Q4 2023 Taskus Inc Earnings Call

Participants

Trent Thrash; Senior Vice President of Corporate Development and Investor Relations; Taskus Inc

Bryce Maddock; Chief Executive Officer, Co-Founder; Taskus Inc

Balaji Sekar; Chief Financial Officer; Taskus Inc

Puneet Jain; Analyst; JPMorgan

Margaret Nolan; Analyst; William Blair

David Koning; Analyst; Baird

Matthew Roswell; Analyst; RBC Capital Markets

Matthew VanVliet; Analyst; BTIG

Presentation

Operator

Good afternoon, and welcome to the TaskUs fourth-quarter and full-year 2023 earnings call. My name is Liz, and I will be your conference facilitator today. (Operator Instructions) I would now like to introduce Trent Thrash, Senior Vice President of Corporate Development and Investor Relations. Trent, you may begin.

Trent Thrash

Good afternoon and thank you for joining us for the TaskUs fourth-quarter and full-year 2023 earnings call. Joining me on today's call are Bryce Maddock, our Co-Founder and Chief Executive Officer, and Balaji Sekar, our Chief Financial Officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the Investor Relations section of the website at ir.taskus.com.
We have also posted supplemental information on our website, including an investor presentation and an Excel based financial metrics file. Please note, this call is being simultaneously webcast on the Investor Relations section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, statements regarding our future financial results and management's expectations and plans for the business.
These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from these forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 6, 2023.
This filing is accessible on the SEC's website and our website at ir.taskus.com and may be supplemented with subsequent periodic reports we file with the SEC. We expect our 2023 10K to be filed with the SEC no later than March 15, 2024. Any forward-looking statements made on today's conference call, including responses to questions, are based on current expectations as of today.
And TaskUs assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. The following discussion contains non-GAAP financial measures or a reconciliation of these Non-GAAP financial measures to the most directly comparable GAAP metric, please see our earnings press release, which is available in the IR section of our website. Now I will turn the call over to Bryce Maddock, our Co-Founder and Chief Executive Officer. Bryce?

