Good morning. And welcome to the TaskUs Third Quarter 2022 Investor Call. My name is Shomali and I'll be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speakers' remarks, there will be a question-and-answer period. Please note this conference is being recorded. I would now like to introduce Alan Katz, Vice President of Investor Relations. Alan, you may begin.

Good afternoon. And thank you for joining the TaskUs third quarter 2022 earnings call. Joining me on the call today 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 metrics file. Please note that this call is being simultaneously webcast on the IR section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal Securities Laws, 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 those forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 9, 2022. This filing is accessible on the SEC's website and on our website at ir.TaskUs.com, and may be supplemented with subsequent periodic reports that we file with the SEC. Any forward-looking statements made in 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. For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metrics, 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, Co-Founder and Chief Executive Officer of TaskUs. Bryce?

Thank you, Alan. Good afternoon, everyone, and thank you for joining us. In Q3, our revenue and adjusted EBITDA once again came in above the top end of our guidance ranges. Q3 revenue grew by 15.5% year-on-year to $232.1 million, above the top end of our guidance of $226 million. Adjusted EBITDA grew 15.3% year-on-year to $55.5 million for an adjusted EBITDA margin of 23.9%, also above our guidance of 22%. 2022 has been a challenging year as many of our clients have shifted their focus from growth to cost. I am very proud of how quickly our team has responded. After a pause in some client decision-making in Q2, our sales activity picked back up this quarter. We also moved to drive additional efficiencies into our business. This quarter, we increased our margins compared with last quarter through our focus on G&A spending. We delivered our highest adjusted EBITDA margin and highest free cash flow for the year in spite of the top-line headwinds we faced. Over the next few quarters, we will navigate the volatile macro environment and a set of challenging comps from the first half of this year. But given our team's incredible performance over the past quarter, I remain confident in our ability to drive revenue growth and increase profitability and cash flow in 2023. After going through the details of our Q3 performance and briefly highlighting our updated full-year outlook, I'll discuss our current outlook for the start of 2023 given the recent strong sales performance, the current macro environment, and our clients' volume projections. Balaji will then walk through the financials, as well as our guidance for the remainder of 2022. Let's start with the third quarter. We delivered strong signings from both new and existing clients this past quarter and continue to move up the value chain with our clients. Starting with growth with our current clients, in Q3, our top 20 clients increased their spend year-over-year by more than 5%. This growth rate was materially impacted by the transition of work offshore at our largest client and the declines in volume at our largest crypto and equity trading clients. If we exclude those three clients, our largest 17 clients grew 26% year-over-year. Revenue from clients outside the top 20 grew at more than 46% year-over-year. This broad-based growth has continued to reduce our client revenue concentration and improved the diversity and resilience of our client base. Looking at our service offerings, digital customer experience revenue grew 20.9% compared with Q3 of 2021 as a result of expansion with existing clients and new client signings. We're seeing strong signings activity from existing clients in the travel and on-demand transportation space, as well as with healthtech and non-crypto fintech clients. In terms of new clients, our signings are weighted towards clients in the retail and e-commerce and travel verticals, as well as with one of the big tech clients I discussed on the Q2 call. The sequential quarterly revenue decline in the service offering was primarily driven by the continued decline in volumes from our crypto and equity trading clients. In Q2, these clients accounted for about 12% of revenue. In Q3, they represented about 6% of our revenue, and we now expect them to represent about 4% of Q4 revenues. In terms of major DCX signings, we signed a significant expansion for the smart home technology client. This client has asked TaskUs to take on their most complex customer support interactions and escalations. We are also now leading user retention efforts when one of their customers moves or considers canceling their service. This is a client who we began working with at the end of 2019. At the time, they had a large diverse global vendor network. Our performance and strategic relationship have consistently led to us taking share from these competitors, and we have a clear path to become this client's largest vendor in 2023. We also signed a DCX engagement with a rapidly growing app in the mental health space. This is a great example of the growth we're seeing in healthtech. Here, we're providing digital customer experience to support their patients. The client chose us as their first vendor partner in large part due to our focus on health and wellness for our frontline teammates and our learning experience expertise. Finally, we signed a new digital customer experience contract with one of the largest global retailers to provide support for their e-commerce offering. We'll be ramping up with this client during the holiday season and see the potential for significant expansion with them over time. This client is another step forward in our engagement with the Fortune 100 and some of