Q1 2023 TaskUs Inc Earnings Call

Good morning, and welcome to the task of <unk> first quarter 2023, Investor call. My name is John and I'll be your conference facilitator today at this time all lines have been placed on mute to avoid background noise. After the speakers' remarks, there'll be a question and answer period, if anyone should require operator assistance during the conference. Please press star zero.

And as a reminder, this conference is being recorded I would now like to introduce you to Alan Katz, Vice President of Investor Relations. Thank.

Thank you Allen you may begin.

Good afternoon, and thank you for joining us for the task US first quarter 2023 earnings call. Joining me on the call today are bright smiles are co founder and Chief Executive Officer anthology stuck our Chief Financial Officer.

Full details of our results and additional management commentary are available in our earnings release, which can be found in the Investor Relations section of our website at IR got task that's dot com.

We've also posted supplemental information on our website, including an investor presentation, and an excel based metrics file.

Please note that this call is being simultaneously webcast on the IR section of our website.

Before we start I would like to remind you that the following discussion contains forward looking statements within the meaning of the federal Securities laws.

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 those forward looking statements can be found in our annual report on Form 10-K, which was filed with the STC on March six 2023.

This filing is accessible on the SEC's website and on our website at IR that task of Dot com and may be supplemented with subsequent periodic reports we file with the FTC any forward looking statements made on today's conference call, including responses to questions are based on current expectations as of today and tax cuts it seems 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 on the IR section of our website.

With that I will now turn the call over to Bryce Medical co founder and Chief Executive Officer Bryce.

Thank you Alan good afternoon, everyone and thank you for joining us in the first quarter, we outperformed both our revenue and adjusted EBITDA guidance ranges, we delivered $235 $3 million in revenue compared to the top end of our guidance range of $233 million, we delivered adjusted EBITDA.

<unk> of $55 $2 million for an adjusted EBITDA margin of 23, 5%.

Also well above our guidance of a 21% margin.

Our first quarter results were stronger than expectations, we've revised our revenue outlook for the remainder of the year as the macro environment has become more challenging.

We're seeing a continued lengthening of the sales cycle delaying some forecasted revenues for the year. Additionally, our U S based delivery revenues continued to decline.

The largest client we serve from the U S. Whilst a large contract significantly impacting our forecasted revenues from this client finally, we continue to see volatility and our largest global clients as their development priorities of volt.

In the first quarter, we took decisive action to drive additional operational efficiencies into our own business. As a result, we've improved profitability and now expect to deliver 23, 5% adjusted EBITDA margins for the full year.

At the midpoint of our guidance range, we expect to earn over $220 million and adjusted EBITDA essentially unchanged from last quarter's guidance. We also continue to expect to deliver over $100 billion in free cash flow at any point in our guidance range, excluding an earn out payment associated with <unk>.

Session.

I'll go through the details of our Q1 performance and provide an update on our three strategic growth drivers as well as the impact from our efficiency gains biology will then walk through our financials as well as our updated guidance ranges for Q2 and the remainder of 2023.

Starting with growth with our current clients revenue from our top 20 clients declined by 8% year over year in Q1 impacted by the transition of work offshore at our largest client and the declines in volume at our largest crypto and equity trading clients.

If we exclude those three clients our largest 17 clients grew 20% year over year.

Revenue from our clients outside of the top 20 grew by 17% year over year.

Looking at our service offerings digital customer experience revenue declined by one 6% compared with Q1 of 2022.

Expansions with existing clients and new client signings were offset by the decline in revenues from crypto and equity trading clients.

As a reminder, crypto and equity trading clients, which accounted for 15% of total revenues in Q1 of 2022 dropped to just 4% of total revenues in Q1 of this year.

In terms of major Dcs signings, we continue to win business from the competition in Q1, we signed a fast growing direct to consumer wellness product there.

Their prior Outsourcer was not performing so they turned to us to improve their customer engagement.

We're assisting with customer complaints and new product orders email chat and voice. We also signed a sizeable contract with the consumer savings App. They moved all of their digital support to us from a competitor they were looking to partner with a company that utilize technology to drive efficiency and quality and supporting their customers.

We also expanded our work during the quarter with the nations, leading home leasing company. After a successful pilot last year.

I'll work with that and the spans multiple service lines from voice support for their leasing agents to digital support for their residents to moderation of their social media and online with us.

Finally, we signed two new contracts in the health Tech space for digital customer experience. Most of these clients are AI enabled provider platforms that we're looking to leverage our global delivery model could drive efficiency, while simplifying practice management and improving the patient experience will be.