Bryce Maddock

Thank you, Trent. Good afternoon, everyone, and thank you for joining us. I want to start by expressing my deep gratitude for our TaskUs teammates around the globe who have worked tirelessly over the holidays and into the New Year to deliver for our clients and our shareholders. As a result of their efforts, we outperformed the top end of our revenue and adjusted EBITDA guidance for the fourth quarter. We delivered $234.3 million in revenue compared to guidance of between $225 million and $227 million.
In terms of profitability, we delivered $59 million in adjusted EBITDA for an adjusted EBITDA margin of 25.2%, 270 basis points above our guidance of 22.5%. For the calendar year 2023, we delivered $924.4 million in revenue and $220.8 million in adjusted EBITDA, representing an adjusted EBITDA margin of 23.9% compared to guidance of 23.3%. Finally, we delivered $131 million in free cash flow in 2023, excluding acquisition-related payments, well above our guidance of more than $115 million.
While I'm pleased with our team's efforts and results, we are not satisfied. 2023 was a challenging year, and we did not deliver anywhere near the top line growth rates that we have historically. In 2024, we're determined to do better and to return to consistent year-over-year revenue growth. While it's still early in the year, 2024 is off to a solid start. Despite a macro backdrop that remains challenging, we've continued making investments in technology, sales and marketing.
We are pleased with the dividends that those investments are producing and have seen increasingly strong demand over the first quarter of the year. I'll recap some of the highlights from our Q4 and full year 2023 performance before discussing our 2024 outlook. (inaudible) will then walk through our financials and 2024 guidance in greater detail. Q4 revenues were $234.3 million, a 3.3% decline on a year-over-year basis, consistent with Q3's rate of decline and ahead of our expectations.
On a sequential basis, Q4 revenue increased by 3.8%, largely as a result of seasonal volumes. As anticipated, revenue from our top 20 clients declined 10% year-over-year in Q4 as a result of certain clients' cost optimization and offer migration efforts, including those by our largest clients. These top 20 revenue headwinds were partially offset by growth from new and existing clients that moved into our top 20 for 2023.
Year-over-year revenue growth from customers outside the top 20 accelerated to 13% in Q4 versus 8% in Q3. We expect to continue to grow clients outside of our top 20 at a faster rate than our largest clients in 2024 as we continue to diversify our client base and expand our business in new areas like health care and banking and financial services. In terms of delivery geographies, on a year-over-year basis, revenues from US delivery declined 35% in Q4, while revenue from all other geographies grew by 5%, demonstrating the strength of our global delivery model.
Q4 again saw rapid growth in Latin America. Revenue from the region grew approximately 78% year-over-year. At the end of 2023, approximately 96% of our total head count was outside the United States. We ended the year with approximately 48,200 global teammates, an increase of approximately 1,200 teammates quarter-over-quarter. As noted in Q3, we continue to make progress on our strategy of cross-selling our specialized services.
In Q4, we saw a 30% year-over-year increase in clients utilizing more than one of our service lines. We also continued expanding our presence in new markets, including adding notable use cases for enterprise clients in the health care and banking and financial services spaces as well as fast-growing technology clients in the autonomous vehicle and generative AI markets. In addition to supporting clients in the Generative AI space on the development and support of their technology, we are integrating Generative AI into our core service offerings.
In 2023, we launched past GPP, our Gen AI platform with multiple clients. We continue to believe that these tools will yield the greatest returns when they're trained on client-specific data and utilized by talented teammates to ensure efficient, consistent and secure results. In line with this, we're excited to announce Assist AI, our Knowledge Assistant built on the TaskGPT platform. Assist AI is custom-trained on our clients' knowledge bases, training materials and historical customer interactions.
Our teammates chat with Assist AI to answer customer questions more efficiently and accurately in our Digital CX business or to ensure they're utilizing the latest policy when taking action on a piece of content in our trust and safety business. We are offering Assist AI to all TaskUs clients as an integrated part of our service offering. Going forward, we will deliver a well-trained combination of technology and talent to support our clients, protect their brands and deliver for their customers.