the world's most prominent brands. We're increasingly partnering with these global enterprises to support their digital transformations and customer engagement efforts. Moving on to content security. Revenues in this service offering declined 3.2% compared with Q3 of 2021, driven by the impact from our largest client moving work to our locations in the Philippines and India. Our relationship with our largest client remains very strong. We're taking significant share from competitors and continue to see both sequential and year-over-year volume growth. In fact, the number of teammates supporting this client have increased by 30% from the start of this year to the end of Q3. This significant volume growth was offset by the shift of business from the US, which is the geography with the highest fill rates in the Philippines and India. This shift led to the revenue decline for the service offering this quarter. Despite these challenges, we expect more revenue from our largest client this year than last year. We also expect to add hundreds more teammates to support them over the next few quarters as we continue to take share. Globally, they continue to move work from high-cost delivery locations to lower-cost geographies. We are benefiting from this shift due to our strong capabilities in the Philippines and India. We will see another smaller transition of less than 100 roles that remain in the US for this client at the end of this year. We expect this to net out to revenues from our largest client being roughly flat from 2022 to 2023. If we exclude the impact from our largest client, this quarter's content security revenues would have grown 26% compared with Q3 of 2021. We're seeing even faster volume growth as overall content security teammates increased by 44% year-over-year. As I mentioned last quarter, we expect to show sequential growth in content security moving forward. We expanded our content security services with a global music streaming app. Here we provide trust and safety for a diverse set of music and podcasts posted to the platform by global creators. We also moderate user comments on the platform. We're taking action on privacy violations, harassment, and the posting of illegal or copyrighted content. We are the sole provider at this client and won this expansion from their in-house team against several competitors. We continue to expand our risk and response offering with an e-commerce client to support any money laundering, know your customer, and identity verification inquiries in cases involving unauthorized payments or account issues. We began working with a B2B fintech software platform that is used by global brands to manage disputes and chargebacks with a particular focus on fraud associated with this type of activity. This client turned to us to provide live support outside of their automated platform. This type of engagement is especially interesting, pairing our risk and response capabilities with our client software. Finally, we launched a risk and response engagement with one of our large food delivery clients. Here we're leading fraud investigations. AI services revenues grew 21% in Q3 compared with 2021, driven primarily by expansions with existing clients in the social media and autonomous vehicle spaces and new client signings. We signed new engagements with the leading global provider of generative AI technology, a collectibles marketplace, and one of the largest global technology companies in the world. Our AI services engagements continue to be supported by a combination of our dedicated teams and taskers. We continue to invest aggressively in the TaskVerse and have signed up over 70,000 global taskers to the platform, surpassing the number of TaskUs teammates for the first time. We're seeing TaskVerse deals utilizing thousands of taskers focused on areas such as data collection, annotation, and online research. In addition to image, video, and audio annotation, we engaged with a global technology company who leveraged our platform to collect competitive benchmarking data from a demographically diverse community of taskers. We are also seeing demand for our crowd outside of AI services. We engaged with one of the largest e-commerce marketplaces leveraging thousands of taskers to perform online research tasks to support this client's sales team. These are just a few examples of the type of creative engagements that we've seen on the TaskVerse thus far. Looking at overall signings, our engagements this quarter were again driven largely by growth from existing clients, which accounted for over 70% of total new business signings in Q3. Turning to revenue growth within our industry verticals. We're seeing particularly strength from entertainment and gaming, high tech, and on-demand travel and transportation, which includes our food delivery clients. Each of these verticals grew by approximately 40% this quarter compared with Q3 of 2021. Throughout this year, we've discussed the trend of clients shifting work that they were previously doing in higher-cost locations to our offshore teams. This has been particularly true of higher-value services that clients may not have looked to outsource in the past. We saw this trend continue this past quarter with several clients, including a digital media company in the entertainment and gaming space. As the streaming media industry is increasingly driving revenue from advertisements, the support needed to insert ads into shows has increased. We were able to engage with our client to transition this entire workflow to our teams in the Philippines. We're providing the same quality as their internal US-based teams at a lower cost. We expect this type of work to increase in the quarters to come. Last quarter, I also highlighted signings with three of the world's largest tech firms. We've had strong traction on our initial engagements and are actively engaged in other opportunities as part of their 2023 budget