TaskUs Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 10 speakers on the call.

Operator

Good evening, and welcome to Tasca's Third Quarter 2023 Investor Call. My name is Sherry, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question and answer period. I would now like to introduce Trent Slach, Senior Vice President of Corporate Development and Interim Head of Investor Relations.

Operator

Trent, you may begin.

Speaker 1

Good afternoon, and thank you for joining us for the Tascus Q3 2023 earnings call. Joining me on today's call are Bryce Mattock, our Co Founder and Chief Executive Officer and Balaji Sekhar, our Chief Financial Officer. Full details of our results Additional management commentary are available in our earnings release, which can be found on the Investor Relations section of the website atir.tascus.com. We have also posted supplemental information on our website, including an investor presentation and Excel based metrics file. Please note that this call is being simultaneously webcast on the IR section of our website.

Speaker 1

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 ks, which was filed with the SEC on March 6, 2023. This file is accessible on the SEC's website and on our web at ir.tasca.com and may be supplemented with subsequent periodic reports we file with the SEC.

Speaker 1

Any forward looking statements made on today's conference call, including responses to questions, are based on current expectations as of today, Entascus assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law. The following discussion contains non GAAP financial measures. For a reconciliation of each of these non GAAP financial measures to the most directly comparable GAAP metric, please see our earnings press release, which is available in the IR section on our website. Now, I will turn the call over to Bryce Mattek, our Co Founder and Chief Executive Officer. Bryce?

Speaker 2

Thank you, Trent. Good afternoon, everyone, and thank you for joining us. In the Q3, we outperformed both our revenue Adjusted EBITDA margin guidance. We delivered $225,600,000 in revenue compared to the top end of our guidance range of $222,000,000 In terms of margins, we delivered adjusted EBITDA of $52,900,000 For an adjusted EBITDA margin of 23.5%, 110 basis points above our guidance For a 22.4 percent margin. I am so proud of our global team, which continues to work tirelessly despite challenging macroeconomic backdrop.

Speaker 2

As a result of these efforts, we're increasing our revenue guidance for the full year Between $915,000,000 $917,000,000 in revenue, up from a midpoint of $905,000,000 Despite this improvement, the environment remains challenging. In the face of these challenges, our team has continued to focus maximizing cash generation by optimizing our G and A and CapEx spending, while continuing to invest in our generative AI initiatives along with sales and marketing to drive growth. As a result, we generated $32,200,000 free cash flow in the Q3, excluding the impact of our Helu acquisition earn out payment. As a result, we're increasing our full year free cash flow guidance for more than $100,000,000 to more than $115,000,000 excluding the earn out payment. I'll spend some time going through the details of our Q3 performance And we'll then discuss in more detail some of the results of our strategic growth initiatives.

Speaker 2

Balaji will then walk through our financials as well as our updated guidance ranges for the remainder of 2023. Starting with our current clients, Total revenue declined by 2.8% on a year over year basis. Revenue from our top 20 clients declined by 7% year over year in Q3 as the top 20 continued to be impacted by the optimization of our largest clients' delivery model as well as operational efficiency initiatives at certain other clients. Revenue from clients outside of the top 20 Grew by 8% year over year. Revenue from U.

Speaker 2

S. Delivery declined by 33.9% in Q3 year over year, While revenue from all other geographies grew by approximately 6%, demonstrating the strength of our offshore business. Looking at our service offerings, the number of clients who use more than one of our specialized services increased by nearly 28% year over year, demonstrating our ability to cross sell into our base. Focusing first on digital customer experience, revenue declined by 3.6% compared with Q3 of 2022 as expansions with existing clients and new client signings We're offset by declines in revenues from our largest client as well as cost optimization initiatives and declines in volume at a few other clients. In terms of major DCX signings, we are winning business from the competition and are continuing to see internal volumes From certain clients shift to us to drive cost savings.

Speaker 2

We've seen opportunities emerge as clients look to diversify Their partner networks following recent industry consolidation. In Q3, we saw returns on our investments in providing services to clients in the generative AI and healthcare spaces, as well as expanding our DCX engagements with current clients to include sales and customer acquisition services. We signed an expansion of our relationship with the world's leading large language model developer in Q3. With this expansion of our specialized support services, we're now supporting this client across all three of our service lines for multiple delivery geographies. Within healthcare, we signed a multiyear contract supporting the open enrollment activities of a company providing transformative Cloud based technology and services to the Medicare market.