During 2023, we also made continued progress on our internal cost efficiency programs in order to maintain our strong margin and free cash flow performance in the face of our clients' own cost optimization efforts. We remain vigilant on cost in the business, not as a onetime optimization program, but as an ongoing fundamental discipline to ensure we remain competitive. Shifting to sales, 2023 was characterized by slower decision-making and an intensified focus on cost reduction compared to prior years.
Despite this, our sales team delivered. We added 47 new clients, the most in any year since 2018 partially as a result of this success, we have further improved our client concentration. In Q4, clients outside the top 20 drove 34% of our revenue versus 29% in Q4 of 2022. We ended 2023 with 97 clients who we build $1 million or more for services up from 86% in 2022. In Q4, sales were again driven largely by bookings from existing clients, which accounted for approximately 70% of total new business signings.
We ended the year with a strong pipeline of opportunities with both new and existing clients. We're encouraged by the size, quality and depth of pipeline opportunities across our service lines to the end of 2023, and we have continued to see improved sales momentum in 2024. Turning to our service lines, in Q4, digital customer experience revenue declined by 4.4% compared with Q4 of 2022.
Consistent with prior quarters, expansion with existing clients and new client signings was offset by the decline in revenues from our largest client as well as cost optimization and volume declines in other clients. On a sequential basis, our DCX revenues were up by 4.1%, inclusive of seasonal revenues. In Q4, we saw strong signings activity from existing DCX clients into technology and on-demand travel and transportation spaces as well as with Non-crypto Fintech and Enterprise Financial Services clients.
We also continue to be encouraged by the increase in opportunities we're seeing to provide sales and customer acquisition services to clients across multiple vertical markets. We signed a DCX contract leveraging the capabilities of our HelloTeam to support a European-based financial services client. We also won a competitive bid process to provide support from our US operations for a leading credit union.
This win is a direct result of the 2023 investments we made in banking and financial services expertise in order to provide balance to our core, fast-growing technology clients. This type of work in the regulated industries is a great example of US-based delivery services that we believe are likely to remain onshore regardless of the economic environment. We also see the US continuing to be a key geography for delivering specialized services to health care clients.
Our trust and safety service line continued to perform well in Q4. Trust and Safety growth further accelerated in the quarter, growing 23.5% year-over-year and 7.3% quarter-over-quarter. Q4's growth was largely driven by the continued growth in our large on-demand travel and transportation clients as well as certain clients in the social media, technology and Fintech verticals.
This growth, again, more than offset the volume declines we saw from our largest equity trading client, which will cease to provide difficult year-over-year growth comparisons after Q2 2024. Our trust and safety service line includes both our content moderation offerings and the work of our risk and response teams, which deliver financial compliance, risk and fraud detection services. While we don't separately report this offering, we're pleased that our Q4 risk and response revenue growth was again accretive to the overall growth rate of the trust and safety service line.
Speaking of our risk and response team, I'm proud to announce that we were named a leader in Everest Group's Financial Crime and Compliance Operation Services peak matrix for 2024. Demand for all of our trust and safety services continues to grow. In Q4, we saw a notable win with a decacorn start-up in the graphic design space. We now provide multilingual content moderation to this client.
We also began supporting a provider of consumer credit building and financial education solutions with both our DCX and risk and response service line. This is another clear demonstration of our success in cross-selling highly specialized services to both new and existing clients. AI service revenues declined 26.5% in Q4 compared with Q4 of 2022, driven primarily by a mid-2023 decision to offer certain US-based work by our largest autonomous vehicle client and a reduction in US-based delivery at our largest client.
As discussed in Q3, the health of these 2 large client relationships remains very strong. In fact, we won exciting new projects at both clients in Q4 and early Q1 that will ramp in 2024. We anticipate existing AI services revenues from these clients to stabilize on a sequential basis in 2024 and the difficult year-over-year comparisons within our AI service line to lapse by year-end. Despite the revenue decline, we're selling our AI services to a greater number of clients.
The number of clients using our AI services grew by a double-digit percentage year-over-year in 2023. In line with this, we're seeing growing demand for AI services from large language model and multimodal Generative AI providers. Here, our teams are performing expert response writing, ranking and scoring, prompt review, adversarial testing and trust and safety evaluations. We expect these clients and new opportunities to become an increasingly larger portion of our AI services revenue over the course of 2024.