One of these clients out of Latin America, and another one out of the Philippines.

Moving on to trust and safety revenues in this service offering declined by 11, 5% compared with Q1 of 2022, driven by the impact from our largest client moving work to our locations in the Philippines and India.

Despite this volumes continue to grow within our trust and safety offering.

The number of trust and safety teammates have tasked us increased by 16% year over year as volumes grew at our clients.

Our relationship with our largest client remained strong we expect that their trust and safety volumes will grow again. This year as we continue to take share from competitors. However, given the onshore to offshore shifts and the deep prioritization of certain R&D projects, we expect that revenue will decline with this client year over year.

Year end 2023.

Looking at our other clients in signings in our trust and safety offering we signed a new risk and response engagement with the high growth Fintech company.

Supporting their charge backs and disputes know your customer and fraud monitoring work taking share from another provider.

Another milestone for our trusted and safety service offering came last month. When we were named both a leader and star performer in Everest Group's Trust and safety services peak matrix assessment for 2023.

The recognition reflects our continued progress and delivering on our vision for trust and safety clients around the world as well as our significant investments building a hybrid solution of technology and talent to detect and remove harmful content.

Our inclusion as a leader among a small handful of large providers, it's humbling to.

To further be named a star performer demonstrates the trust we've earned from clients as we invest in the best technology and people to protect their platforms.

Moving lines, where AI service offering revenues grew 10, 2% in Q1 compared with Q1 of 2022, driven primarily by expansions with our current clients, including growth in degenerative AI space.

Volumes continued to grow in this service line is well demonstrated by over 17% growth in the number of teammates providing AI services to our clients.

Within this service line, we signed expansion agreements with clients in the social media space and we signed an exciting new generative AI start up that is raised hundreds of millions of dollars in venture funding.

We will be providing adversarial testing to prevent their model from providing harmful or misleading responses.

After a successful pilot in Europe with this client we have already expanded to the U S. Our deep understanding of generative AI and our industry, leading wellness program is what differentiated us from the competition and want us to this business.

We also signed an expansion with a dating app to provide additional trust and safety support will be leveraging our task force offering to provide a portion of these services. This will allow for flexibility for the client and as an attractive use case of our gaming platform.

Turning to revenue growth within our industry verticals, we're seeing particular strength from our technology and entertainment and gaming verticals, both of which grew 40% year over year.

Additionally, our on demand travel and transportation vertical which includes food delivery clients grew almost 30% year over year.

We continue to see clients turning to us to take on volumes as they optimize their internal cost structures, one of our largest clients one of the world's leading e-commerce platforms expanded their efficiency efforts recently.

Reduce the size of their in house team and are scaling with US. In addition to scaling our core support offerings. This client relocated multiple strategic business lines chart teams. This.

This year, we expect revenues from this client to nearly double from 2021, and we're now supporting this client from five different countries.

Another one of our large clients, who we migrated to an outcome based pricing model has turned to us to drive cost savings in order to ensure that this is a win win we made significant progress in the quarter, leveraging automation and process reengineering to reduce our teammate count and improve margins.

This increase in efficiency drove the majority of the reduction in our global teammate count over the past quarter.

Biology will discuss this was also one of the drivers of our margin improvement in Q1 as margins with this client increased by four percentage points over the course of the quarter.

We expect to see an increase in client interest for outcome based pricing underpinned by automation in this environment.

I'll spend a few minutes discussing our teammates and the environment for talent before I move on to an update on our growth drivers.

We ended Q1 with 47700 teammates up by 4% compared with Q1 of last year.

We grew year over year in all geographies with the exception of the U S and Ireland.

I mentioned, we also grew the number of teammates year over year in both our trust and safety and.

Service lines by 16% and 17% respectively.

Despite a competitive environment for talent, we continue to attract new teammates to ask us in the quarter and were able to meet all of our hiring SL as we exited the quarter with task as teammates rating US four five stars on Glassdoor.

Moving on to our growth strategy I discussed three initiatives to accelerate revenue over the course of 2023 on our last earnings call.

Growing with our large global technology and traditional enterprise clients.

[noise] spanning to serve increasingly global clients in new geographies and increasing our focus on specialized services.

First we continue to expand with the large global technology and traditional enterprise clients that we signed in 2022 states.

To take just one example in Q4, we ramped to support the holiday volumes of one of the worlds largest technology companies typically the majority of these volumes would ramp down in Q1, but our team delivered excellent customer satisfaction and efficiency in our first year supporting this client.

As a result, not only did we retain all the volume we had over the holiday season.

<unk> doubled the size of this team.