Speaker 2

This win with its seasonal peak in Q4 contributes to our confidence in raising our full year revenue expectations. We also signed an expansion of services to a provider of mental health technology solutions where we're providing credentialing, charting and coding services. We've seen an increase in demand for our sales Customer Acquisition Services as our clients continue to invest in growth. Our largest signing for the quarter came from 1 of our top 3 clients. This client, a food delivery app, tasked us to replace a large incumbent provider And expanded our new merchant acquisition, activation and onboarding services to cover multiple larger geographies after we proved ourselves in smaller markets.

Speaker 2

We now provide these services to multiple clients in on demand travel and transportation. We also added additional sales and customer acquisition work for clients in our retail and e commerce and technology verticals during Q3. These global brands continue to choose TaskUs because of our ability to support their complex, multilingual needs at scale And our tech forward approach to solving their most challenging support and growth needs. Moving on to trust and safety. Revenues in this service offering increased by 10.9% compared with Q3 of 2022, largely driven by the continued growth in our large on demand travel and transportation clients as well as certain clients in the social media and FinTech markets.

Speaker 2

This growth more than offset the volume declines we saw from our largest equity trading client. As a reminder, in addition to content moderation, our trust and safety services also include 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 Q3 risk and response revenue growth was accretive to the overall growth rate of the trust and safety vertical. This is another clear demonstration of our success selling highly specialized services to our client base. Demand for all of our trust and safety services continues to grow.

Speaker 2

The number of clients using our trust and safety solutions increased by 42% year over year. If we exclude our largest client, which was impacted by onshore to offshore mix changes, pest and safety revenue Grew by 22% annually in the quarter. We expanded our relationship with 1 of the world's largest technology companies. We're providing complex work to authenticate and validate submissions from their developer community to their app marketplace. We won this work from a competitor who the client was unsatisfied with due to a lack of innovation.

Speaker 2

This win represents an important entry point for our trust and safety solutions to a client with massive addressable spend. We also signed a contract to implement our proprietary shield technology for the world's leading multi channel social and gaming communications platform, expanding our relationship for a 5th quarter in a row. Shield is a proprietary tool we develop, deliver user safety and content moderator safety all in one platform. It's a wellness tool designed to reduce the emotional impact of reviewing offensive content. The platform includes a variety of wellness interventions with flexible deployment options.

Speaker 2

Notably, this client now is using Shield not only for the work delivered by Cascus, But also for the work done by their internal teams. This is a great example of Tascus' continued leadership and commitment to the health and wellness of the professionals who protect all of us from harmful online content. Moving on to our AI service Revenues declined approximately $5,800,000 or 15.7% on a year over year basis. Here we've simultaneously been impacted by contractions at our largest overall client and our largest autonomous vehicle client. We continue to have very strong relationships with both clients and Tapas continues to be one of their largest providers of AI services.

Speaker 2

In response to the reduced outsource spend on AI services, we've implemented new processes and leveraged our global footprint to achieve greater efficiencies on behalf of both clients. Despite these large client dynamics, we continue to see an expansion in the number of clients utilizing our at AI Services. In Q3, we had 16% more TASSCUS clients utilize our AI services versus the same quarter a year ago. While some of these clients have started with small engagements or project based work, we expect to expand these relationships in the future. Additionally, our AI services pipeline, particularly in the generative AI and autonomous vehicle segments remains strong.

Speaker 2

During the quarter, we signed new business supporting an autonomous vehicle technology provider's vehicle safety operations. This is an expansion of our complex work troubleshooting vehicles in the field. We will now take over the critical response operations In the event of technology related safety issues affecting our clients' riders, we're excited for this new real time service Supporting AI in the field. We also saw expansion at a leading advertising data and analytics provider, which we launched with earlier this year, as well as a number of new AI service projects at our largest client. Last quarter, we highlighted our implementation of Task GPT for our client MoneyLion.