Speaking of 2024, let's move to our Q1 and full year 2024 revenue outlook and growth strategy. In Q1, we expect to deliver revenues between $222.5 million and $224.5 million, a decline of approximately 5% year-over-year and quarter-over-quarter. The year-over-year decline is primarily driven by US-based projects that concluded at the end of Q1 2023 for our largest client and other client cost optimization decisions made throughout 2023, while the quarter-over-quarter decline is primarily driven by Q4 seasonal revenues.
We expect to deliver full year 2024 revenue of approximately $925 million at the midpoint of our guidance range of between $900 million and $950 million in revenue. The improved momentum we saw in Q4 and early Q1 gives us confidence that we can return to year-over-year growth in the back half of 2024, delivering revenues that are roughly flat to 2023 for the full year and accelerating growth rates as we exit 2024.
We now believe that the material revenue headwinds and rated by 2022 and 2023 onshore to offshore ships are largely behind us. As noted last year, we worked closely with our clients as part of their annual budgeting processes. As a result of these conversations, our strong Q4 results and the progress made in early Q1 across sales, hiring and new program ramps, we are cautiously optimistic.
While revenue declined in 2023 at a few of our largest clients, we expect revenues at these same clients to be flat to slightly up year-over-year in 2024. However, clients continue to look for ways to reduce costs by leveraging automation technologies and global delivery models. We believe this will continue in 2024, but that for a variety of reasons, including regulatory and privacy concerns and the complexity of certain work, approximately 10% of our revenue will be derived from the US for the long term.
As a frame of reference, we delivered approximately 14% of our revenue from US delivery in Q4 of 2023, down from 21% in Q4 of 2022. As our US revenues stabilize, we believe that our international footprint will continue to be a driver of future revenue growth. For 2024, we're focused on 4 initiatives to accelerate revenue growth. First, we will take share from our competitors.
Whether it's an existing or a new client, we continue to see meaningful opportunities where we are underpenetrated from a wallet share perspective. This includes an increased focus on some of the biggest technology companies in the world as well as traditional enterprise clients. Many of these clients and prospects who have annual outsourcing budgets in the hundreds of millions of dollars are only spending a few million dollars with TaskUs today.
Recent large-scale industry consolidation has created opportunities for TaskUs to capture incremental share to help clients better diversify their partner networks. So we are doubling down on our investments in sales and client services to grow these relationships. Our solid performance in the second half of 2023 in the face of significant challenges gives us confidence that our team can compete with anyone and win.
Next, we will continue to focus on diversifying our client base by landing enterprise clients in the banking and financial services and health care spaces. These clients more consistent spending patterns will create a stable balance of revenues, while our continued leadership in servicing high-growth technology clients will enable rapid growth in the years to come. We built teams of experts in both enterprise verticals and have seen solid early progress.
Third, we will continue to successfully cross-sell our specialized services for our client base, whether it's a trust and safety client utilizing our AI services to help develop their latest Generative AI tool or a risk and response client, bringing in our instructional designers to overhaul their training curriculum. We will continue to expand our client relationships by selling more of our specialized services to our existing clients.
And finally, we aim to lead the industry on the deployment of Generative AI tools to support the delivery of services to our clients and their customers. We are very excited to offer our Assist AI tool to all TaskUs clients. This tool improves the accuracy and efficiency of our teammates across digital customer experience, trust and safety and risk and response workflows. We believe the future of this industry will require companies to deliver well-trained teammates and technologies to solve claim challenges.
And with the launch of Assist AI, we're making strong progress towards this vision. By executing on these initiatives, I believe that we will achieve our 2024 goals and return to accelerating year-over-year growth in the back half of the year while maintaining industry-leading adjusted EBITDA margins and free cash flow generation. With that, I'll hand it over to Balaji to go through the Q4 financials and our 2024 guidance in more detail.