planning process. Our global model is perfectly positioned to support these firms as they increasingly focus on reducing their operating expenditures. We see the potential for significant growth with these clients. I'll spend a few minutes discussing our teammates and the environment for talent. In Q3, we added 3,400 net new teammates to TaskUs, bringing our global employee population to 48,700. In the quarter, we added teammates in every geography we operate in except Ireland and the United States. Year-over-year, our combined teammate population in the Philippines and India has grown by over 40%. Our teammate population in the US has declined by approximately 25% in the same period as a result of this shift at our largest client and the volume reductions seen in the crypto and equity trading space. In terms of the environment for talent, we've seen an improvement in the market for talent compared to what we were seeing in the first half of the year. We've continued to meet our clients' aggressive hiring targets by being the employer of choice in each of our delivery markets. We've also seen employee retention improve meaningfully in Q3 as we have worked hard to create a world-class employee experience for both our in-office and work-from-home employees. At the end of the quarter, approximately 40% of our teammates were working safely for TaskUs offices around the globe. Clients are increasingly choosing to permanently adopt our work-from-home platform to drive cost savings and improve teammate retention. We now believe that our global teammate population will settle somewhere around 50/50 in-office and work-from-home for the foreseeable future. This balanced model drives cost savings for our clients, reduces our CapEx, and improves our teammate retention. The savings achieved from lower recruitment and training expenses will also improve our margins over time. Lastly, TaskUs teammates continue to be amongst the happiest in the industry, rating us at 4.6 stars on Glassdoor at the end of the quarter. Now let's move to our outlook for the remainder of 2022 and our initial view of 2023. Given the strong performance in Q3, we've raised our outlook for both our revenue and adjusted EBITDA for the remainder of the year. We now expect to achieve $950 million in revenue at the midpoint for the full year, up from the $940 million outlook that we gave on our Q2 earnings call. We anticipate our adjusted EBITDA margins to be 23.1% for the full year, above the initial guidance we provided for 2022. Consistent with past practice, we will provide formal 2023 guidance on our Q4 earnings call. However, let me spend a few minutes on what we're initially seeing for next year given the current macroeconomic backdrop. We've been working closely with each of our clients as part of their 2023 budget planning processes. We're seeing two trends across much of our client base. First, we're seeing significant sales success among clients who are looking to shift expenses, in-house resources to our efficient offshore teams. We're also benefiting greatly from an increase in vendor consolidation efforts. We've taken over more critical processes and are moving up the value chain with both long-term and newer clients, as they look to improve the efficiency of every aspect of their operations. At the same time, we've seen some clients lower their overall growth and volume forecasts for 2023. This combined with the cost-focused shift our clients continue to undertake by moving work from our onshore operations to our offshore delivery centers will continue to weigh on revenue for the next few quarters. Our guidance implies low single-digit year-on-year revenue growth in Q4, which includes the benefit of some seasonal volumes. In Q1, we will see some reduction from these Q4 seasonal volumes and the small transition of work offshore at our largest client, but we expect to offset this reduction through strong sales performance. We expect to return to sequential quarterly revenue growth in Q2 of 2023. After we lap the challenging comps we faced in the first half of next year, we expect to return to double-digit year-on-year revenue growth for the second half of 2023. We've used this period as an opportunity to drive additional efficiency into our own business, significantly improving our margins and cash flows. We now expect our 2023 adjusted EBITDA margins to be at or above this year's performance of 23.1%. These improvements are driven by expanded gross margins and the reduced G&A spending our team achieved in the past 90 days. Last quarter, we also set a goal of achieving $100 million in free cash flow in 2022. We remain confident in our ability to deliver on this goal, and we expect to increase free cash flow in 2023. We remain focused on creating long-term shareholder value with the cash we generate. We've continued to invest in the business to drive growth in new geographies and new service offerings. At the same time, in September, our Board approved a share repurchase program, and we repurchased approximately 739,000 shares in the quarter, successfully returning capital to our investors. We will continue to allocate capital to our buyback program opportunistically. While this year has been challenging, I am extremely proud of how quickly our team has responded. We've driven significant growth in all of our offshore delivery locations, signed engagements with three of the biggest technology companies in the world, and expanded our addressable market by providing digital transformation to more stable enterprise clients, all while continuing to take share in our core high-growth technology client base. We've made the tough choices quickly, improving our adjusted EBITDA margins and free cash flow conversion. As a result, we are well positioned to drive growth and profitability in 2023. With that, I'll hand it over to Balaji to go through our Q3 financial results and provide more details on our 2022 guidance.

