TaskUs, Inc. (NASDAQ:TASK) Q1 2024 Earnings Call Transcript May 9, 2024
TaskUs, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the TaskUs’ First Quarter 2024 Investor Call. My name is Daniel and I will be your conference facilitator today. At this time, all participants have been placed on mute to avoid background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to introduce Trent Thrash, Senior Vice President of Corporate Development and Investor Relations. Trent, you may begin.
Trent Thrash: Good afternoon and thank you for joining us for the TaskUs first quarter 2024 earnings call. Joining me on today’s call are Bryce Maddock, our Co-Founder and Chief Executive Officer and Balaji Zucker, our Chief Financial Officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the Investor Relations section of our website at ir.taskus.com. We have also posted supplemental information on our website, including an investor presentation and an Excel-based financial metrics file. Please note that this call is being simultaneously webcast on the Investor Relations section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to statements regarding our future financial results and management’s expectations and plans for the business.
These statements are neither promises nor guarantees, and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from these forward-looking statements can be found on our Annual Report on Form 10-K, which was filed with the SEC on March 8th of 2024. This filing, which may be supplemented with subsequent periodic reports we filed with the SEC, is available on the SEC’s website and our Investor Relations website. Any forward-looking statements made on today’s conference call, including responses to questions, are based on current expectations as of today. and TaskUs assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law.
The following discussion contains non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP 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. In the first quarter, we outperformed the top end of both our revenue and adjusted EBITDA guidance. We generated $227.5 million in revenue, approximately $3 million above the top end of our guidance of $224.5 million. We delivered $50.6 million of adjusted EBITDA for an adjusted EBITDA margin of 22.2%, also above our guidance of 22%. I’m very happy to announce that we now expect to return to year-over-year revenue growth in the second quarter and we expect our growth rate to accelerate in each subsequent quarter this year. We updated our annual revenue guidance and now expect to grow annual revenue year-over-year at any point in the guidance range.
I’m also very pleased with our team’s financial discipline, which is focused on balancing cash flow generation with our investments in sales, marketing and technology, including our Generative AI initiatives. As a result, we generated strong free cash flow in the first quarter of 2024, putting us on track to deliver on our full-year free cash flow guidance of $120 million to $130 million. Next, I’ll spend time going through some of the highlights of our Q1 performance. Balaji will then walk through our Q1 financials, our Q2 outlook and our increased full-year 2024 guidance. Q1 revenue was $227.5 million, a decline of 3.3% on a year-over-year basis, but $4 million ahead of the midpoint of our guidance. The 2.9% sequential quarterly decline was reflective of an anticipated decline in seasonal revenue discussed during our Q4 2023 call, which was partially offset by better-than-expected performance by our top 20 clients during the quarter.
In terms of delivery geographies, revenue from U.S. delivery declined 45% in Q1 year-over-year. As a result, U.S. revenue is now approximately 11% of total revenue, continuing to migrate towards our long-term view that approximately 10% of revenue will be delivered from the U.S. Revenue for all other geographies grew by approximately 7%, demonstrating the strength of our offshore business. Q1 again saw a rapid growth in Latin America with revenue from the region growing by more than 50% year-over-year. We ended the quarter with approximately 490,600 global teammates, an increase of approximately 1,400 teammates from the end of 2023. On the heels of a strong sales performance in Q4, our sales and client services teams have continued to deliver in the face of an unpredictable macroenvironment.
In Q1, sales were again, largely driven by bookings from existing clients, which accounted for approximately 72% of total new signings. We’re encouraged by the size, quality and depth of pipeline opportunities across our service lines from both new and existing clients. During Q1, we also continued to make progress on our strategic goal of cross-selling our suite of specialized services to our client base. The number of clients using more than one of our specialized services increased by more than 20% year-over-year. We also continued expanding our presence in new markets, including adding notable use cases for enterprise clients in the banking and financial services industry, as well as with fast-growing technology clients in the professional services, travel and transportation and social media verticals.