Speaker 2

Our teammates are using CashGPT to quickly and accurately respond to customer questions. We also recently completed the implementation rollout of CashGPT in support of a large e commerce marketplace for unique and creative goods. In both cases, Cash DPP has demonstrated a meaningful improvement in average handle times for both chat And voice support, while improving customer satisfaction. Our sales and client service teams continue to see demand From new and existing clients interested in leveraging cash GPT through both outcome and subscription based pricing models. From a headcount perspective, we ended Q3 with 47,000 teammates, a decrease of 3% compared with Q3 of last year and flat from the prior quarter.

Speaker 2

At the start of this year, we discussed 3 areas of focus to return to revenue growth, Expanding with our large technology and enterprise accounts, serving increasingly global clients from new geographies and focusing on our specialized services. Let me discuss some of the results we're seeing from the investments we are making to support these growth initiatives. First, we continue to expand our relationships with the world's largest technology companies. This holiday season, we're once again ramping a large team for a global e commerce retailer. Throughout the year, Our operations team has continuously improved versus this client's appropriately high service expectations, landing us in the Top quartile of their partners in just 12 months.

Speaker 2

We will double the size of our holiday staff versus 2022 and then look to expand into additional services and geographies with this client over time. We also signed our first trust and safety engagement with another one of the world's largest technology companies. Here we're doing complex work to review and approve submissions to their developer App Store. Finally, we expanded our scope of work with the autonomous vehicle division of one of these companies. We will be providing Vehicle safety operations from the U.

Speaker 2

S. Amongst enterprise clients, we've made solid progress in healthcare and retail and e commerce. In our healthcare vertical, we signed a provider of technology and services to the Medicare market and a provider of technology for Americans seeking mental health assistance. In our retail and e commerce vertical, we continue to ramp our support of multiple clients, including our provider Technology Solutions to Brick and Mortar Businesses, a well known international house of fashion brands and one of the world's best known athletic apparel in footwear brands. We continue to invest in our sales and client service teams to drive growth across new and existing clients.

Speaker 2

2nd, we've continued to expand to serve increasingly global clients from new geographies. We're seeing particularly strong traction in Latin America where we again grew revenue by more than 70% year over year. This quarter, we signed a new client where we will provide multichannel bilingual support to a large global provider of governance, Risk and compliance software solutions for MedEAN Columbia. We expanded our work with one of our top three clients from Cali, Colombia. And we successfully cross sold Spanish language support services to one of the clients we brought on as part of the Helu acquisition.

Speaker 2

This German based provider of remote desktop management software will now be supported from our operations in both Croatia and Colombia. We've seen growth in Japan, Malaysia and Taiwan for the delivery of Asian language services. Revenue from these global delivery geographies grew by nearly 35% year over year in Q3. This quarter, we also expanded our The world's leading audio streaming platform and one of our large on demand travel and transportation clients from Malaysia. We also signed a contract to provide Japanese language support to a global provider of integrated financial technology, commerce in Payment Solutions.

Speaker 2

We also continue to grow our revenue in Greece, where we launched a new site recently and Croatia providing European language Lastly, in terms of specialized services, we continue to see traction across our offerings. I mentioned the significant growth we've seen in our trust and safety offering. Our industry leading position was once again highlighted by the Everest Group as they rank TaskUs a leader in their augmented intelligence, the future of trust and safety is humans plus AI report during Q3. We continue to believe that generative AI, synthetic data and the overall growth And user generated content will lead to long term growth opportunities in the trust and safety market. And we've made great progress in the area of generative AI this quarter.

Speaker 2

First, we expanded our relationship providing support services to the leading large language model provider. Additionally, we deployed more instances of TashGPT for clients and have seen significant improvements to both productivity and client satisfaction as a result of these implementations. Our progress on these growth initiatives is encouraging and I'm confident they will bring us back to revenue growth in time. As I mentioned at the start of the call, the tireless efforts of our team have led to an increase in our full year Revenue guidance between $915,000,000 $917,000,000 up from $905,000,000 at the midpoint of the guidance range we provided last quarter. We expect to generate $225,000,000 to $227,000,000 in revenue in the Q4.