Thanks, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the third quarter of 2022. Please note that some of the items are non-GAAP measures, and the relevant reconciliations are attached to the press release we issued earlier today. In the third quarter, we earned total revenues of $232.1 million, an increase of 15.5% over the prior year. We outperformed compared to our guidance driven by strong sales performance and client expansions. In the third quarter, our digital customer experience offerings generated $151.5 million for a year-over-year growth rate of 20.9%. Our content security business declined 3.2% versus Q3 of 2021, resulting in $43.9 million of revenue, and our AI services business grew 21% year-over-year for revenues of $36.7 million. Our client base continued to diversify in Q3 as we saw growth from our largest clients exceeded by the ongoing expansion of the rest of our client base. As a result, our revenue concentration with our largest client was approximately 22%, consistent with Q2 and down from 27% in Q3 of 2021. Our second-largest client was below 10% of our revenue, down from approximately 11% in Q3 2021. Our top 10 and top 20 clients accounted for 56% and 70%, down from 58% and 73% in Q2 of this year and down from 61% and 76% as of Q3 2021. In the third quarter, we generated 55% of our revenue in the Philippines, 21% of our revenues in the United States, and 24% of our revenues from the rest of the world, mainly driven by our operations in India and Europe. We also expanded our global footprint with clients in Japan and Malaysia. We expect to continue to see our revenue concentration shift towards our offshore geographies for the foreseeable future. As a reminder, our margin is driven in large part by our geographic mix, with offshore margins higher than onshore. So this mix change should help to drive margins over time. Our cost of service as a percentage of revenue was 58% in the third quarter compared to 55.9% in Q3 of the prior year. The increase was primarily driven by ongoing expenses associated with increased facilities expenses as a result of both our return to office and positioning for growth and costs associated with the transition of work from onshore to offshore locations. As I discussed last quarter, the majority of the impact from wage inflation this year was offset by the currency benefit of the strong US dollar and price increases from COLA provisions in our contracts. Quarter-over-quarter, we have seen our cost of service as a percentage of revenue improve from 58.2% in Q2 to 58% this quarter. We expect this trend to continue in Q4 and next year, as we realize the margin benefits that come with an increasing percentage of our business being delivered in offshore geographies. In the third quarter, our SG&A expenses were $62.3 million or 26.9% of revenue. This compares to SG&A in Q3 of 2021 of $60.3 million or 30% of revenue. The improvement in SG&A was driven by the FX as well as cost reductions and other efficiency efforts while we continue to invest in sales and our TaskVerse platform. Stock compensation expenses in the quarter were $15.1 million relating to equity grants compared with $18.8 million in Q3 2021. In the third quarter of 2022, we earned adjusted EBITDA of $55.5 million or 23.9% margins compared to $48.1 million and 23.9% in the third quarter of 2021. We outperformed compared with guidance driven by the impact of FX due to the strengthening of the US dollar against the Filipino peso and Indian rupee and our cost optimization efforts in G&A, partially offset by our investments supporting our return to office and onshore to offshore transition costs. Adjusted net income for the quarter was $35.8 million, and adjusted earnings per share was $0.35. By comparison, in the year-ago period, we earned adjusted net income of $32.8 million and adjusted EPS of $0.30. Now moving on to the balance sheet. Cash and cash equivalents were $132.5 million as of September 30, 2022, compared with a June 30, 2022 balance of $104.7 million. In the quarter, we utilized approximately $14 million for share repurchases, buying back approximately 739,000 shares at an average price of $18.54. As of quarter-end, we had approximately $86 million of authorization left on our plan. Cash generated from operations was $41.5 million for the third quarter of 2022 as compared to a use of cash of $109.1 million in Q3 of 2021, which was a result of one-time payments to employees related to the IPO. Our DSO was 66 days in the current quarter compared with 71 days in Q3, 2021, driven by improvements in our billing processes. Our capital expenditure decreased in the third quarter of 2022 to $6.7 million compared to $15.2 million in Q3 of 2021. The decrease was primarily driven by teammate-related equipment purchases in Q3 2021, which were lower this year. Free cash flow was $34.8 million or 62.8% of adjusted EBITDA. This product conversion rate was particularly high given the optimization in CapEx spend and releases in working capital. In terms of our financial outlook, for the remainder of the year, we've updated our guidance as follows. We now anticipate full-year 2022 total revenues to be in the range of $949 million to $951 million, representing a year-over-year growth of 24.9% at the midpoint. In addition, we expect to earn full-year 2022 adjusted EBITDA margin of 23.1%. Lastly, free cash flow, which we define as cash flow from operations less CapEx, is expected to be $100 million. I will now hand it back to Bryce before we take your questions.