Shifting focus to our service lines. In Q1 of 2024, digital customer experience revenue declined 8.7%, compared with Q1 of 2023. Here, we saw expansions with existing clients and new client revenue, but both of those were more than offset by a decline in revenues from the cost optimization initiatives we discussed on prior calls. In terms of DCX signings in Q1, we saw strength in bookings in our on-demand travel and transportation and non-crypto FinTech verticals. Additionally, we were pleased to see the Q4 momentum in sales and customer acquisition services carry over into Q1 with wins in multiple client verticals, including a large contract signing with a new client that provides technology-enabled legal solutions. We signed a new DCX contract leveraging the capabilities of our teammates from the heloo acquisition to support another European-based financial services client.
heloo also signed contracts to support a pan-European job search application and a provider of digital parking services in Q1. Lastly, as a result of our strong relationship with a leading food delivery client, we signed multiple new DCX contracts to support their vendors and customers from our Colombia operations. Turning to trust and safety, which includes our risk and response solutions, revenue growth in this specialized service offering again, accelerated, increasing by 36% compared with Q1 of 2023 and 5.8% quarter-over-quarter. Q1’s rate of growth exceeded Q4’s solid 24%. This broad-based growth was largely driven by seven clients with increases in excess of $1 million, including the continued strong growth of our largest client from a large on-demand travel and transportation client, and from certain clients in the FinTech market.
During Q1, our risk and response teams, which deliver financial, compliance, risk and fraud detection services, once again, delivered revenue growth that was accretive to the overall growth of the trust and safety service line. In Q1, we were honored to be recognized as a leader in the Everest Group’s trust and Safety Services PEAK Matrix for the second consecutive year, as well as their Financial Crime and Compliance Operations Services PEAK Matrix for the first time. When combined with our Q1 recognition as a leader in their data annotation and labeling solutions for AI PEAK Matrix, TaskUs is now the only company to achieve a leader recognition in all three specialized service offering categories. From a sales perspective, demand for all of our trust and safety services continues to grow.
Similar to recent quarters, we saw strong growth in the number of clients using our trust and safety service line. Notably, we signed a meaningful expansion of our relationship with our largest client in Q1, increasing the scope of both our content moderation, and risk and response services. We also added additional work providing pre-sanctioned streaming services to a provider of card issuing and payment solutions. As a new client in 2023, this revenue expansion is a testament to the quality performance our teammates consistently deliver on behalf of our clients. Moving on to AI Services, revenues declined approximately $8.9 million or 23.6%, compared to Q1 of 2023. AIS revenue continued to be impacted by declines at our largest overall client and our largest autonomous vehicle client.
We continue to see strong sales momentum for our AI service work, including at our largest client, where we signed multiple new AI projects this quarter. Additionally, we signed a contract to support our largest autonomous vehicle client’s expansion of their operations in Texas. As discussed in our Q4 call, we still anticipate AI service revenue from these two clients and AI services in general to stabilize over the course of 2024 as difficult comparisons lapse and recent signings continue to ramp. Before moving on to our updated 2024 outlook, I want to provide a brief update on our generative AI initiatives. We believe these technologies have the potential to be incredibly powerful when properly trained, maintained and integrated into our clients’ operations.
TaskUs is well positioned to help clients leverage genAI and other automation technologies across their customer experience. Some of this work will automate services we currently deliver, while other aspects of it will increase demand for our specialized services. To date, we have not experienced any material impact on our revenues from clients directly leveraging genAI to automate processes we currently support. Meanwhile, the development and maintenance of these technologies have increased demand for our specialized services. Today, we deliver services across all three of our service lines for genAI industry leaders. We’re playing often supporting our clients’ automation efforts, while capturing a larger and larger share of the demand for the specialized services that support and protect their use of GenAI.
We’re pleased with the results we’ve seen since making our taskGPT-based knowledge co-pilot, AssistAI freely available to all TaskUs clients. After being trained on our clients’ knowledge bases by our GenAI engineering team, these early use cases have demonstrated measurable improvements in our teammates’ efficiency and quality. In summary, GenAI is going to have a transformative impact on our business in the years to come. We believe it creates significant opportunities for us and that these opportunities will more than make up for the impact of successful automation efforts. While the details are ever-evolving, our core value proposition of delivering a well-trained combination of technology, talent and global delivery capabilities remains the same.