We expect to see continued growth with this client this year.

Second we continue to focus on expanding our global client base, particularly in Europe , and Asia, We signed two new engagements and an expansion deal with European clients this past quarter.

We have a solid pipeline of global opportunities for clients in Europe , and Southeast Asia are European based sales team has been integrated with how we go to market organization and they've begun to cross sell our capabilities and offerings.

Finally, we continue to see demand for specialized services, where we have a distinct competitive advantage. We've continued to sign new clients in the health Tech space, adding two new health care clients in Q1 health care continues to be a growth opportunity for us.

We've also seen an increase in demand for our generative AI services. We're now supporting the development of two out of the three leading large language models, we've developed adversarial testing and prompt engineering teams in the past quarter, we doubled the size of the teams supporting the industry's leader and we see significant.

Demand for these services.

Beyond the support that we're providing to generative AI companies. There are significant strategic questions about what generative AI means for the bto industry in general and our business more specifically.

As I said on our last call. We're very excited about the generative AI Revolution, we've been using this technology for nearly two years recently, we've seen a significant uptick in client interest we've launched task G. P. T are open AI powered platform that supercharging the productivity of our teammates.

Since the start of the year, we've engaged with multiple clients to implement past G. P T to improve the efficiency and quality of their workflows.

We're early in this journey this type of dynamic rapidly changing environment is we're tasked us thrives, we've consistently demonstrated an ability to quickly discover and launch services in new markets as they grow exponentially general debate I represents our next opportunity to do this we believe the few.

For a general Goodbye is one of augmentation rather than automation, our talented teammates will leverage these tools can meaningfully improve customer outcomes and operational efficiencies over the next few years. There are a large revenue opportunities for system integrators and service providers to successfully build integrate.

And deploy this technology for our clients.

Finally every new technology produces demand for novel unexpected services.

Decade ago, no one would have guessed that tens of thousands of people would be employed moderating political ads on social media or coordinating between restaurants drivers and hungry customers to ensure food was delivered hot and on time.

We believe that the same will be true of generative AI. For example, we expect to see enormous demand for trust and safety services in a world of infinite content creation and deep stake technology. Many other demands are impossible to predict today. The task is well positioned to discover these service needs and deliver them for our.

Innovative clients.

Despite progress across these three initiatives since our last call we've seen a lengthening sales cycle lower volumes at our largest U S client and shifting priorities impacting projects for our largest global clients.

These factors have led us to lower our revenue outlook for the remainder of the year. We now expect that revenue for the full year will be between $925 million to $950 million, we expect to return to year over year revenue growth in the fourth quarter at the midpoint of our range.

In light of the changed revenue outlook, we've taken immediate action to improve our margins and cash generation, we're executing well on our multiyear efficiency program as demonstrated in our adjusted EBITDA margins for Q1.

As a result of these decisive actions we've increased our guidance for adjusted EBITDA margins to 23, 5% for the year, leading to an outlook for adjusted EBITDA dollars. It is essentially unchanged.

We have also reaffirmed our guidance of at least $100 million of free cash flow for the year.

We are using this cash to drive shareholder value, we've repurchased over $2 5 million shares since the start of our share repurchase program in September of last year you'll.

You'll see that we were even more active in the market during the second quarter driven by our dynamic repurchase plan that allows us to purchase more shares at lower prices.

Have you seen repurchasing our stock is a very attractive use of capital as a result, our board has approved an increase in our repurchase authorization of another $100 million through the end of 2024.

Our three strategic growth initiatives, coupled with our focus on cost will underpin our results for the remainder of 2023 and gives us confidence that we will achieve the revenue adjusted EBITDA and free cash flow outlook that we provided today.

With that I'll hand, it over to biology to go through the Q1 financials in a bit more detail and provide our outlook for Q2 and the year ahead.

Thanks, Brian and good afternoon, everyone.

I'm going to discuss our financial results for the first quarter of 2023.

Please note that some of these items, our non-GAAP measures and the relevant reconciliations are attached to the press release, we issued earlier today.

In the first quarter.

On total revenues of $235.3 million, a decrease of one 8% compared to Q1 of <unk> 'twenty.

We outperformed compared to our guidance as a result of blind volumes coming in stronger than expected, primarily within our digital customer experience and service lines.

In the first quarter, although it still customer experience offering generated Harlan 57 $1 million for the year over year decline of one 6% driven by the impact of lower revenue from our crypto trading clients.

Our trust and safety business declined by 11, 5% compared to Q1 of 2022 there's something and $46 million of revenue.

This decline was as a result of the geography mix shift from our largest client moving volumes offshore.