Thank you, Balaji. Before we get to Q&A, I want to share another TaskUs teammate story. This time from Stella Esposito, a teammate in the Philippines, who is one of our next-gen scholarship recipients. In 2013, Stella resigned from her prior job to care for her children full time. Stella's youngest child has special needs and requires multiple therapy sessions a week. These therapy sessions are expensive and ultimately led to Stella deciding to go back to work full time four years ago to help pay for her child's care. Around this same time, her eldest child began going to school, which brought another set of expenses for Stella and her family. Despite returning to work, Stella found herself struggling to meet all of the expenses. She had to cancel her youngest child's therapy sessions in order to meet her family's budget. This is when Stella joined TaskUs and learned about our next-gen scholarship program. This is a program that we started in the Philippines that offers any TaskUs teammate who's been with the company for a year or more and is in good standing the opportunity to have one of their children's educations paid for by the company. For Stella, the scholarship alleviated a large expense and allowed her to enroll her youngest child back into therapy. This year, TaskUs paid for the private education of over a thousand next-gen scholars in the Philippines. We're now in the process of expanding this program to India. It's stories such as Stella's and the incredible impact of the next-gen scholarship program that make me so proud to work at TaskUs. With that, I'll ask the operator to open the line for our question-and-answer session.

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Ryan Potter with Citi.

I'd like to start on the tech vertical. With the increased cost focus and clients there, including higher freezes than layoffs we've seen recently, has this led to any reduced volume or spend commitments from clients that you have there? And then generally, how do you broadly view the trends within the vertical, both with larger clients as well as startups, and I guess have these clients started to turn to you more to help on costs whether it’d be offshoring or outsourcing?

So in Q2, we saw a momentary pause in decision-making amongst many of our clients and prospects in the technology space. In Q3, deal activity accelerated meaningfully. As our clients started to plan their 2023 budgets, they turned to TaskUs to help improve the efficiency of their spending. And as a result, we've seen clients turn to us to take on more complex processes that they were previously doing in-house. We've also continued to take significant share from our competitors. On the call, I mentioned that we took share at our large ride-sharing client, we took share at our largest gaming client, and we took share at the smart home device company that I mentioned. We're also taking meaningful share at our largest client. So in this market, our view is that the strong will get stronger. And we're certainly benefiting from our clients’ efforts to consolidate their vendor networks. In Q3, we also saw new client sales pick up, and we posted our highest ACV numbers for the year. We signed a digital customer experience engagement with an e-commerce division of the world's largest retailer, we landed a meaningful engagement with one of the world's best-known B2C brands, and we also won a large opportunity with a leading mental health app. So all of this combined to the strength of our guidance, our Q3 beat, and the raise of the full-year outlook. When we think about what's happening here amongst our larger clients versus startups, in our top 20 clients this year, 15 of them are publicly traded. And we've seen strength amongst most of those clients with the exception of the largest crypto and equity trading client. And across the rapidly growing private companies, we're increasingly seeing a focus on cost savings and efficiency that continues to support our revenue growth.

And then shifting gears to AI services, in particular, growth in that offering was kind of stronger than we expected, given the impact of the Facebook’s offshore transition. Can you discuss some of the trends that you're seeing within this offering? And are you starting to reach a wider range of companies beyond just kind of tech companies? And I guess, beyond that also, what has adoption and demand of the TaskVerse platform specifically been so far with clients?

So AI services grew 21% year-on-year in Q3, and we expect to continue to grow AI services revenues each quarter. The year-over-year growth rate is likely to decelerate over the next two quarters, and that's being driven at least in part by the onshore to offshore transition at our largest client. But we're seeing sustained growth in our autonomous vehicle clients, along with multiple new client wins on the TaskVerse. These tend to be technology clients, some of the biggest technology companies in the world, but we're also seeing some unique customer applications in the automotive space. I mentioned the collectibles marketplace on the call. So the growth for AI services has certainly been supported by the incredible traction we're seeing in the TaskVerse. On the call, we mentioned that we've now signed up over 70,000 gig workers that we call taskers, and we're signing multiple new clients to the platform each month. But obviously, that growth is being partially offset by the onshore to offshore transition.

Our next question comes from the line of Puneet Jain with JPMorgan.

So I understand there might be uncertainty over business volume, clients’ business volumes. But can you talk about how much of your pipeline consists of large clients, maybe Fortune 100, 500 companies? You talked about signing like a retail customer in this quarter. What are the trends you are seeing in signing large companies, large clients to your portfolio?