Balaji Sekar

Thank you, Bryce, and good afternoon, everyone. I'm going to focus my remarks primarily on our fourth quarter but will reference a few key full year metrics. Please note that some of these items are Non-GAAP measures and the relevant reconciliations are attached to the press release we issued earlier today.
The fourth quarter was another quarter of both top line and bottom line performance that exceeded expectations, while revenue declined by 3.3% year-over-year to $234.3 million, we came in higher than the midpoint of our guidance of $226 million. Adjusted EBITDA of $59 million and adjusted EBITDA margin of 25.2% came in higher than our guidance of 22.5%, primarily due to better than forecasted revenues as well as lower than expected seasonal costs.
Adjusted EBITDA margins improved by 113 basis points compared to Q4 of the previous year. For full year 2023, revenue declined by 3.8% to $924.4 million, but came in above the top end of our guidance range of $917 million. We achieved adjusted EBITDA of $220.8 million for an adjusted EBITDA margin of 23.9%, again above our guidance of 23.3%. The strong revenue performance in the fourth quarter compared with guidance was driven primarily by volume risks that we expected not materializing, along with strong seasonal revenues that we discussed in (inaudible).
The stronger than expected results also reflected our ability to ramp and consistently deliver on key metrics for our clients. Moving on to our service offerings. In the fourth quarter, our digital customer experience offering generated $151.9 million for a decline of 4.4%. Our trust and safety business grew 23.5% to $52.2 million, and AI services declined 26.5% to $30.1 million. In Q4, we continue to see the diversification of our revenue base.
Our revenue concentration with our largest client was 19% consistent with Q3, but down from 22% in Q4 of 2022. Our top 10 and top 20 clients accounted for 55% and 66% of our revenue, respectively, compared to 58% and 71% in the prior year as our consistent march towards a more diversified revenue base continues. In the fourth quarter, we generated 56% of our revenues in the Philippines, 14% of our revenues in the United States and 12% of our revenues from India and 18% of our revenues from the rest of the world, mainly driven by our operations in Latin America and Europe.
Cost of service as a percentage of revenue was 58.6% in the fourth quarter compared to 57.5% in the prior year. The year-over-year increase was driven by depreciation of the US dollar against some of the currencies in our major delivery geographies, big inflation and expenses associated with our return to the office, which was partially offset by the geographic mix of revenue and operational efficiency gains.
In the fourth quarter, SG&A expenses were $48.9 million or 20.9% of revenue compared to $64.5 million or 26.6% of revenues in the prior year. This decrease was driven by our disciplined cost efficiency program as well as a $4.8 million reduction in our earn-out expense associated with the Halo acquisition and a decrease in stock compensation expense from $13.3 million in Q4 of 2022 to $9.8 million in Q4 of 2023.
We earned adjusted EBITDA of $59 million and a 25.2% margin in Q4 compared to $57.9 million and 23.9% margin in the fourth quarter of last year. The reduction in revenue and increased cost of service was more than offset by savings in SG&A. For the full year, we achieved $220.8 million in adjusted EBITDA and an adjusted EBITDA margin of 23.9% above our guidance range. Adjusted net income for the quarter was $32.2 million, and adjusted EPS was $0.35.
For the full year, adjusted net income was $126.5 million and adjusted EPS was $1.32. This compares to adjusted net income of $33.3 million and adjusted EPS of $0.33 for the fourth quarter of 2022 and $142.8 million in adjusted net income and $1.39 of adjusted EPS for full year 2022. Adjusted EPS in 2023 benefited from a lower number of weighted average shares outstanding as the result top of our share repurchases.
Now moving on to our cash flow and balance sheet. Free cash flow was $31.7 million in Q4. For the full year, free cash flow, excluding payments for earn-out consideration was $131 million, exceeding our guidance of greater than $150 million. This represents a conversion rate of 59.3% of adjusted EBITDA for the full year. Cash and cash equivalents were $125.8 million as of December 31, 2023, compared with the September 30 balance of $114.6 million.
Our capital expenditures increased in the fourth quarter to $8.1 million or 3.5% of revenue compared to $7.7 million or 3.2% of revenue in the prior year. For the full year, CapEx was $31 million or 3.4% of revenue compared with $43.8 million or 4.6% of revenue in 2022. This full year decrease was driven largely by optimizing CapEx spend and better utilization of existing investments.
We maintained our disciplined capital allocation program. As you will remember, this year, we allocated an additional $100 million towards our buyback program, bringing the total authorization to $200 million. In the quarter, we bought 2 million shares at an average cost of $9.66 per share for $19.2 million. For the year, we repurchased 10.1 million shares at an average cost of $11.02 per share for $111.8 million.
Over the life of the program, we bought back 11.8 million shares and spent $142.7 million at an average cost of $12.10 per share. We will continue to allocate capital to our buyback program on a programmatic basis in products with our plan. We maintained low leverage, ending the year with 0.6x net debt to adjusted EBITDA leverage ratio. Our priority remains investing for growth. Through this end, we are increasing our investment in sales and marketing.
Given the strength of our balance sheet, we have ample capacity for these growth investments while preserving our ability to take action on any M&A opportunity that meets our investment criteria or to return capital in the form of share repurchases. In summary, we've built more efficiency into our global operating model and leverage automation and shared services, resulting in millions of dollars of savings while letting us invest in strategic growth areas like sales, marketing and technology.
As a result, in 2023, we delivered adjusted EBITDA margins and free cash flows that we believe are among the best in the industry. At this point, I will outline our financial outlook for the full year and first quarter of 2024. We anticipate full year 2024 total revenues to be in the range of $900 million to $950 million. We expect to earn a full year 2024 adjusted EBITDA margin of approximately 22% to 23%, and we expect to achieve $120 million to $130 million in free cash flow for 2024.
Our profitability guidance takes into account the impact of typical dedication that we see on an annual basis and the investments that we are making in strategic growth areas. As a result, in the first quarter of 2024, we anticipate revenues to be in the range of $222.5 million to $224.5 million, and we expect to earn an adjusted EBITDA margin of approximately 22%. The adjusted EBITDA margin for Q1 will be impacted by lower revenues, the partial quarter impact of annual base increases and investments in sales, marketing and technology.
This adjusted EBITDA margin guidance for the quarter and full year is based on current Forex rates. So any change to currency rates would impact our margins. As a reminder, the majority of our revenue is built and collected in US dollars. So we do not see the impact of US dollar fluctuation in our revenues. I will now hand it back to Bryce before we take your questions. Thank you.

Bryce Maddock

Thank you, Balaji. Before we open for questions, I want to share another TaskUs teammate story. At the end of last year, TaskUs senior leaders gathered in the Philippines for our 2024 strategy session. In addition to planning, it was critical to me to bring leaders together from across the globe so that everyone could experience the magic of our sites and the culture of our people in the Philippines.
During one of our site visits, we met with Desiree Omiles. I know Desiree because she started with TaskUs 12 years ago as a transcriptionist when we're still a very small operation. Back then, I still know everyone's first name. Desiree originally trained to become a nurse. However, when she graduated, the Philippines job market for nurses was very tough. So she took a job with TaskUs instead.
Today, Desiree is a senior wellness and resiliency coach working directly with our content moderators. She received extensive training from TaskUs and now teaches teammates everything from the importance of positive self-talk to the power of music how to better regulate their emotions. Thanks TaskUs, says Desiree. You've changed my life. I get to make a difference one wellness session at a time.
Reconnecting with Desiree was a powerful reminder for me, and our senior leaders of the positive impact TaskUs has on the lives our teammates across the globe. With that, I will ask the operator to open the line for our question and answer session. Operator?