Although air services business grew 10, 2% year over year for revenues of $37 $6 million as a result of expansion with both existing and new clients.

Our client base has continued to diversify in Q1.

Our revenue concentration with our largest client was approximately 20% down from 32% in Q4 'twenty to 'twenty, two and 24% in Q1, 'twenty, two primarily driven by the shift from onshore to offshore.

Our thoughts and I also would be clients accounted for 58% and 71 person down from 61% and 75 per se in Q1 of last year.

In the first quarter, we generated 4% of our revenues in the Philippines.

20% of our revenues in the United States.

12% of our revenues in India, and 14% of our revenues from the rest of the world.

As Blake discussed.

We expect to see a continued shift of revenue to our nearshore and offshore geographies.

I also have a third we now expect revenues from our U S operation still account for approximately 10% of total revenue in the second half of the year.

Other cost of service as a percentage of revenue was 58, 5% in the first quarter compared to 58, 9% in Q1 of the prior year.

The decline was primarily driven by the stronger dollar in the current quarter compared with Q1 of two day 22, and the transition of work from our onshore to offshore locations, which have lower cost of service.

This was primarily offset by wage inflation and the return to office expenses as we have more people back into the office compared with last year.

Yeah.

Got it a lot harder given you know the cost of service increased as a percentage of revenues from 57, 5% in Q4 to 58, 5% this quarter.

This is the result of a weaker U S dollar as well as wage inflation, partially offset with the margin benefits from our operational efficiency gains.

In the first quarter, although it is G&A expenses were $64 $3 million or 27, 3% of revenue.

This compares to SG&A in Q1, 2022 of $64 $2 million or 26, 8% of revenue.

Excluding the impact of severance cost the earn out accrual associated with our new acquisition and stock based compensation for the quarter, Yes, Virginia as a percent of revenue would have been 18, 6%.

As we realize the impact of cost optimization and other efficiency efforts.

First with revenue trends, we expect this percentage to decline.

In the first part of 'twenty to 'twenty three.

Adjusted EBITDA of $55 2 million dogs.

23 under half, we're saying margin.

Compared to $54.1 million and 22, 6% in the first quarter often between digital driven by lower cost of service and in reduction in SG&A as I just discussed.

We outperformed compared with guidance driven by our strong revenue performance and operational efficiency gains.

Adjusted net income for the quarter was $32 5 million and adjusted.

Adjusted earnings per share was 32 cents.

By comparison in the year ago period, we earned adjusted net income of $35 million and adjusted yes. After before.

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 offset by the improvement we saw in our adjusted EBITDA margins.

Now moving onto the balance sheet cash.

Cash and cash equivalents were $167 million as of March 31st 2023, compared with December 31, 2022 balance of $134 million.

In the quarter, we utilized approximately $6 $4 million for share repurchases.

Buying back approximately 390000 shares.

Average price of $16.75.

As of quarter end, we had approximately $62 $7 million of authorization left on our planet with today's board authorization. We now have approximately harlan could be $5 million remaining in our plan.

Cash generated from operations was $43 $7 million for the first quarter of <unk> 23, as compared to $36 $9 million in Q1 of <unk>.

Our capital expenditure decreased in the first quarter of 2000 $23 million to $5.2 million compared to $17.8 million in Q1 of 2022.

The decrease was primarily driven by lower technology related expenses as employees have returned to the office and.

And the timing of spend within the year.

We would expect capex to be higher in the second quarter.

Free cash flow was $38 $4 million or 69, 6% of adjusted EBITDA.

This quarter's conversion rate was particularly high given the lower capex spend.

The reduction in working capital.

In terms of our financial outlook for the remainder of the year, we have updated our guidance.

No I used to be.

In full year 2023 total revenues to be in the range of $925 million to $950 million.

After the first of the efficiency gains that we've realized since the start of the year.

We increased our margin outlook and now expect to.

On a full year 'twenty 'twenty, the adjusted EBIDTA margin of 23, and a half person.

And adjusted EBITDA guide, but it's essentially unchanged at the midpoint.

We continue to expect free cash flow, which we define as cash flow from operation less capex to be $100 million, excluding the one off payment associated with Halo acquisition.

For the second quarter, we expect revenue to be in the range of 226 million to $228 million and.

We expect adjusted EBITDA margin to be approximately 23% for the quarter.

This adjusted EBITDA margin guidance for the second quarter and full year is based on current spot rates.

He seems to currency rates will impact our margin.

As a reminder, the majority of our revenue is booth and collected in U S. Dollars. So we do not see the impact of U S dollar fluctuation in our revenues.