So we talked in each quarter of this year about large enterprise clients that we've signed up. In the first quarter, we signed one of the US's largest airlines. In the second quarter, we signed a large corporate travel agency. And then this quarter we talked about the world's largest retailer. We continue to see significant interest amongst enterprise clients in the Fortune 100 and Fortune 500. And I think this is being driven by the demand to digitally reimagine these large enterprise businesses. There has been some concern expressed from investors about whether these deals mark a shift to more traditional outsourced services for TaskUs. And as I said on the call last quarter, all of these deals are being done at gross margins that are higher than the average for our business. So it's actually quite the contrary. We're seeing real demand for highly specialized services and digital transformation from these enterprise clients. The majority of our pipeline does continue to be the innovative technology clients that have made up the base of our business for so long, but that's being supplemented by the demand we're seeing amongst the biggest technology companies in the world and more traditional enterprise clients.

And then your top clients have been down 11% over the last two quarters. How should we think about that number in terms of volume versus pricing from the offshore mix shift? And it seems like there is some more offshore mix shift coming up in Q1 of next year. How close are you to moving past that offshore mix shift at that client and also on an overall basis?

This year, we transitioned a large number of roles from the US to the Philippines and India in May. And obviously the US is the geography with the highest revenue per employee for TaskUs, and in the Philippines and India, we make significantly less revenue per employee. So in isolation, this shift would have led to a substantial decline in revenues from our client. Fortunately, we added thousands of net new roles across the Philippines and India this year for this client, growing a global headcount by over 30% from the start of 2022 to the end of Q3. And as a result, revenue will increase from our largest client from 2021 to 2022. You're right to point out that sequentially the revenue has declined in Q3, but we see this stabilizing. We're now in the process of transitioning a much smaller group of employees from the remainder of our US operations. But simultaneously, you've been awarded multiple new lines of business that are being shifted from other vendors in higher-cost geographies to our efficient operations. And I want to point out that this is a really great example of us taking meaningful share at our largest client. So when all this is netted out, these transactions and significant share gains, along with sitting down with our client and going through a detailed 2023 budgeting process, leave us confident that next year's revenues will be roughly flat when compared to this year's revenues.

Next question comes from the line of Dan Perlin with RBC Capital Markets.

I just wanted to make sure, point of clarity around the commentary where you said you're going to get back to sequential growth in the second quarter, and I think this kind of dovetails on the last question. But just to be clear, the expectation here is that there's going to be another kind of mix shift in Q1. So Q1’s numbers are likely to be down sequentially versus Q4, but then we start to ramp back into Q2. And then the second part is when we think about what double-digit growth means kind of in the back half, should we use as kind of a baseline plus or minus where your growth is today kind of X probably the top three clients or the top 17 growing in the call it mid-20s?

Let me clarify that while we're not offering formal guidance at this point, we anticipate that Q1 revenues will be approximately flat compared to Q4. Several factors are influencing Q1. Firstly, there's the reversal of seasonal volumes from Q4. Although our business is not highly seasonal, we do experience some effects in Q1. Secondly, there is a transition of fewer than 100 roles at our largest client, which will be retained in the US and moved by the end of this year. We believe these factors will be balanced by our strong sales performance and the addition of roles at both new and existing clients, resulting in Q1 revenues being roughly flat compared to Q4. Looking ahead to the second half of the year, while we are not providing formal guidance during this call, we expect to see sequential quarterly revenue growth in Q2 of 2023 and project double-digit revenue growth for the latter half of 2023. Additionally, we foresee an acceleration in year-on-year revenue growth in each quarter of next year, which should provide some insight into our expectations for the upcoming year.

In listening to your competitors, it's clear that you have significantly increased your headcount, indicating strong demand as operations shift more offshore. Considering the 3,400 new employees you've brought on board and looking ahead to next year, how should we approach the metric for net new headcount in relation to attrition rates? I'm aware that you're not providing guidance, but your continued hiring amidst demand certainly reflects confidence.

Given the macro environment, we've seen acceleration in demand, particularly for our offshore delivery locations, particularly for the Philippines and India. We saw a 40% increase in headcount in these two regions year-on-year in Q3. And so we expect that type of growth to continue into next year, and that will continue to drive additional net headcount growth in 2023.

Our next question comes from the line of Maggie Nolan with William Blair. This is Jesse on for Maggie.

I had a couple of questions on the shift to offshore. So first, how do you think the shift impacts your view for the company's long-term growth profile?

