Taskus Inc
NASDAQ:TASK
Earnings Call Analysis
Q4-2023 Analysis
Taskus Inc
The company reported revenues of $234.3 million, surpassing their guidance of $225-$227 million, and an adjusted EBITDA of $59 million, resulting in a margin of 25.2%, which was also above the guided 22.5%. For the full year of 2023, revenues reached $924.4 million with an adjusted EBITDA of $220.8 million, representing a margin of 23.9% against a guidance of 23.3%. Moreover, the company generated $131 million in free cash flow, well above the predicted $115 million.
The company faced challenges in 2023, with a revenue decline of 3.3% year-over-year but is set on achieving consistent growth in 2024. They've already observed solid demand in the first quarter, bolstered by investment returns in technology, sales, and marketing.
Despite a 10% revenue decline from their top 20 clients in Q4, growth from other clients countered this downturn, with revenue from clients outside the top 20 accelerating by 13%. Notably, international expansion was robust, with revenue from one region growing by approximately 78% year-over-year.
The company reported a significant increase in clients utilizing multiple service lines, up 30% year-over-year. They introduced Assist AI, built on the TaskGPT platform, designed to enhance the efficiency and accuracy of customer interactions in their Digital CX business.
Revenue from digital customer experience dropped 4.4% compared to Q4 2022, but offerings in trust and safety saw a rise of 23.5% year-over-year and 7.3% quarter-over-quarter, signaling robust growth driven by large clients in various sectors.
For Q1 2024, revenue is projected between $222.5 million and $224.5 million, with a year-over-year and sequential quarter decline of approximately 5%. Full-year guidance is set at a midpoint of $925 million, with anticipations of flat to modest year-over-year revenue growth by year-end. The company is optimistic about returning to revenue growth in the latter half of 2024 and beyond. With approximately 10% of long-term revenue projected to come from the US, due to various factors including regulatory and privacy concerns, the company foresees its international operations as a growth driver.
The introduction of Assist AI signifies the company's commitment to leveraging technology to solve client challenges more efficiently, reflecting a strong stride towards industry leadership and innovation.
You don't have any saved screeners yet
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.
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 10K, 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?
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. [indiscernible] 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.
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 [indiscernible]. 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.
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?
[Operator Instructions] Our first question will come from the line of Puneet Jain with JPMorgan.
So I wanted to ask like for 2024, what could be like the incremental headwinds that you expect uh 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? Asking this because the guidance implies like the exit rate of around mid-single digits, high single digits based on where you end in the guidance in that range for the full year. So how should we think about like the long-term growth beyond this year for the company?
Thanks, Puneet. So this year, our #1 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 in Q1, we're cautiously optimistic that we're gonna be able to do that. So essentially, I think the numbers you're outlining there happen at the midpoint of our guidance range. And our goal is to try to drive revenues towards the top end of our guidance range. And to do that, we need to execute on the 4 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, health care 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. At this stage, things are trending well on all of these fronts. We've seen increased sales velocity and a reduction in cost optimization discussions that may lead to reduced volumes, and we successfully targeted and taking share from our competitors. And so we're very, very excited about what is gonna come in 2024. As we look ahead, obviously, we're not providing guidance, but at this stage, we believe we will be able to return to year-over-year revenue growth in the back half of 2024, and we would hope to sustain that into 2025.
Got it. Got it. And then your free cash flow guidance, like that so despite like the revenue headwinds, margin headwinds this year, like the free cash flow remains solid. Even like revenue is down relative to 2 years ago, but free cash flow is not. So going forward, like for there are like continued revenue headwinds, what should we expect for free cash flow? Are there more levers that you have to protect free cash flow to continue to grow free cash flow?
So thanks for the question. 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, close to about 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 renounced pretty early in 2023, and we kind of reacted pretty early in terms of the changes that we saw from a macroeconomic perspective. We continue to optimize CapEx spend by levering existing investments, and we also actively started to manage our working capital, including like a new invoicing process. So like Bryce said earlier, this is an ongoing activity, which is now part of the beginning of the business. So it is not like onetime project. It's something that we're going to continue to do. So we are confident that we'll continue to generate strong free cash flows despite any changes that we might see in the business environment.
