've seen selling both into banking and financial service clients and more traditional enterprise healthcare clients. This is obviously one of the four important growth levers for us as we continue into 2024. And we really see the enterprise as forming a much more stable ballast of revenues that, you know, there may not... be ripe for exponential growth, but they're also not going to see the decline that we've seen in certain pockets of the high-growth tech space. So we'll pair that strategy with continuing to be a leading provider in the high-growth technology space, and the combination of those two things will lead us back to growth.
Maggie
Okay, that's helpful. Thanks.
spk11
And then can you just talk a little bit more about, within that context of that last comment you made, leading you back to growth, The second half in particular, it seems like you feel a little bit more optimistic about. Can you talk about your visibility levels into the second half? Maybe talk about what level of optimism is just driven by year-over-year comp versus some of the initiatives you were just outlining and any others. Thank you.
Bryce Maddock
Yeah, thanks, Maggie. The first half of the year, we've got very strong visibility into. Historically, we've always demonstrated an ability to accurately forecast our quarterly revenues. And this is based on the strength of our relationships with our clients and the contractual terms that we've got in place to protect us against any major volume fluctuations. As we look into the second half of the year, our confidence is really based on the budget conversations that we've been having with our clients. And I'll give you just an example of our top three clients. Last year, our top three clients' revenue declined by a double-digit percentage when you combine the three of them. And this was led by our largest client where we saw massive shifts of volume from onshore to offshore. And This year, we are forecasting that that group will grow by a single digit percentage. So we're going from a pretty substantial decline back to fairly modest growth. That gives us confidence that the base of the business is a lot more secure in 2024 and that the strong sales momentum that we've seen in the first quarter will get us back to growth.
Maggie
That was really helpful. Thank you.
spk13
Our next question will come from the line of Dave Koenig with Baird.
Dave Koenig
Yeah. Hey, guys. Thank you. I guess my first question, your margins have held up extremely well despite some volatility in revenue. And I know part of that is the offshore shift. Now that you're pretty fully out of the U.S., you won't get the kind of the incremental benefit to margins, but you know, is there some other offset or I mean, could margins come down or how do you see that now that you might not get that kind of incremental, um, uh, kind of benefit from the shift? Yeah.
Taskus
So, Hey Dave, I'll take the question and I'll have, uh, I'll have a price to add more color if required. So we did see benefit from an offshore mid-shift in 2023, but some of the drivers that we've been focused on is one is we started the optimization and efficiency building process sometime late part of 2022. And like I said earlier, that's kind of part of the business now. So we'll continue to find efficiencies from an operational perspective, from a GNA perspective. So that's something that we'll continue to try. Second is as Bryce spoke about growth rates, especially in the second half of the year. So as we start seeing growth rates improve, we will begin to see that margins also will start to expand. And then we'd also continue to see that the growth is happening more in offshore locations. And like we have spoken about this before, those are margin accretive. So again, that's going to help from a margin perspective. And then as we continue to grow some of our specialized service lines, you've seen that these are higher margin. So, again, that's going to be a focus area from a business perspective. So those are some of the things that we are thinking about as how to deliver margins that we are getting into 2024.
Dave Koenig
Gotcha. Okay. No, that's really helpful. And I guess the second question, you know, you guys are signing new clients at a pretty amazing pace still and you know it wasn't long ago you were probably around 100 you're probably around 200 clients now give or take um but given the you know given revenue hasn't grown a ton lately um the average size client is is smaller is you know maybe what are the dynamics there are you just doing smaller deals or is that just the incremental client that comes on just doesn't need as much service or How should we think about that dynamic over time?
Bryce Maddock
It's a great question, Dave. The number of clients that we closed in 2023 was the highest that we've seen since we started keeping track of this number back in 2018. We were very pleased to see that, but you're right that the initial deal size was smaller than we've seen historically. Part of that is because we're seeing more interest for offshore deals. So while the volume of work may be the same, the dollar value associated with that work is lower in an offshore environment than in the United States. And as we think about this going forward, I think it's just important that we continue to maintain our sales velocity and bring on more clients because each one of these clients has the opportunity to scale exponentially if their business model begins to grow. So that's really what we've seen there. The other thing I'll just say is some of the challenges we faced in 2023 were more to do with our large clients optimizing their spend As I already said, our top three clients' revenue declined by a double-digit percentage in 2023, and we've now seen that stabilize. That number will increase by a single-digit percentage in 2024.
Dave
Gotcha. Well, thank you.
Operator
Our next question comes from the line of Matthew Roswell with RBC Capital Markets.
Matthew Roswell
Yes, good afternoon. This is Matt Roswell, one for Dan Perlin. A question on the AI Assist. How do you think about balancing pricing and investment in internal solutions like AI Assist against helping companies that are investing in their own solutions? What's the dynamic between those two?