From my perspective, the position of our business has a largely offshore business means that we will see an acceleration in growth given the demand for offshore services in this economy. Clearly, the shift from onshore to offshore was a significant headwind to revenue growth in 2022, and it'll continue to be a significant headwind in the first half of 2023 as we lap some very challenging comps. But as we get into the back half of next year, we believe that our position as an offshore outsource service provider will actually be a tailwind to growth rates.

And then for my follow-up, margin has been lower compared to 2021 despite the shift. So can you elaborate on what's going on there and your expectations for next year?

So the gross margins in Q3 are, which is cost of service in Q3, was lower than what it was in the first half of the year. But one of the things that we pointed out at the beginning of the year is that we will continue to incur transition cost in 2022 as we shift work from onshore to offshore. So that is something that we've been incurring even in Q3. And we also continue to incur return to office expenses because in the previous year, all of our employees were working from home and now we are transitioning employees back to the office, so it’s incurred costs relating to that. But we would start seeing in Q4 with the change in the mix shift, we’ll start seeing some benefit of that in Q4 and we would start seeing full year impact of the mix shift getting into 2023.

Our next question comes from the line of Kathy Chang with Bank of America.

First of all, I just wanted to ask another question about clarifying 2023 guidance. Just wanted to clarify, is that on a FX neutral basis and what does you guys assume for crypto in that? Is it fair to assume the same about a 4% exit rate from the 4Q that you guys had just provided some color on? And then also I wanted to ask about the cadence of margins as well, to get to the overall outlook for that stable to slightly ahead of the 2022 that you guys provided?

In terms of the outlook for next year, I will begin by addressing the last question. Regarding the margin progression, as we advance into 2023, we anticipate continued margin expansion. We have taken significant steps to enhance efficiencies within our business, which is expected to result in an increase in our adjusted EBITDA margins, not only for this quarter but also for the full year when comparing to our initial projections. In relation to crypto, we analyzed the figures and found that in Q1, 15% of our revenues were generated from crypto and equity trading clients, whereas in Q4, that figure decreased to 4%. We do not expect any significant downside from the more than a dozen clients we still have in that sector, and we are not anticipating any growth from those clients in the 2023 outlook. If you could assist me with the first question you asked, I would appreciate it.

You basically answered it. The other part was just is that like a constant currency basis organic?

Yes, thank you. You want to take that, Balaji?

Yes, I’ll address that. So Kathy, to clarify, most of our revenues are billed and collected in US dollars. Consequently, we don't notice any revenue impact from fluctuations in foreign currency since they are billed in US dollars. However, we do have exposure to foreign currencies in our offshore locations, particularly in the Philippines and India. For forecasting, we utilize the current projections along with the existing spot rates to estimate margins and costs.

And then I wanted to switch gears a bit and ask about free cash flow as well, which was very strong in the quarter. What kind of drove the outperformance in this quarter? And you talked about engaging in buybacks? Should we expect that pace of about the 740,000 in September to continue throughout 4Q? And how are you thinking about M&A within the priorities for your excess free cash flow?

So Bryce, let me take the free cash flow question, and then I'll let you handle the M&A piece. So from a free cash flow perspective, it was about $34.8 million and about 63% conversion on adjusted EBITDA. And this quarter’s conversion rate was particularly high given the optimization that we had in CapEx spend as more of our employees work from home than we anticipated earlier, and some releases that we have from a working capital perspective. But for the full year, we are expecting free cash flow conversion to be 45% and at about $100 million. Bryce, you want to take the M&A question?

When considering our overall capital allocation, we are adopting a practical approach. Currently, stock buybacks are the most sensible option given our stock's valuation. The M&A landscape today is quite intriguing. We've noticed a significant repricing in public markets, which hasn't yet affected private market valuations. Recently, some transactions occurred at substantial premiums compared to historical multiples and current public market conditions, often at multiples much higher than those of the acquirers themselves. At TaskUs, we maintain a long-term perspective and our strategy is to stay disciplined. We aim to acquire businesses that enhance our growth margins and align with our culture. For example, our acquisition of heloo earlier this year exemplifies this strategy. It has been very successful, outperforming expectations, and is being smoothly integrated into TaskUs, conducted at a multiple favorable to us at the time. We are exploring a few promising M&A opportunities similar to heloo, focusing on bolt-on acquisitions that would enhance our geographic reach or service capabilities. In general, we stand out in our industry for our ability to achieve organic growth. Therefore, our priority for the latter half of 2023 is to return to double-digit organic growth.