I will now hand, it back to Brian before we take your questions.

Thank you biology before we open for questions I want to share another task as teammates story in March I visited five of our 10 sites in the Philippines, our strategy of building sites in locations outside large metro areas and close to where teammates live meant I got to visit our beautiful facility on the island.

And a ball.

The location of the Bowl site proved to be very attractive for duress, a teammate who joined US after working in Manila for 13 years originally from the whole Juris was overjoyed to learn that we were opening a facility on the island.

Parents were getting older and she wanted to be closer to that but prior to task us she hadn't been able to find companies with good salaries and benefits near her hometown.

As a result of the career that she found with US Juress was able to spend three years living with her father and behold before he passed away last December she talked about how happy she was to have the time and how grateful. She was for the assistance task is provided for her and her father it gets final dates.

<unk> also told me how wonderful it is not to have to deal with Manila is notoriously bad traffic and how grateful she has for weekends at the beach and her mother's home cooking.

Listening to Jewish was an important reminder, to me that our strategy of locating sites outside major metro areas and close to where people actually live is critical not just to lower our costs and increase our ability to recruit the best talent, but also to enhance our teammates quality of life.

With that I'll ask the operator to open our line for the question and answer session.

Thank you Sir we will now be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It.

May be necessary to pick up your handset before pressing the star keys.

One moment, please when we poll for any questions.

Yeah.

Our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.

Thank you.

I wanted to ask Bryce what needs to happen for you to get back to growth both from kind of an internal caskets perspective, as well as whats your clients need to see and those kind of demand factors.

Yeah, Maggie thanks, so much for the question. So I think it's important to remember that our offshore and near shore business. He has continued to grow healthily. If we excluded revenue from the U S and Ireland revenue from our offshore and nearshore locations grew 19% year over year in Q1, and we expect to see continued double digit.

Revenue growth in these geographies going forward.

Our current guidance includes a significant risk hedge which takes U S revenues to just 10% of total revenues for the back half of the year and this continues to challenging year over year compares that are being driven by the drops in crypto and equity volumes and the onshore to offshore shifts that we began seeing in Q1 of last year. This is the prime.

Jerry driver of the delayed return to revenue growth with that said, we expect to return to year over year revenue growth in Q4 of 2023 at the midpoint of today's guidance.

As the remaining U S revenues become a smaller portion of our overall business, we expect sustained demand for our nearshore and offshore services.

Accelerate this growth into 2024 as I outlined on today's call. There are three factors that are driving this growth first we continue to expand our relationships with the big Tech and enterprise clients that we won last year as.

As these clients are ramping up their cost savings initiatives. There are meaningful opportunities ahead second we're accelerating our go to market efforts in Europe , and Asia and finally, we are delivering on the significant opportunities, where we're very well positioned.

The health check and degenerative AI space.

That's helpful. Thank you and then biology, you know I know.

The guidance for for EBITDA margin has remained strong.

Can you talk a little bit about are those.

Cost initiatives.

Deep enough.

Rental things that you're doing deep enough to compensate for a slightly lower revenue expectation going forward and then if you were to come in at the lower end of your guidance and how that impacts the margin as well.

Yeah. So as we discussed on the last call and so we kicked off a multiyear program.

<unk>, which is driving efficiencies in our global operating model in their bidding automation that the bidding sheds.

Which has resulted in millions of dollars in Phebe N.

We quantified that Phoenix was helpful.

Your savings in 'twenty three.

So we continue to optimize the spend on continuing to drive efficiency installation for babies to you and your board.

But he was asking about.

One.

Second just as a reminder, the majority of our cost is variable in nature, which also uses a mi two revenue. So we were able to continue to drive that piece of it.

This is the reason that you feel confident you could even think about EBITDA guidance to three and a half or something for the full year and leaving the dollars EBITDA dollars unchanged from our previous guidance.

Thanks for taking my question.

Thank you and ladies and gentlemen, as a reminder, we ask that you. Please limit yourself to one question and one follow up and reenter the queue. If you have any additional questions. Thank you. Our next question comes from the line of Puneet Jain with J P. Morgan. Please proceed with your question.

Hey, Thanks for taking my question.

Can you talk a bit more about the work you do for them. They gave me I talk up like what are you doing how are you providing those services and those who were supposed to be transferred to other clients, who intend to launch Directv IP solutions.

Yeah. Thank you pretty well the work we're doing for generally bad companies is incredibly exciting we've.

We've spun up adversarial testing teams. These are teams of people who are provoking a large language models and image generation models to produce offensive content or content that violates terms of service.