Question and Answer Session

Operator

(Operator Instructions) Puneet Jain, JPMorgan.

Puneet Jain

Hey, thanks for taking my question. So wanted to ask like So for 2024, what could be like the incremental headwinds that you expect relative to Q4 of this year. I know like there is seasonality in the fourth quarter, but adjusted for that, like are there any incremental headwinds that you expect from asking this because the guidance implies like the exit rate of around mid-single digits, high single digits based on where you end up in the guidance in that range for the full year. So how should we think about like the long-term growth beyond this year for the Company?

Bryce Maddock

Yes.
Thanks, Puneet. So this year, our number one goal is to return to year-over-year growth. And given the strong performance in Q4. And the performance we've seen at this point, the Q. one were copper, cautiously optimistic that we're going to be able to do that. So essentially, you think the numbers you're outlining there happened at the midpoint of our guidance range, and our goal is to trying to drive revenues towards the top end of our guidance range and to do that we need to execute on the four elements of our growth strategy. We need to get aggressive and take share from our competitors. We need to continue to grow our relationships with enterprise healthcare and banking and financial services clients. And we need to successfully cross-sell our specialized services. And finally, we have to lead the industry on the deployment of generative AI tools in our service delivery as the stage things are trending well on all of these fronts, we've seen increased sales velocity and a reduction in cost optimization discussions that may lead to reduced volumes, and we successfully targeted and taking share from our competitors. And so we're very, very excited about what is going to come in 2024 as we look ahead, obviously, we're not providing guidance, but at this stage, we believe we will be able to we'll return to year-over-year revenue growth in the back half of 2024 and we would hope to sustain that into 2025.

Puneet Jain

Got it. Got it. And then your free cash flow guidance like that for despite the revenue headwinds are margin headwinds this year like the free cash flow remains solid, even like revenues down relative to years ago. But free cash flow is not so going forward like for as there are like continued revenue headwinds, what should we expect for free cash flow? Are there more levers so you have to protect free cash flow to continue to grow free cash flow?

Bryce Maddock

Yes, sorry. By 24%. So like I said, we delivered very strong free cash flow despite a very challenging macro environment in 2023. And as a reminder, we delivered $131 million goes towards 60% adjusted EBITDA conversion, which excludes payment for the Hallo acquisition. And the way we did this is due to the proactive multiyear efficiency effort that we announced pretty early in 2023. And we kind of reacted pretty early in terms of which the changes that we saw from a macroeconomic perspective. We continue to optimize CapEx spend by leveraging existing investments. And we also actively sought to manage our working capital, including like a new invoicing process.
So like Brian said earlier, this is an ongoing activity, which is not part of the DNA of the business. So it is not like one-time pricing is something that we're going to continue to do. So we are confident that we'll continue to generate strong free cash flows despite any changes that we might see in the business segment.

Puneet Jain

Got it. Thank you.

Operator

Maggie Nolan, William Blair.

Margaret Nolan

Hi, thank you for taking my question. I wanted to expand on something that Brice You briefly touched in your prepared remarks and you mentioned the focus on enterprise clients. And I wanted to kind of understand your progress there, maybe how you've adjusted and the go to market versus when you are more historically focused on maybe tech clients or more kind of emerging disruptive clients?

Bryce Maddock

Thanks so much for the question, Maggie. So we continue to expand our sales and client service teams over the course of 2023. We've recruited a number of industry veterans who got deep experience selling into the enterprise space. And I mentioned on the call that we successfully signed a leading credit union in Q4. And I think that's one of many examples of the success we've seen selling both into banking and financial service clients and more traditional enterprise health care clients and this is obviously one of the four important growth levers for us as we continue into 2024. And we really see the enterprise is forming a much more stable Valicert revenues. There may not be ripe for exponential growth, but they're also not going to see the declines that we've seen in certain pockets of the hybrid tech space. And so that will pair that strategy with continuing to be a leading provider in the high-growth technology space. And the combination of those two things will lead us.

Margaret Nolan

Great. Okay. That's helpful. Thanks. And then can you just talk a little bit more about within that context of that last comment you made you made leaving you back to growth the second half in particular it seems like you feel a little bit more optimistic about. And can you talk about your visibility levels into the second half? Maybe talk about what level of optimism is just driven by year-over-year comp versus some of the initiatives you were just outlining and any others? Thank you.