Bryce Maddock
Yeah, thanks for the question. Assist AI is a platform that our teammates use to improve their productivity and the accuracy or quality of the responses or actions that they take. And this is a technology that we're actually baking into our service free of charge to our clients. We think that the future of our industry is going to require service providers to bring a well-trained combination of both teammates and technologies to solve client problems. And, you know, we've been wrestling quite a bit with, OK, how do we do this in a way that is margin accretive and protects our underlying revenue? And where we've gotten is we need to be the best and most efficient and most high quality provider in terms of services. And that in the cases in which we're able to do that, to take the number one spot amongst providers. all the vendors that we're competing against, we capture more share of the client spend and where we can demonstrate service excellence, clients tend to also give us more work that they may have been doing historically inside their own operations. The second part of your question is that The entire industry that's being created in front of our eyes, the generative AI industry, requires a huge amount of services. Everything from expert prompt writing to red teaming the various generative AI tools to kind of provoke them to create illicit content. to some of our more traditional trust and safety services. And so we've seen an uptick in demand from Gen AI companies for our core trust and safety and AI services. And as companies continue to invest more and more in those services, we think that we will benefit from that. That being said, we're not seeing that many examples of clients building their own generative AI technology for our core workflows, things like customer service. There are definitely a few. There were some interesting headlines today. But for the most part, we're seeing clients are interested in either using a third-party technology or on partnering with a company like Taskus, who has assist AI as a core solution that we bake into our services.
Matthew Roswell
Okay, thank you. And as a follow-up, should we anticipate any changes to capital allocation now that sort of the revenue growth seems like it's coming back?
Bryce Maddock
Well, I can start, and Balaji, maybe you can jump in there. You know, we are going to be investing more in sales and marketing as well as technology. And so right now, the number one use of capital is going to be funding the expansion of our growth teams. We expect that those investments will pay off here in the near term, as we said, getting back to growth in the back half of the year as well within our sites. Beyond that, we continue to look at the uses of capital for everything from CapEx to potentially share repurchases at the right prices and also considering the potential of M&A.
Bryce
Okay, thank you very much.
Operator
Our next question comes from a line of Matthew Van Bliet with BTIG.
Matthew Van Bliet
Hi, good afternoon. Thanks for taking the question. I guess first was where do we stand at in terms of the progress of I guess the offshoring initiatives of a number of clients, especially the larger ones. Are we pretty much through all of that now or there's still some sort of in process movement there? And then sort of natural follow up there is how much do you anticipate other clients looking to further offshore maybe any U.S. revenues that are still still here today?
Bryce Maddock
Yeah, great question. So in 2023, we saw U.S. revenues decline by more than $100 million from 2022. U.S. revenues ended up about $148 million in 2023. So it was the only region that we report on that declined. All of our other regions, Philippines, India, and the rest of the world, grew year over year in 2023. So as we look at the future here, clearly with almost $150 million in revenue in the US, there is some risk. We've said for a while that we don't expect the percentage of our overall revenue to ever dip below 10%. It was at 14% of revenues coming from the US in Q4 of 2023. So there is a possibility of some risk. incremental onshore to offshore shifts, but those will not be anywhere near the size of the onshore to offshore shifts that we saw in 2022 and 2023.
Matthew Van Bliet
Okay, very helpful. And then when you talk about a greater focus on some of the specialty services, especially being sold back into the existing client base, you know, I guess at what point during the year do you expect that to show sort of an inflection point higher? And, you know, I guess how many of the clients that have gone through, you know, a pretty detailed offshoring initiatives over the last year plus are now ready to sort of come back and look for more opportunities to use Task Us, especially for those specialty services?
Bryce Maddock
Yeah, I mean, we're seeing a real increase in demand for our specialized services. As I said, you know, the number of clients who are using I should say two or more of our specialized services has increased quite substantially in 2023 over 2022. The growth in our trust and safety offering, which also includes all the risk and response work that we do for financial crimes and compliance, is really, really encouraging. I think the decline that we saw in our AI services revenues is really driven by two simultaneous impacts. The first is that over the course of 2023, our largest client cut spending on certain AIS-related R&D investments. And the second is that our largest autonomous vehicle client cut did a huge onshore to offshore shift in 2023. So we expect to lap the impact of those towards the back half of 2024. And we're continuing to see an uptick in the number of customers who are using our AI services. A lot of these clients are coming from the generative AI space. And while the projects themselves may be starting small, I think there's massive potential upside. So we're excited and encouraged to see a continued increase in demand for our specialized services.
Bryce
Great. Thank you.
spk13
Thank you. This concludes today's conference call. Thank you for participating. You may now
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