We're then documenting those violations so that generative AIE engineering teams can further refine their models to protect their users. In addition to this we're actually helping to train many of these models.

Answering complex questions recruiting experts in particular.

There isn't a subject matter expertise to help build the future of large language models today, we work for two of the three leading large language models in the first quarter, we doubled the size of our team supporting the industry's clear leader, we also signed a contract with.

A very exciting January may I start up.

Hundreds of millions of dollars. So we see this as a rapidly growing.

Area that task is perfectly suited to support.

Okay got it and.

Your guidance for this year, it's like for Q2.

Apply like a sequential decline.

From Q1 revenue, but.

Full year guidance implies like a sequential growth in CQ and possibly enforced you also and you also mentioned that in fourth Q, you expect revenue to be up on a year on year basis at the midpoint of the guidance.

Can you talk about like what drives that confidence of the sequential increase that you expect in second half.

And how much visibility you have on that second half revenue at this point of time.

Yeah, I mean, the confidence comes from the fact that our offshore business is continuing to grow at a very healthy clip as I said to Maggie's question earlier in Q1, our offshore and near shore business grew 19% year over year, and we expect to continue to see strong double digit revenue growth from our offshore.

There's four locations for the remainder of the year.

As you pointed out unfortunately since.

Since the time of our last call. We've seen some shifts that have impacted our U S business. The largest client that we have in the U S business lost a significant customer contract cutting the size of our business with them roughly in half.

When we look at the rest of the year, it's important to note just.

What we're expecting to happen here. So if we look back at 2022 in Q1 of 2022, our U S business was over a $300 million annual run rate business today.

Today, we expect our annual run rate to drop to under $100 million from U S delivery in the back half of 2023. So we will have lost about twice as much business as we have left.

As the percentage of U S business declines the continued growth in our offshore and near shore locations will outpace.

The business that we are.

We're losing in the U S.

That's what gives us confidence about getting back to sequential quarterly revenue growth in Q3 year over year revenue growth in Q4, and watching that revenue growth accelerate in 2024.

Patrick Let me quickly follow up like what do you expect for the U S mixed to be into Q I know for the second half you said you expect 10%.

But yeah, that's number one.

We're not guiding to that number specifically, but as we said we had 20% of our global revenues come from the U S. In Q1 by Q3, we expect that to drop to about 10%.

And so you can kind of do the math and it would be somewhere in between those two numbers.

Gotcha Gotcha alright, thank you.

And the next question comes from the line of James Fawcett with Morgan Stanley . Please proceed with your question.

Hey, guys, it's Jonathan on for James Thanks for taking my questions and good to hear about the utilization of AI in your own operations, especially as you think about potential improvements in productivity and that said can you talk about how that may impact your pricing model going forward, particularly as it relates to efficiency gains you may be recognizing in some of your contracts.

Yeah, It's a great question Jonathan. Thank you. So obviously, we're very excited about what's taking place in January of AI very excited too.

Announced the task G P T platform.

Clearly what's happening in this space as a step function change about anything we've seen in the past and over the next couple of years, we will see this technology automate simple workflows, where given the complexity of the majority of work that we do we see generally by AI, primarily as a tool to augment our talented teammates.

And so in terms of our pricing models as I said in the first quarter, our largest outcome based pricing agreement, we were able to increase our margins by 4% and we did that by driving efficiencies with process design and technology.

Going forward leveraging platforms like task G. P. T. He was getting at.

Enable us to enhance our margins and pass on cost savings to our customers.

And this will be done with outcome based pricing and gained share agreements, which we expect to see an increase in demand for from our customers.

Yeah.

Got it that's good color.

Beyond sort of the company is undertaking a mixed shift offshore are you seeing any changes to like for like pricing of deals near term I mean, how are you thinking about the pricing environment now and how is that being reflected in your outlook.

Yeah, I mean, the pricing environment today is.

Is one where we're seeing our clients continue to look for cost savings were able to drive those cost savings for our clients by taking them offshore leveraging our network of.

Locations in tier two cities and then baking in technology and digital solutions that we're offering to our customers task has always been a premium service provider and so.

While pricing is always competitive it's usually not the real reason that we win or lose business.

I appreciate that thanks, guys.

And the next question comes from the line of David Koning with Baird. Please proceed with your question.

Yeah, Hey, guys. Thank you and I guess my first question I saw employees were down I think 4% sequentially. If I saw that right and I know for years, they've kind of they've been building and and really revenue.

Isn't declining that much. So I was just kind of interested in why why employees are down a bit.