Before handing it over to Balaji to provide more details about our Q1 results, I want to touch briefly on our 2024 outlook. In light of our year-to-date achievements, positive sales momentum and our cautiously-optimistic outlook for the remainder of 2024, we’re increasing the low end of our full-year revenue guidance from $900 million to $925 million and maintained the top end of our outlook at $950 million. This represents a $25 million increase to the lower end of our guidance and a $12.5 million increase in our midpoint, up from $925 million to $937.5 million. Our updated guidance implies a return to annual revenue growth at any point in the range. To support our return to growth, we’re accelerating our investments in sales and marketing, technology and the capacity and infrastructure needed to deliver on this increased demand.
Despite these investments, we’re maintaining our adjusted EBITDA margin guidance of 22% to 23% and free cash flow guidance of $120 million to $130 million for the full year. We remain focused on executing against our strategic initiatives and investing for growth, while remaining diligent about our cost structure in order to maximize cash flow and drive value for shareholders. With that, I’ll hand it over to Balaji to go through the Q1 financials and our 2024 outlook in more detail.
Balaji Sekar: Thank you, Bryce and good afternoon, everyone. I’m going to discuss our financial results for the first quarter of 2024. Please note that some of these items are non-GAAP measures and the relevant reconciliations are attached to the press release we issued earlier today. In the first quarter, we earned total revenues of $227.5 million, once again, beating our guidance range of $222.5 million to $224.5 million. Revenues decreased by 3.3% compared to the previous year. We outperformed our guidance as a result of new client ramps and existing client volumes, both of which came in stronger than we expected. In the first quarter, our DCX service offering generated $143.5 million for a year-over-year decline of 8.7%.
As Bryce covered earlier, the decline was primarily from certain client cost optimization initiatives, including the Q1 2023 project rundowns from our largest client and the U.S. client, who lost a large contract, both of which we previously discussed in Q1 of 2023. This was partially offset by expansions with existing clients and new clients signing ramps. Our trust and safety business, which includes our risk and response solutions, grew by 36.1%, compared to Q1 of 2023, resulting in $55.3 million of revenue. As we pointed out earlier, we are excited about the fairly broad-based progress in the service line, which included Q1 growth from new and existing clients across our on-demand travel and transportation, social media and FinTech verticals.
Our AI Services business declined by 23.6% year-over-year for revenues of $28.7 million due to contractions at our largest client and our largest autonomous vehicle client. We expect revenues from this service line to stabilize over the course of 2024, as we lap the difficult comparisons resulting from client-driven cost optimization programs in 2023 and as recent signings continue to ramp. Our client base has continued to diversify in Q1. Our revenue concentration with our largest client was approximately 19%, down from 20% in Q1 2023. Despite the prior year’s optimization efforts, we saw revenue from our top clients stabilize beginning Q2 of 2023 and we expect to grow revenues with this client this year. Our top 10 and top 20 clients accounted for 56% and 67% respectively, down from 58% and 71% in Q1 of last year.
We continue to see strength from our clients outside of our top 20, which grew 7% year-over-year. In the first quarter, we generated 58% of our revenues in the Philippines, 11% in the United States, 13% in India and 18% from the rest of the world. We saw particularly strong year-over-year growth in excess of 50% in Latin America. For the full-year 2024, we now expect to see year-over-year revenue growth in all of our delivering geographies with the exception of United States. Our cost of service as a percentage of revenue was 59.5% in the first quarter compared to 58.5% in Q1 of the prior year. The increase was due to typical wage and benefits cost inflation, as well as the net impact of the weaker dollar compared with Q1 of 2023 in Latin America, partially offset by the gains from operational cost efficiency and geographic mix shift.