Speaker 2

This includes between $4,000,000 $6,000,000 in seasonal revenue. In addition to losing these seasonal volumes, we expect to see some continued volume reductions given the impact of ongoing macroeconomic uncertainty. As a result, we expect Q1 twenty twenty four revenue to decline from Q4 of this year. We will provide our full year 2024 revenue guidance on our annual earnings call early next year. Given the uncertain growth environment, our team has been hyper focused on improving margins and cash flow.

Speaker 2

In terms of margins, Our ongoing focus on cost optimization, process improvement and technology driven automation continued to pay dividends in Q3, resulting in Q3 adjusted EBITDA margins of 23.5%. We now expect to deliver adjusted EBITDA margins of 23.3 for the full year of 2023 compared with our prior guidance of 23%. In light of our Q3 performance, Our outlook on free cash flow has been revised upward. We now expect to deliver more than $115,000,000 Our free cash flow at any point in our guidance range, excluding payments associated with the Halu acquisition. In this environment, we are very focused on using our cash to generate shareholder value.

Speaker 2

As I discussed, our first priority is to invest in the business to drive growth. We also continue to see M and A as a potential use of cash to drive value in the future. However, we've still not seen private market valuations align with the public market. Given our low leverage ratio of just 0.7 times, we're well positioned to move quickly on M and A when valuations improve. As noted in Q2, given the public valuation of TaskUs, we see continued share repurchases as an attractive use of cash today.

Speaker 2

As of the end of Q3, we had repurchased more than 9,800,000 shares since the start of our share repurchase program. We were much more active in the market during the Q3 driven by our dynamic repurchase plan that allows us to purchase We see repurchasing our stock as a very attractive use of capital and believe that as growth returns, Our repurchases at these levels will result in significant value creation. In closing, we remain focused on executing against our strategic initiatives and investing for growth, while at the same time remaining diligent on our cost structure and driving value for shareholders. With that, I'll hand it over to Balaji to go through the Q3 financials in more detail and provide our outlook for Q4.

Speaker 3

Thanks, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the Q3 of 2023. 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 Q3, we earned total revenues of $225,600,000 Once again beating our guidance range of $220,000,000 to $222,000,000 in revenues. Revenues decreased by 2.8% compared to Q3 of 2022.

Speaker 3

We outperformed compared to our guidance as a result of new client signings and existing client volumes, both of which came in stronger than expected. In the Q3, our DCX offering generated $146,000,000 for a year over year decline of 3.6%, driven by the impact of lower revenues from our largest overall client as well as cost optimization initiatives and declines in volume from a few other clients. This was partially offset by expansions with existing clients and new client signings. Our Trust and Safety business grew by 10.9% compared to Q3 of 2022, resulting in $48,700,000 of revenue. This increase was the result of continued growth in our large on demand travel and As well as clients in the social media and fintech markets offset by the year over year impact from our largest equity trading client.

Speaker 3

Our AI Services business declined by 15.7 Year over year for revenue of $31,000,000 as a result of the contractions at our largest overall client and our largest autonomous vehicle client. Our client base has continued to diversify in Q3. Our revenue concentration with our largest client was approximately 90%, down from 22% in Q3 of 2022, primarily resulting from their cost optimization efforts. Our top 10 and top 20 clients accounted for 55% and 67%, respectively, down from 56% 70% in Q3 of last year. We continue to see strength from our clients outside of our top 20, which grew 8% year over year.

Speaker 3

In the Q3, we generated 56% of our revenues in the Philippines, 14% of our revenues in the United States, 13% of our revenues in India and 17% of our revenues from the rest of the world. We saw particularly strong growth in Latin America. Our cost of service as a percentage of revenue Was 57.7 percent in the 3rd quarter compared to 58% in Q3 of the prior year. The decrease was due to the gain from operational cost efficiency and geographic mix shift, Partially offset by wage inflation and the impact of the weaker dollar in the current quarter compared with Q3 of 2022. In the Q3, our SG and A expenses were $57,100,000 or 25.3 percent of revenue.

Speaker 3

This compares to SG and A in Q3 2022 of $62,300,000 or 26.9 percent of revenue. Stock compensation expenses reduced $1,900,000 compared to the previous year. Adjusted SG and A, which excludes stock based compensation expense, was 19.5% for the quarter. The impact of our cost optimization and other efficiency efforts will continue to drive improvement in our G and A spend. However, As we continue to invest in our generative AI initiatives along with sales and marketing to drive growth, we expect total SG and A as percentage of revenue could increase slightly in Q4 of 2023.