Bryce Maddock

Yes. Thanks, Maggie. So the good first half of the year, we've got very strong visibility into it. Historically, we've always demonstrated an ability to and accurately forecast our quarterly revenues, and this is based on the strength of our relationships with our clients and the contractual terms that we've got in place to protect us against any major volume fluctuations.
As we look into the second half of the year, our confidence is really based on the budget conversations that we've been having with our clients. And I'll give you just an example and of our top three clients. Last year, our top three clients revenue declined by a double-digit percentage. And when you combine the three of them, this is led by our largest client where we saw massive shifts in volume from onshore to offshore. And this year, we are forecasting that that group will grow by a single-digit percentage. And so we're going from a pretty substantial decline back to it's fairly modest growth, and that gives us confidence that the base of the business is a lot more secure in 2024. And that the strong sales momentum that we've seen in the first quarter will get us back to growth.

Margaret Nolan

Yes, that was really helpful. Thank you.

Operator

Dave Koning, Baird.

David Koning

Yes, hey, guys, thank you. And I guess my first question your margins have held up extremely well despite some volatility in revenue. And I know part of that is the offshore shift and now that you're pretty fully out of the US you won't get the kind of the incremental benefit to margins, but is there some other offset or yes, I mean, could margins come down or how do you see that now that you might not get that kind of incremental? What kind of benefit from the shift?

Balaji Sekar

So Dave, I'll take that question and I'll have to add more color if required so. So we did see benefit from a from an offshore mix shift in 2023. But some of the drivers that we've been focused on is one is we started the optimization and efficiency building process sometime late part of 2022. And like I said earlier, that's kind of part of the business. And also we'll continue to find efficiencies from an operational perspective from a G&A perspective. So that's something that we'll continue to drive.
Second is, as Brian spoke about growth rates, especially in the second half of the year, so as we start seeing growth rates improve, we will begin to see that margins also will start to expand. And then we'll also continue to see that the growth is happening more in offshore locations. And like we have spoken about this before, those are margin accretive. So again, that's going to help from a margin perspective.
And then as you continue to grow some of our specialized service lines. You have seen that these are higher margin. So again, that's going to be a focus area from a from a business perspective. So that those are some of the things that we're thinking about as to how to deliver margins that we are guiding to getting into the 24, I'd say, Okay.

Bryce Maddock

No, that's really helpful on. And I guess the second question, I know you guys are signing new clients at a pretty amazing pace still and it wasn't long ago, you were probably around 100, you're probably around 200 clients now give or take. And but given given revenue hasn't grown a ton lately on the average size client is smaller, is it maybe what are the dynamics there? Are you just doing smaller deals? Or is that just the incremental client that comes on just doesn't need as much service or how should we think about that that dynamic over time?
It's a great question that the number of clients that we closed in 2023 was and the highest that we've seen since we started keeping track of this number back in 2018. So we were very pleased to see that. But you're right that the initial deal size was smaller than we've seen historically, part of that is because we're seeing more interest for offshore deals. So while that the volume of work may be the same, the dollar value associated with that work is lower in an offshore environment than in the United States. As we think about this going forward, I think it's just important that we continue to maintain our sales velocity and bring on more clients because each one of these clients is it has to be opportunity and scale exponentially if their business model begins to grow. And so that's really what we're seeing there.
The other thing I'll just say is some of the challenges we faced in 2023 were more to do with our large clients optimizing their spend. As I already said, our top three clients revenue declined by a double-digit percentage in 2023, and we've now seen that stabilize. That number will increase by single digit percentage in 2020 for scotch.

David Koning

Thank you.

Operator

Matthew Roswell, RBC Capital Markets.

Matthew Roswell

Yes, good afternoon. It's Matt Roswell on for Dan Perlin. A question on the MBAI. Assist, how do you think about balancing pricing and investment in internal solutions like AI assist against helping companies sort of they're investing in their own solutions? What's the dynamic between those two?
Yes.