In the first quarter, our SG&A expenses were $52.9 million or 23.3% of revenue. This compares to SG&A in Q1 of 2023 of $64.3 million or a 27.3% of revenue. Earn-out consideration and stock compensation expenses reduced $6.6 million and $3 million respectively, compared to the previous year. In the first quarter of 2024, we earned adjusted EBITDA of $50.6 million or 22.2% margin, compared to $55 million and 23.4% in the previous year. Adjusted net income for the quarter was $27.3 million and adjusted earnings per share was $0.30. By comparison, in the year-ago period, we earned adjusted net income of $32.5 million and adjusted EPS of $0.32. The reductions in adjusted EBITDA and adjusted net income were primarily driven by the impact of lower revenue, wage and benefits compensation, net Forex impact and investments in strategic growth areas, which were partially offset by our G&A cost optimization initiatives.
Now, moving on to the balance sheet, cash and cash equivalents were $165.4 million as of March 31st, 2024, compared with December 31st, 2023 balance of $125.8 million. In the quarter, we bought back approximately 300,000 shares at an average price of $11.91. And as of quarter end, we had approximately $53.9 million of authorization left on our plan. Our net leverage ratio continues to be healthy and was 0.4 times as of the quarter end. Cash generated from operations was $51.2 million for the first quarter of 2024 as compared to $43.7 million in Q1 of 2023. Our capital expenditure decreased in the first quarter of 2024 to $3.6 million compared to $5.2 million in Q1 of 2023. As Bryce mentioned, the strength of our anticipated client ramps will drive an increase in investments during the remainder of 2024.
As a result, we now expect CapEx to be approximately $39 million for the year. Free cash flow was $47.6 million or 94.1% of adjusted EBITDA for the quarter. Our strong cash flow performance in Q1 was primarily the result of working capital decrease associated with the drop in revenue from Q4 to Q1, and a strong collections activity and low capital expenditures. For the remainder of 2024, we expect lower free cash flow conversion due to increased capital expenditures and the buildup of working capital associated with our return to revenue growth. In terms of our financial outlook for the remainder of the year, we now anticipate full-year 2024 total revenues to be in the range of $925 million to $950 million. Consistent with Q1, we expect to earn full-year 2024 adjusted EBITDA margin of between 22% and 23%.
Including the additional investments supporting our improved outlook, we are maintaining our free cash flow guidance between $120 million and $130 million at any point in our guidance range. This implies a conversion rate of over 50% from adjusted EBITDA, a great demonstration of our financial discipline. For the second quarter, we expect revenues to be in the range of $230 million to $232 million. And we expect our adjusted EBITDA margin to be between 22% and 22.5% for the quarter. The adjusted EBITDA margin guidance for the second 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 built and collected in U.S. dollars. So, we do not see the impact of U.S. dollar fluctuations in our revenues.
Also, please note that our free cash flow guidance excludes the impact of certain litigation costs, which are non-recurring and outside the ordinary course of business. In Q1, we have and we will continue to add back these costs to our adjusted EBITDA. While new material this quarter, we anticipate these expenses will increase as we progress further into 2024. I will now hand it back to Bryce.
Bryce Maddock: Thank you, Balaji. Before we open for questions, I’d like to share another TaskUs teammate story. John Raleigh de Guzman [ph] has been navigating life with cerebral palsy since birth. Cerebral palsy affects movement and muscle tone, and makes everyday mobility very challenging for Raleigh, who relies on crutches to get around. As a Tier 2 dispute teammate supporting a FinTech campaign, Raleigh is responsible for providing timely resolutions to escalated customer complaints. Leveraging his comprehensive understanding of the dispute process and strong customer service skills, he recommends solutions and solves customer problems with each interaction. Raleigh says that his work at TaskUs is more than just a job. It’s a source of purpose and fulfillment.
He is an active member of the TaskUs community in Bulacan, Philippines, where his site is located. On a recent visit to the site, his colleague shared with me how impressive he is. He never makes excuses, shows up to work early and always delivers for our customers. Raleigh embodies our core value inspire others by believing in yourself. His story is just one example of the positive impact TaskUs on people and communities all around the world. With that, I’ll ask the operator to open our line for our question-and-answer session. Operator?
See also 15 Best Places to Retire in Delaware and Top 20 Coal Exporting Countries in the World.
To continue reading the Q&A session, please click here.