Our next question will come from the line of Maggie Nolan with William Blair.
I wanted to expand on something that Bryce, you briefly touched in your prepared remarks. You mentioned the focus on enterprise clients, and I wanted to kind of understand your progress there, maybe how you've adjusted the go-to-market versus when you were more historically focused on maybe tech clients or more kind of emerging disruptive clients?
So we continue to expand our sales and client service teams. Over the course of 2023, we've recruited a number of industry veterans who've got deep experience selling into the enterprise space. I mentioned on the call that we successfully signed a leading credit union in Q4. And I think that's one of many examples of the success we've seen selling both into banking and financial service clients and more traditional enterprise health care clients. This is obviously one of the 4 important growth levers for us as we continue into 2024. And we really see the enterprise as forming a much more stable balance of revenues that there may not be ripe for exponential growth, but they're also not gonna see the decline that we've seen in certain pockets of the high-growth tech space. So that will pair that strategy with continuing to be a leading provider in the high-growth technology space, and the combination of those 2 things will lead us back to growth.
Okay. That's helpful. And then can you just talk a little bit more about within that context of that last comment you made leaving you back to growth. The second half in particular seems like you feel a little bit more optimistic about. Can you talk about your visibility levels into the second half? Maybe talk about what level of optimism is just driven by year-over-year comp versus some of the initiatives you were just outlining in any others? Thank you.
Yes. Thanks, Maggie. So the first half of the year, we've got very strong visibility into -- historically, we've always demonstrated an ability to accurately forecast our quarterly revenues. And this is based on the strength of our relationships with our clients and the contractual terms that we've got in place to protect us against any major volume fluctuations. As we look into the second half of the year, our confidence is really based on the budget conversations that we've been having with our clients. And I'll give you just an example of our top 3 clients. Last year, our top 3 clients revenue declined by a double-digit percentage when you combine the 3 of them. And this is led by our largest client, where we saw massive shifts of volume from onshore to offshore. And this year, we are forecasting that, that group will grow by a single-digit percentage. So we're going from a pretty substantial decline back to fairly modest growth. That gives us confidence that the base of the business is a lot more secure in 2024 and that the strong sales momentum that we've seen in the first quarter will get us back to growth.
That was really helpful. Thank you.
Our next question will come from the line of Dave Koning with Baird.
I guess my first question, your margins have held up extremely well despite some volatility in revenue. And I know part of that is the offshore shift. Now that you're pretty fully out of the US, you won't get the kinda the incremental benefit to margins, but is there some other offset? Or I mean could margins come down? Or how do you see that now that you might not get that kinda incremental kinda benefit from the shift?
So Dave, I'll take that question, and I'll have Bryce to add more color, if required. So we did see benefit from an offshore mix shift in 2023. But some of the drivers that we kind of focused on is one is we started the optimization and efficiency building process sometime late part of 2022. And like I said earlier, that's kind of part of the business now. So we'll continue to find efficiencies from an operational perspective, from a G&A perspective. So that's something that we'll continue to drive. Second is, as Bryce talk 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 accrual. So again, that's going to help from a margin perspective. And then as we continue to grow some of our specialized service lines, we have seen that these are higher margin. So again, that's gonna be a focus area from a business perspective. So that -- those are some of the things that we are thinking about as how to deliver margins that we are guiding to -- getting into '24.
Got you. Okay. Now, that's really helpful. And then I guess the second question, 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. But given revenue hasn't grown a ton lately, the average size client is smaller. Maybe what are the dynamics there? Are you just doing smaller deals? Or is that just the incremental client that comes on just doesn't need as much service? Or how should we think about that dynamic over time?