Yeah. Thanks for the question, Dave So we did see the number of teammates declined by about 800 teammates.

About half of that decline was driven by seasonal volumes. The other half was driven by the efficiency gains that we realized in our largest outcome based.

Hum.

Contact with our with one of our largest clients and so.

This isn't a situation in which we've been able to.

<unk> increased our productivity significantly.

Thus used fewer people to deliver on the same amount of work.

Gotcha, Okay and then.

My second question, just when we've done like different surveys it seems like almost everybody acknowledges like puts and takes of AI like it could be good there could be some negative but net most think it's positive.

What parts of your business do you think are most beneficial in and may be most at risk and I think content is the one that I'd say most people worry the most about but what what what do you think there.

Yeah, I mean, I think it's worth it to maybe look across our three major service lines and ask the question, what's the impact of generate AI on each of them starting with digital CX tier one customer support is going to be further automated I think everyone agrees on that educational questions on how to use an app or understand the policy are.

Unlikely to require human intervention for much longer and the good news is that today, we do very little of this kind of work our customer experienced workers almost all complex involving technical questions and interactions with multiple systems to salt urgent issues in real time. So we don't believe that that type of work is likely to be automated anytime soon.

Instead, we're using task GBT to augment our talented teammates supercharging their efficiency and improving the quality of their responses.

Further we believe that the demand for our trust and safety services is.

He is going to grow as a result of these technologies. We're already working on moderating images that are produced by a leading image generation model and earlier I mentioned some of the adversarial testing work that our team is already doing to protect people against harmful responses.

Hard to imagine today, all of the trust and safety workflows that are going to emerge as a result of near perfect deep fakes are infinite user prompted content creation, but in general we expect an exponential increase in trust and safety demand as a result of generative and finally, we continue to see demand for our AI services.

To build and refine these generative AI models. The nature of this work is a bombing we've gone from basic tagging to more complex content creation editing and rating led by global teams of experts in specific subject matter areas. So as I outlined on the last call. We've already made great progress.

Selling both our trust and safety services, and our AI services to leading generative AI companies and.

And we expect that our clients to leverage new services to demand more in the in the immediate future. So we're excited about the generative AI revolution, and feel very well positioned to benefit from it.

Great. Thanks, you guys.

Yeah.

And the next question comes from the line of Cathy Chan from Bank of America. Please proceed with your question.

Hey, So first I just wanted to dig in a little bit more with your top client. So it sounds like couple of projects, where do you prioritize where they you know outright canceled could you just give us a little bit more color on the type of project that that is as it related to like the trusted security aspect of your business and so I just wanted to ask about that alright. Thank you.

Thanks, Kathy So we've got a very strong relationship with our largest client. Unfortunately, the core of what we do for them that trust and safety work.

Continues to be stable in fact, we expect that demand for our trust and safety services at our largest client will grow between here and the end of the year.

We also support certain R&D projects and so our largest client has.

Been developing exciting new technologies in many different areas and.

In on some of these projects we've seen.

Certain projects be prioritized and other new projects spun out but at this stage, while the new projects are taking some time to scale.

Basically catch up to the scale of the the old projects that were that were.

Reduced.

Part of their overall cost savings initiatives. So the relationship itself remains very very strong we believe that overall, we continue to take share in an environment of declining you're spending.

The core of the work that we do for them in trust and safety continues to grow.

Got it and then just a follow up I wanted to touch back on the U S portion, what you're now assuming 10% of revenues in the back half of the year I mean could that go to zero and I believe that so your your top client is fully offshore now because they have no patents in the U I just wanted to confirm that as well, but yeah. Thank you.

Yes.

The U S will continue to be an important part of our global.

Delivery network.

Obviously, we've seen a significant decline in our U S business from roughly a $300 million revenue run rate business in Q1 of 2022 to about $100 million revenue run rate business in the back half of 2023.

What remains in the U S. We believe.

We will stay onshore because of regulatory reasons and in some cases, because the end customer of our client is the U S government and in other cases because of strong client preferences. So at this stage, we feel good about what remains in the U S business and I should mention that to get to that 10 <unk>.

Remember, we've taken a significant risk hedge based on the trends that we've seen to date.

As far as our largest customer almost all of their work has been moved to the Philippines and India tasked us.

Okay got it thank you.

Okay.

And the next question comes from the line of Ryan Potter with Citi. Please proceed with your question.

Hey, Thanks for taking my question I wanted to touch on the international opportunity, particularly in the European and Asian growth like you mentioned can.

Can you just kind of highlight your positioning there how would your how you're kind of viewed versus our peers and I mean, what actions you're taking to kind of accelerate growth. There is it investments into.