Speaker 3

In the Q3 of 2023, we earned adjusted EBITDA of $52,900,000 23.5 percent margin compared to $55,500,000 23.9 percent in the Q3 of 2022. We were able to offset most of the impact of lower revenue through lower cost of service and our cost optimization initiative in G and A. We came in higher than our guidance for the current quarter, primarily driven by higher than expected revenues and continued operational efficiency gains. Adjusted net income for the quarter was $30,000,000 and adjusted earnings per share was $0.32 By comparison, in the year ago period, we earned adjusted net income of $35,800,000 and adjusted EPS of $0.35 The decline in adjusted net income was primarily due to higher financing expenses Compared to last year, due to the impact of higher interest rates and a higher accrual for taxes due to increased income before taxes. Now moving on to the balance sheet.

Speaker 3

Cash and cash equivalents were $114,600,000 as of September 30, 2023 Compared with the December 31, 2022 balance of $134,000,000 In the quarter, we utilized approximately $48,300,000 for share repurchases, buying back approximately 4,500,000 shares at an average price of $10.62 As of quarter end, We had approximately $76,500,000 of authorization left on our plan. Our net leverage ratio continues to be healthy and was 0.7 times as of quarter end. Cash generated from operations was $21,700,000 for the Q3 of 2023 as compared to $41,500,000 in Q3 of 2022. In the current quarter, We had an earn out compensation payment related to the Hillu acquisition of $18,300,000 Without this payment, cash from operations would have been $40,000,000 Our capital expenditure increased in the Q3 of 2023 to $7,900,000 compared to $6,700,000 in Q3 of 2022. We now expect CapEx to be approximately $35,000,000 for the year.

Speaker 3

Free cash flow was $13,800,000 Our 26.1 percent of adjusted EBITDA for the quarter. Excluding the impact of the payments related to the Hello acquisition, Our free cash flow was $32,200,000 60.8 percent of adjusted EBITDA. As a reminder, we typically have employee related statutory payments happen in Q4, which impacts free cash flow. Year to date, we have generated $81,000,000 of free cash flow, representing a 49.7 percent conversion rate to adjusted EBITDA. Excluding the impact of payments related to the Hillu acquisition, Year to date free cash flow was $99,300,000 61 percent of adjusted EBITDA.

Speaker 3

Along with managing our cost structure, we've also ensured that we continue to deliver on our cash flow goals. In terms of our financial outlook for the remainder of the year, we have updated our guidance. We now anticipate Full year 2023 total revenues to be in the range of $915,000,000 to $917,000,000 We expect to earn a full year 2023 adjusted EBITDA margin of approximately 23.3%, which is higher than the outlook we provided last quarter. We've increased our free cash flow guidance and now expect to deliver More than $115,000,000 of free cash flow at any point in our guidance range excluding the earn out payment associated with these This implies a conversion rate of over 50% from adjusted EBITDA, a great demonstration of our financial discipline during challenging times. For the Q4, We expect revenue to be in the range of $225,000,000 to $227,000,000 and we Our adjusted EBITDA margin to be approximately 22.5% for the quarter.

Speaker 3

As a reminder, Q4 has higher cost of service due to certain seasonal expenses such as holiday pay. This adjusted EBITDA margin guidance for the Q4 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.

Speaker 3

So we do not see the impact of U. S. Dollar fluctuation in our revenues. I will now hand it back to Bryce before we take your questions.

Speaker 2

Thank you, Balaji. Before we open for questions, I wanted to share another TaskUs teammate story. This month, we officially opened our new site in beautiful Thessalonica Greece, Which I visited last July. It was amazing to see teammates from dozens of different countries and cultures all working together in one building. Our teammates here speak more than 30 different languages.

Speaker 2

1 of these teammates Valerie Sabluc is a trust and safety professional Valarie moved to Greece in March of 2022 as a Ukrainian war refugee. It was not easy for him at first, but he started to make new friends in the Ukrainian community in the city. And that's where he first heard about TaskUs. 2 of his new friends were already TaskUs teammates and they encouraged him to apply. We met Valerie at one of our career days and he impressed us with his Russian, Ukrainian and English language skills.