Bryce Maddock

Thanks for the question. So stay, I is a platform that our teammates used to improve their productivity and the accuracy or quality of the responses or actions that they take in. And this is a technology that we're actually baking into our service free of charge to our clients. We think that the future of our industry is going to require service providers to bring a well-trained combination of both teammates and technologies to solve client problems.
And we've been wrestling quite a bit with.
Okay.
How do we do this in a way that is margin accretive and protects our underlying revenue. And where we've gotten is we need to be the best and most efficient and most high quality provider in terms of services. And in the cases in which we're able to do that to take the number one spot spot amongst all the vendors that we're competing against, we capture more share it be a client spend and where we can demonstrate service excellence. Clients tend to also give us more work that they may have been doing historically inside their own operations and the second part of your question is that the entire industry that's being created in front of Verizon's degenerative AI industry requires a huge amount of services. Everything from expert prompt writing two red teaming and the various generative AI tools to kind of provoke them to create that content to some of our more traditional trust and safety services. And so we've seen an uptick in demand from G&A companies for our core trust and safety and high services. And as companies continue to invest more and more in those services, we think that we will benefit from that. That being said, we're not seeing that many examples of clients building their own generative AI technology for our core workflows, things like customer service. There are definitely a few. There's some interesting headlines today, but for the most part, we're seeing clients certainly interested in either using a third party technology and or on partnering with a client a company like Comcast and who has assist AI as a core solution that we bake into our services.

Matthew Roswell

Okay, thank you. And as a follow-up, should we anticipate any changes to capital allocation, no bets sort of the revenue growth seems like it's coming back.

Bryce Maddock

Well, I can start and Balaji, maybe you can jump in there. We are going to be investing more in sales and marketing as well as technology. And so right now are the number one use of capital is going to be funding and funding the expansion of our growth team and we expect that those investments will pay off here in the near term, as we said, getting back to growth in the back half of the year as well within our sights. And beyond that, we continue to look at is it the uses of capital. We are for everything from CapEx to potentially share repurchases and at the right at the right prices and also considering the potential of M&A.

Matthew Roswell

Okay. Thank you very much.

Operator

Matthew VanVliet, BTIG.

Matthew VanVliet

Hi, good afternoon. Thanks for taking the question or I guess the first was and where do we stand at in terms of the progress of, I guess, the offshoring initiatives of a number of clients, especially the larger ones. Are we pretty much through all of that now? Or are there still some sort of in-process movement there? And then the sort of natural follow-up there is how much do you anticipate other clients looking to further offshore, maybe any U.S. revenues that are still still here today?

Bryce Maddock

Yes, great question.
So in 2023, we saw U.S. revenues declined by more than 100 million from 2022. U.s. revenues ended up about $148 million in 2023. And so it was the only region that we report on that declined all of our other regions, our Philippines, India and the rest of the world grew out of Europe for Europe in 2023. And so as we look at the future here, clearly with a with almost 100, $50 million in revenue in the U.S., there is some risk we've said for a while that we don't expect a percentage of our overall revenue to ever dip below 10%. It was at 14% of revenues coming from the US in Q4 of 2023 so there is a possibility of some incremental onshore to offshore ships, but those will not be anywhere near the size of the onshore offshore ships that we see on 2022 and 2023.

Matthew VanVliet

Okay. Very helpful. And then when you talk about a greater focus on some of the specialty services, especially being sold back into the existing client base, and I guess at what point during the year, do you expect that to show sort of an inflection point higher? And I guess how many of the clients that have gone through a pretty detailed offshoring initiatives over the last year, plus are now ready to sort of come back and look for more opportunities to use Tesco's, especially for those specialty services.

Bryce Maddock

I mean, we're seeing a real increase in demand for our specialized services. As I said, the number of clients who are using the gene and one of them, we actually is, I should say two or more of our Specialized Services has, yes, increased quite substantially in 2023 over 2022. And the growth in our trust and safety offering, which also includes all the risks and response work that we do for financial crimes and compliance is really, really encouraging. I think the decline that we saw in our AI services revenues, it's really driven by two simultaneous impacts. The first is that over the course of 2023, our largest client cut spending on server and AIS. related our R&D investments. And the second is that our largest autonomous vehicle clients and hence did did a huge onshore to offshore ship in 2023. So we expect to lap the impact of those. And towards the back half of 2024, we're continuing to see an uptick in the number customers are using our ad services. A lot of these clients are coming from the generative AI space. And while the projects themselves may be starting small equities, massive potential upside. And so we're excited and encouraged to see a continued increase in demand for our specialized services.

Matthew VanVliet

Great. Thank you.

Operator

Thank you. This concludes today's conference call and thank you for participating. You may now disconnect.