TaskUs Predicts Revenue Decline In 2023 As AI Automation Weighs (NASDAQ:TASK)

A Quick Take On TaskUs

TaskUs, Inc. (NASDAQ:TASK) reported its Q1 2023 financial results on May 8, 2023, beating both revenue and EPS estimates.

The firm provides enterprises with a variety of outsourced digital services for customer care and content security applications.

TaskUs, Inc. management has guided to 2023 full-year revenue contraction and the firm may be negatively impacted by AI technology development and adoption by customers and prospects.

I’m on Hold for TASK stock in the near term.

TaskUs Overview

New Braunfels, Texas-based TaskUs, Inc. was founded to provide labor outsourcing services to enterprises seeking to accommodate increased demand.

Management is headed by co-founder and CEO Bryce Maddock, who received a B.A. in International Business from New York University.

The company’s primary offerings include:

• Digital Customer Experience.

• Content Security.

• AI Operations.

The company provides services to firms in industries including general technology, streaming media, food delivery and ride sharing, financial technology and health technology.

TASK pursues client relationships in high-priority industry verticals such as various technology verticals and food delivery and ride sharing.

The TaskUs Market & Competition

According to a 2021 market research report by Grand View Research, the global market for business process outsourcing was an estimated $232 billion in 2020 and is expected to reach $446 billion by 2028.

This represents a forecast of 8.5% from 2021 to 2028.

The main drivers for this expected growth are an increasing usage of digital tools and delocalized talent to maximize business efficiencies.

Also, the versatility of outsourcing services is increasing as other types of service process automation and intelligence adds to return on investment for enterprises.

Below is a chart showing the historical and expected future growth trajectory of process outsourcing services in the U.S.:

The Asia Pacific market is forecast to see the highest CAGR from 2021 to 2028, and the chart below indicates the breakdown of that market by end-use industry in 2020:

Major competitive or other industry participants include:

• 24/7 Intouch.

• Appen.

• TDCX.

• Accenture.

• Genpact.

• Tata Consultancy.

• Cognizant.

• Teleperformance.

• TELUS International.

• TTEC.

• VXI.

• Sutherland.

TaskUs Recent Financial Trends

• Total revenue by quarter has plateaued in recent quarters:

• Gross profit margin by quarter has been more volatile lately:

• Selling, G&A expenses as a percentage of total revenue by quarter have also varied materially recently:

• Operating income by quarter has remained positive, as the chart shows below:

• Operating leverage by quarter has improved in recent quarters:

• Earnings per share (Diluted) have remained in positive territory recently:

(All data in the above charts is GAAP).

In the past 12 months, TASK’s stock price has fallen 48.54% vs. that of the iShares Expanded Technology-Software ETF’s (IGV) rise of 13.33%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $167.0 million in cash and equivalents and $266.9 million in total debt, of which $4.3 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $122.7 million, of which capital expenditures accounted for $31.2 million. The company paid $62.8 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For TaskUs

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	1.3
Enterprise Value / EBITDA	8.3
Price / Sales	1.2
Revenue Growth Rate	12.8%
Net Income Margin	4.0%
EBITDA %	15.9%
Net Debt To Annual EBITDA	0.7
Market Capitalization	$1,120,000,000
Enterprise Value	$1,260,000,000
Operating Cash Flow	$153,890,000
Earnings Per Share (Fully Diluted)	$0.36

Click to enlarge

(Source – Seeking Alpha)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Assuming generous DCF parameters, the firm’s shares would be valued at approximately $12.31 versus the current price of $12.02, indicating they are potentially currently undervalued, with the given earnings, growth, and discount rate assumptions of the DCF.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

TASK’s most recent Rule of 40 calculation was 28.7% as of Q1 2023’s results, so the firm is in need of some improvement in this regard, per the table below:

Rule of 40 Performance	Calculation
Recent Rev. Growth %	12.8%
EBITDA %	15.9%
Total	28.7%

Click to enlarge

(Source – Seeking Alpha)

Commentary On TaskUs

In its last earnings call (Source – Seeking Alpha), covering Q1 2023’s results, management highlighted a more challenging macroeconomic environment, with a large U.S. client losing a large contract, thereby negatively impacting the company’s revenue targets.

Crypto equity trading client revenue dropped to just 4% of revenue in Q1 2023 versus accounting for 15% of revenue in Q1 2022.

On the AI front, the company has launched its TaskGPT functionality and is working with some clients to implement the technology into their operations, although it is still early days.

It is also early to determine how the growth of AI-enabled technologies will affect TASK’s core business and how quickly it will change.

Management did not disclose any company or customer retention rate metrics.

Total revenue for Q1 2023 dropped 1.8% year-over-year, but gross profit margin rose 0.6 percentage points.

Selling, G&A expenses as a percentage of revenue increased 0.7 percentage points year-over-year, a negative signal, and operating income fell 9.88% YoY.

Looking ahead, management guided full-year 2023 revenue to be $937.5 million at the midpoint of its guidance range, or a contraction of 2.45% for the year.

The company’s financial position is generally solid, with ample liquidity, some long-term debt and strong free cash flow; its net debt-to-EBITDA multiple is a low 0.7x.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited “Challeng[es][ing]” two times, “Macro” two times and “Drop” four times.

The negative terms refer to lost activity from the firm’s largest global client and the growing challenges the firm faces due to the macroeconomic environment.

Regarding valuation, my discounted cash flow calculation estimates that the stock may be fully valued at its current level of around $12.00.

A potential upside catalyst to TaskUs stock could include a pause or “skip” in interest rate hikes from the U.S. Federal Reserve, but that potential bounce could be short-lived.

The primary risk to the company’s outlook is continued automation from AI technologies that may serve to disrupt the market for certain of its products.

As such, I’m on Hold for TaskUs, Inc. for the near term.