Speaker 2

Today, he's a valued member of our content moderation team and doing extremely well. He takes great pride in ensuring a safer online world, monitoring for everything from offensive images to political misinformation. Valerie's story is just one example of the impact that Taskos has on people and communities all around the world. With that, I'll ask our operator to open our line for our question and answer session. Operator?

Operator

Thank Our first question is from Maggie Nolan with William Blair. Please proceed.

Speaker 4

Thank you, and congrats on the results. I was hoping you could expand on a comment that you had made about your top 20 clients. You referenced some efficiency efforts from clients outside of your top clients. Can you just elaborate on what those are and whether you that trend to improve or worsen or be stable in the coming quarters?

Speaker 2

Yes, Maggie, thanks so much for the question. So What we've seen amongst our top 20 clients is the vast majority of them continue to grow revenue year over year and invest more with TaskUs. However, there have been a few pockets where clients have used Contact deflection and other forms of automation to drive down volumes. We've also seen a few move work from onshore to Offshore. At this stage, we think that this trend is closer to the end than the beginning.

Speaker 2

If we take the example of our largest client, we've seen a decrease in revenue there this year. But at this stage, we would expect revenues to stabilize next year given all the conversations that we're having with them. So we feel good about where we're at despite obviously having a challenge in 2023.

Speaker 4

Thank you. And then In the past, you've mentioned some success at moving clients to outcome based pricing. Are those conversations that you're still engaging in with existing clients? And are they coming up with some of the new clients that you're signing? And any kind of notable progress on this in the quarter?

Speaker 2

Yes. Well, really the Automation efforts that we've been making with TASK GPT have increased the number of conversations we're having about outcome based pricing. We've seen clients become much more interested in fixing unit economics and really kind of baking in savings. And we think that the investments we're making in generative AI will position us well to be able to deliver there.

Speaker 4

Thanks, Bryce.

Operator

Our next question is from Ryan Potter with Citi. Please

Speaker 5

Hey, thanks for taking my question and congrats on the good quarter.

Speaker 3

Yes, so just looking at the

Speaker 5

outlook, you're guiding 4Q to be Flattish on a sequential basis, which would be a nice bounce back from the sequential declines you've seen in the last few quarters. So what's driving This confidence in improving sequential performance. I know you mentioned some seasonal volumes there, but are clients also Like communicating increasing volumes overall in their end businesses to you or do you believe you're also taking some wallet share here?

Speaker 2

Yes, I think it's a combination of all three. We've definitely seen a real success in selling into Certain seasonal volumes this year, I gave the example of our large e commerce client, where we've seen a very significant seasonal ramp, As well as the 1st open enrollment client that we've signed in the U. S. Improving The healthcare business. I think we're also seeing clients, in some cases increase kind of our base business And we've seen some success selling into clients, selling new services into clients who are looking to reduce costs.

Speaker 5

Got it. And then kind of diving more into the healthcare vertical. I mean, I know you mentioned you signed a large enrollment client there. But Is the strength you're seeing in terms of the 4Q ramp or just overall there from just a couple of clients or is it kind of multiple clients you signed over recent And what kind of opportunity do you see overall in the vertical going forward?

Speaker 2

Yes. We've made great progress this year, signing up a number of health And we've got a very active pipeline of healthcare opportunities. I think this will be a really big growth area for us as we head into 2024.

Speaker 5

Got it. Thanks again.

Operator

Our next question is from Puneet Tane with JPMorgan. Please proceed.

Speaker 6

Hey, thanks for taking my question. So I wanted to ask about margins. So for the full year, the guidance is 23.3, Yet you are going to be below that in Q4. So are there any seasonal headwinds to margins that you expect in Q4? And how should we think about next year?

Speaker 6

Is 23.3% the right base for margins next year given like we've been hearing pricing pressure and whatnot

Speaker 3

Yes, great. Thanks, Fili for the question. So in Q3, you're right, we came in higher than our guidance We inject 23.5%, and the full year guidance has been now revised to 23.3%. And that implies that Q4 is at 22.5%. And the reason is because we do incur seasonal expenses, as an example, holiday pay, typically in Q4, and this is something that we see every year.