It's a great question, Dave. The number of clients that we closed in 2023 was the highest that we've seen since we started keeping track of this number back in 2018. So we were very pleased to see that. But you're right that the initial deal size was smaller than we've seen historically. Part of that is because we're seeing more interest for offshore deals. So while the volume of work may be the same, the dollar value associated with that work is lower in an offshore environment than in the United States. And as we think about this going forward, I think it's just important that we continue to maintain our sales velocity and bring on more clients because each one of these clients has the opportunity to scale exponentially if their business model begins to grow. So that's really what we've seen there. The other thing I'll just say is some of the challenges we faced in 2023 were more to do with our large clients optimizing their spend. As I already said, our top 3 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 2024.
Our next question comes from the line of Matthew Roswell with RBC Capital Markets.
This is Matt Roswell on for Daniel Perlin. Our question on the AI Assist, how do you think about balancing pricing and investment in internal solutions like AI Assist against helping companies sort of that are investing in their own solutions? What's the dynamic between those two?
Thanks for the question. So Assist AI is a platform that our teammates use to improve their productivity and the accuracy or quality of the responses or actions that they take. And this is a technology that we're actually baking into our service free of charge to our clients. We think that the future of our industry is gonna 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 that in the cases in which we're able to do that to take the #1 spot amongst all the vendors that we're competing against, we capture more share of the clients spending where we can demonstrate service excellence, clients tend to also give us more work that they may have been doing historically inside their own operations. The second part of your question is that the entire industry that's being created in front of horizons, the Generative AI industry requires a huge amount of services. Everything from expert prompt writing to red teaming the various Generative AI tools to kinda provoke them to create illicit content to some of our more traditional trust and safety services. And so we've seen an uptick in demand from Gen AI companies for our core trust and safety and AI services. And as companies continue to invest more and more in those services, we think that we will benefit from that. That being said, we're not seeing that many examples of clients building their own Generative AI technology for our core workflows, things like customer service. There are definitely a few. There was some interesting headlines today. But for the most part, we're seeing clients are interested in either using a third-party technology or on partnering with a client -- a company like TaskUs, who has Assist AI as a core solution that we baked into our services.
Okay. And as a follow-up, should we anticipate any changes to capital allocation now that sort of the revenue growth seems like it's coming back?
Well, I can start in biology, 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, the #1 use of capital is gonna be funding the expansion of our growth team. 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. Beyond that, we continue to look at the uses of capital for everything from CapEx to potentially share repurchases at the right prices and also considering the potential of M&A.
Our next question comes from the line of Matthew VanVliet with BTIG.
I guess first was where do we stand in terms of the progress of, I guess, of the offshoring initiatives of a number of clients, especially the larger ones. Are we pretty much through all of that now? Or are there still some sort of in-process movement there? And then sort of natural follow-up there is, how much do you anticipate other clients looking to further offshore maybe any US revenues that are still here today.
Yes, great question. So in 2023, we saw US revenues declined by more than $100 million from 2022. US 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, Philippines, India and the rest of the world grew year-over-year in 2023. So as we look at the future here, clearly with almost $150 million in revenue in the US, there is some risk. We've said for a while that we don't expect 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 onset offer ships that we saw in 2022 and 2023.
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. 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 TaskUs, especially for those specialty services?
I mean we're seeing a real increase in demand for our specialized services. As I said, the number of clients who are using -- I should say 2 or more of our specialized services has increased quite substantially in 2023 over 2022. The growth in our trust and safety offering, which also includes all the risk and response work that we do for financial crimes and compliance is really, really encouraging. I think the decline that we saw in our AI services revenues is really driven by 2 simultaneous impacts. The first is that over the course of 2023, our largest client cut spending on certain AIS-related R&D investments. And the second is that our largest autonomous vehicle client has did a huge onshore offer ship in 2023. So we expect to lap the impact of those towards the back half of 2024. And we're continuing to see an uptick in the number of customers who are using our AI services. A lot of these clients are coming from the Generative AI space. And while the projects themselves may be starting small, I think there's massive potential upside. So we're excited and encouraged to see a continued increase in demand for our specialized services.
This concludes today's conference call. Thank you for participating. You may now disconnect.