Sales or is there some kind of regional kind of domain expertise that you're also investing in as well.

Yeah. Thanks for the question Ryan So as.

As you know we completed our first acquisition last year of a company called <unk>.

As operations in Croatia, Serbia.

In other parts of eastern Europe .

We also have our own operations in Greece and in Ireland.

Over the course of the last year, we fully integrated.

Operations and our go to market efforts, we've got a go to market team in Europe .

That is based in the U K and Croatia.

And is actively selling our European solutions.

Multiple clients, we landed multiple new logos for from Europe in the first quarter.

In Asia, we've got delivery locations in Malaysia, Taiwan and Japan.

And a really robust group of global technology clients that rely on tasked us for agent language support. This is an area of the business that continues to grow very healthily.

We plan to make further investments in go to market efforts in the region.

Uh huh.

Got it and then on the <unk>.

Capital allocation I guess can you discuss what led to the decision to increase the share repurchase authorization as opposed.

If I was to something more like a human capital towards M&A.

Have your thoughts changed at all around M&A and you could you provide some color I guess on how the acquisition pipeline looks pretty good.

Yeah. Thanks for that question. So we increased our share repurchase authorization by $100 million and that's on top of the $100 million that our board authorized us to.

To re purchase shares starting in September of last year.

This decision was driven.

By two factors. The first is that our business continues to create a huge amount of cash. This year, we expect our adjusted EBITDA to be north of $220 million and we expect to generate over $100 million in free cash flow, excluding the one time payment.

For the how we earn out.

We had been purchasing shares actively in the market and have bought two 5 million shares to date.

But we are.

You mean to accrue cash on our balance sheet, we added approximately $30 million in cash.

From the end of Q4 at the end of Q1, and so we're looking at.

Our capital allocation strategy.

First we want to invest in the business and we've done this successfully investing in sales and marketing.

And also in technology.

Both both of those are areas in which we've continued to increase the amount of money, we're spending to drive growth and deliver value for our clients.

But despite that we are on pace to deliver a 23, 5% adjusted EBITDA margins. This year. So second we are looking for opportunities to acquire businesses to grow inorganically. Unfortunately, there the valuations of private companies continue to stay Stefan.

Hi, especially when compared to <unk>.

Public market multiples.

And so we turned to share repurchases as the most productive use of our capital and given what we believe is.

A very attractive share price.

And current valuation of our business.

Okay.

Understood. Thanks again.

And the next question comes from the line of Matt Vanvliet with BTG. Please proceed with your question.

Hey, good afternoon, Thanks for taking my question.

Curious if you could give us a little more color in terms of some of the sales cycles that you're seeing elongate.

Are there specific areas of the market that are just seem to be kind of in a holding pattern waiting to see more things on the macro side or.

Is it just becoming maybe more signatures more more kind of discussions of the contract, but things are maybe slowly moving along more so than being out of impasse.

Yeah. Thanks for the question, Matt. So the pipeline itself is strong but the sales cycle does continue to elongate in general it seems like there was less urgency to sign large new engagements and this is definitely the case among innovative technology companies that are.

Much slower than they have in the past few years.

We'll say that in terms of the number of new logos that we've been able to sign historically, we've signed about 10, new logos a quarter in the first quarter, we signed more than that.

But the size of the deals that we've signed is smaller than we have seen in the past.

We have continued to sell successfully into our existing clients.

Here, our clients have increased urgency to drive cost savings. So we're helping a number of our clients who can produce the size of their in house teams to scale in our offshore and near shore environments overall.

<unk> itself is healthy built with opportunities for nearshore and offshore delivery and our task GPT powered solutions and so we expect this to return us to growth.

Later this year.

Alright helpful and.

That kind of leads me into the follow up question on the generative AI side I'm sure a lot of questions and certainly a lot going on there, but it is it is it currently sort of cannibalizing any of the other AI model training that you were doing to this point for some of your clients have they now decided to maybe forego building their own.

Models are at least not as robust fleet build out their own models and using some of these large language models.

Just curious on how any mix shift or trends youre seeing.

And the existing book of business in that space.

What's happened is most of the smaller players in the space have shifted to leveraging.

Open AI or one of the other leading large language models and what we've seen is that the industry's meters had increased their investment.

<unk>.

Training.

And trust and safety.

And so overall.

Our AI services revenue continues to grow.

Alright, great. Thank you.

Yeah.

There are no further questions at this time and that does conclude today's teleconference. Thank you everyone for your participation you may disconnect. Your lines at this time enjoy the rest of your day.

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