Speaker 3

So that is factored into these numbers. So while we are not providing guidance for 2024, What I can say is that we will continue to optimize G and A. We'll continue to gain additional leverage from our offshore geographies. Like Bryce mentioned, we are growing those geographies and last is continuing to grow our specialized service lines.

Speaker 6

Got it. And then on top line price, you mentioned that you expect like a sequential Decline from Q4 to Q1 given there is some seasonal benefits that you expect in Q4. But how should we think about Sequential trends beyond Q1 next year, like is the business the incoming business as well as existing book of business at a point That we should we can see growth next year beyond Q1?

Speaker 2

Yes. I mean getting back to growth is the number one Our team has done an excellent job capturing incremental share and new opportunities, which is what allowed us to Revise our guidance range up. Obviously, we'll provide more detailed guidance on 2024 on the next earnings call. But we're focused on this 3 part growth strategy, selling into enterprise clients and big tech clients, selling into new clients in Europe and Asia and Cross selling our specialized services to our portfolio clients and that strategy does seem to be working.

Speaker 6

Got it. Thank you.

Operator

Our next question is from Dave Koning with Baird. Please proceed.

Speaker 7

Yes. Hey, guys. Thanks so much. And yes, nice results. When we think about you gave your employee count 47,000, maybe just reflect a little on Morale like of the just given the backdrop right now, just maybe talk a little bit about wage, Whether inflation or how pay is going, but just kind of the whole feeling of employees and how that's all going right now?

Speaker 2

Yes. Well, I'll start with our frontline teammates, which is the primary focus of everybody in our business. We want to make sure that we've got The best experience for our employees around the globe. And the experience here I think really varies based on the geography. We've got Some geographies where we're growing 70% or more year over year like our near shore geographies in Mexico and Colombia.

Speaker 2

And so it's very easy in that type of environment, I think, to have positive employee morale, lots of opportunities for upward mobility. I think that our offshore business continues to be one where employees are very satisfied, very engaged. In our onshore business, we definitely have challenges. And these challenges exist from the fact that we've seen a substantial decline. I mentioned Nearly 34% decline in revenue over the course of the last year and that's led us to have to say goodbye to a lot Really great frontline talent in the U.

Speaker 2

S. So that does make for a challenging environment. And then I think more broadly from our leadership team's perspective, It has been a challenging 18 months, there's no doubt about that. But the team has stuck together And I'm incredibly proud of the work that they have done. Yes.

Speaker 2

Great. Thanks for that.

Speaker 3

And again quickly touch upon Yes, Deva, let me just quickly touch upon the weight inflation question that you had. So we did see significant weight inflation in 2022, But this has returned to more normalized levels in 2023. And since the share of onshore business is expected to be lower, The impact of wage inflation will be mostly in our offshore location, which has been offset by the mix shift, which is margin accretive as we work Move work more from onshore to offshore locations. And second is we do have cola provisions in our contracts that we've been imposing this year.

Speaker 7

Got you. Okay, thanks. And maybe just as my follow-up, within the content business, how do you See the next several months kind of going with the political cycle like maybe how much of that business is political, how much of it is other stuff, just Kind of how the backdrop might be for that the next few quarters?

Speaker 2

Yes. So I mean clearly our trust and safety business continues to grow And this is being driven both by risk and response work in the financial space as well as content moderation for a variety of different companies, including social networks. As we head into 2024, we do expect To have more work in the political realm, and I think we're well positioned to Capture growth that comes from that. I would just sort of moderate expectations though and just say that we have a team today, I think that's Staff to handle, everything that we're expecting, amongst our current clients. But we also have a lot of opportunities amongst large Social media and video streaming companies that aren't task as clients today in that realm.

Speaker 7

Got you. Thanks and congrats on the great margins too.

Speaker 2

Yes. Thanks so much, Dave.

Operator

Our next question is from James Faucette with Morgan Stanley. Please proceed.

Speaker 8

Thank you. I wanted to follow-up on the margin question. I apologize, I hear you loud and clear that, the December quarter you have some SG and A pressure just Given the nature of the calendar, but with as much growth as you guys are seeing overseas and in new delivery geographies in particular, How can we think about that as a source of SG and A as well as CapEx on a go forward basis? Or are we at the point where we can start to get good leverage on those operations already?

Speaker 3

Yes. So James like in terms of margins for next year like Like I said that while you're not providing any guidance there, but we will continue to optimize on G and A. So there Still opportunities for us to continue to optimize DNA, that's something that I feel like the team did really good work. And in terms of the EBITDA margin guidance for I feel like it's one of the industry leading margins currently. And the so we'll continue to optimize G and A.

Speaker 3

And second is we'll continue to gain additional leverage from our offshore dollar base, but we'll also see the impact of wage inflation getting into next year. Some of these additional leverage that we'll get will be an offset to wage inflation. And then the third is we'll continue to grow our specialized service lines, which we believe is going to be margin accretive. And then again from a CapEx perspective, if you kind of look at what the year to date CapEx has been about 3.3% of revenues. And then for the full year at about $35,000,000 we'll probably be at about 3.8%.

Speaker 3

So we will continue to invest back in the business both in terms of OpEx In sales and in generative AI and also from a CapEx perspective, where it is required in terms of expansion. But again, we've been very mindful this year In terms of where we have to invest, which is leading to these current CapEx predictions.

Speaker 8

Got it. Got it. Appreciate that. And then Bryce, I want to go back to something you talked about. You talked about some of the engagements you have around generative AI and Large language model training, etcetera.

Speaker 8

How are you thinking about the type of investments that task us needs to make Over at the next step in the cycle of generative AI development, training It seems like it's the first, but what comes after that and how should we think about the ways that you'll look to pursue that investment? Thanks.

Speaker 2

Yes. I mean, we've been investing pretty heavily in building a technology organization that's capable of Building a platform in the form of TashGPT. We also have a team of AI experts that lead our AI services line. I think that those investments will increase as we go into next year. We expect to invest more In generative AI, as well as more in sales and marketing to drive growth.

Speaker 2

And then I would just say also though that there is a huge Opportunity for us to grow revenue through the training of large language models and the trust and safety services that These image generation and language models are going to require.

Speaker 8

Got it. Appreciate that.

Operator

Our next question is from William McNamara with BTIG. Please proceed.

Speaker 1

Hi, this is Bill on for Matt. With the support of autonomous driving that is currently in use, is there a number of agents per car We should be thinking about or is it too early to know for vehicle safety operations and kind of how large do you think this can become for task?

Speaker 2

Yes. Thanks so much for the question, Bill. So I think that, at this point, it's very early days in the autonomous vehicle But we're very well positioned. We support a number of the leading makers of autonomous vehicles. And this vehicle safety operation that we launched this quarter is an incredibly exciting expansion of that work.

Speaker 2

At this stage, we're seeing clients look for ways to make sure they're ready to deliver safety for There are cars and riders in the field, but to do so in a way that's a bit more cost efficient. We mentioned One of our large autonomous vehicle clients cutting spend on certain AI services in the last quarter. So it's early days to figure out exactly what that Per CAR ratio to agents would be, but I think we're really well positioned as this space continues to grow.

Speaker 1

Great. Thanks for taking my question.

Operator

Our final question is from Cassie Chan with Bank of America. Please proceed.

Speaker 9

Hi. I just wanted to dig in a little further on your comment on 1Q 'twenty four. Should we expect like a modest sequential decline quarter over quarter versus 4Q Similar to trends we saw in 2023? And also on a year over year basis, could you just clarify, could we just see maybe further year over year deceleration as Well versus call it down 7% based on the guidance today for 4Q? Thank you.

Speaker 2

Cassie, thanks so much for the question. So I think that's right. We're talking about the reversal of those seasonal volumes and the risk of Some incremental churn given the macroeconomic environment. At this point, we're really satisfied with the results We were able to deliver this quarter and we hope to deliver similar results going forward. But Given the more challenging comp in Q4 and in Q1 of next year, the year over year decline may be slightly larger.

Speaker 9

Got it. That's helpful. Thank you.

Operator

This concludes our question and answer session and this We'll conclude our conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
TaskUs Q3 2023
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