Our next question comes from the line of James Faucette with Morgan Stanley.

Bryce, can you quickly talk through your strategy right now of going after prospects that may be outside of your typical high growth new economy customer base? And I guess just trying to understand how your interaction and growth potential with those customers may or may not be different from what you've seen historically?

So we're seeing two types of clients outside of our historic high-growth technology focus. The first are the biggest technology companies in the world, and these are clients that we have been working for years to get into. As I said on our last earnings call, we successfully signed deals with three of the biggest technology companies in the world, and those engagements have gone very, very well. We're actively involved in the 2023 budgeting process for these clients, looking at adding additional workflows as all of our clients get more serious about cost savings, TaskUs is the provider that can deliver those cost savings to them. We also have a group of clients that are more traditional enterprise clients, these are Fortune 500 and Fortune 100 clients. And here, we had always been open to engaging with traditional clients but looked to let the type of work these clients are interested in really dictate whether we would take on the work. So we never are going to take on traditional call center work for a big telco, but we will absolutely engage in the digital transformation work inside the app of a leading airline as we did in Q1. So those are the types of engagements that we found ourselves taking on for more traditional enterprise clients. And we see this as broadening our client base and really adding to overall revenue stability in the face of an uncertain macro environment.

And then Balaji, just a couple of quick follow-ups on comments you've already made. But first on the cost base and foreign currencies, particularly from the Philippines and India. Do you hedge any of that cost at all or to what degree do you do that? And then secondly, you explained quite clearly why the cash flow conversion had improved during the course of '22. But is there any catch-up spend or cash flow impact that we should expect for the end of this year and next year? For example, CapEx related to new hires, et cetera.

We hedge about 50% of our exposure in the Philippines using forward contracts to reduce cash flow volatility, especially for costs in Philippine pesos. We do not engage in foreign currency exchange rate contracts for trading purposes, and our contracts typically have a maturity of around 12 months or less. For instance, the contracts that are maturing now were entered into about a year ago. Regarding cash flow, we are maintaining our free cash flow guidance at approximately $100 million, representing a 45% conversion of adjusted EBITDA. While we are not providing specific guidance for 2023, we anticipate a conversion rate between 40% and 50% in the medium term. Additionally, we expect a balanced 50/50 mix of onshore work and remote work, which will be beneficial for our capital expenditures. We foresee capital expenditures ranging from 5% to 5.5% of revenues as we move into next year.

Our next question comes from the line of Ravi with Baird.

Was there any one-time election revenue this quarter in content security from the mid-term elections? And I guess looking into next quarter too, would there be any in Q4 as well?

So we obviously run large content security operations for leading social networks. We don't see election seasonality, because the teammates that we have supporting those workflows tend to roll from one political engagement to another or move from political engagements to traditional advertising and moderation. So to answer the question directly, there's no one-time revenue from that.

And then maybe just about attrition in the quarter, maybe if you could talk a little bit about that. Did that improve in Q3 and are you expecting that to get to normalized levels then in 2023?

So in Q3, our attrition rates declined from the first half of the year, attrition rates hit a high in Q2, driven by ongoing return to office efforts and I think just the attrition challenges that have been facing the industry as a whole. We made attrition a central area of focus for our entire leadership team. And one of the things we really focused on was defining our work-from-home value proposition. I think that had a huge impact in bringing the number back down. We don't anticipate our attrition rates to return to the levels we saw in 2020 and 2021. We think that those low levels were largely driven by the COVID pandemic, but we do anticipate to drive our attrition rates below where they were in 2019. And so our hope is to deliver on a number that's lower than 2019’s number for the full year of 2022.

Our next question comes from the line of Jeff Cantwell with Wells Fargo.

I wanted to revisit the preliminary outlook for 2023 and specifically the context for the year. I just want to ensure we all understand the commentary regarding revenue. Can you explain what the preliminary expectation or sequential growth looks like for the second half of the year? I see that the first half is quite clear, but I'm interested in your remarks about double-digit growth in the latter half of the year. Does that imply double-digit sequential growth in the third quarter compared to the second quarter and then again in the fourth quarter compared to the third quarter? Any insights you can provide on the preliminary revenue outlook for the second half would be appreciated.

Jeff, thanks for the clarification. So to be clear, we expect to deliver double-digit year-on-year revenue growth in the back half. At this stage, it would be too early to predict what the quarter-over-quarter growth rates would be that far out. But maybe I'll spend just a moment on talking about what is giving us the confidence that we're going to return to double-digit growth, and really are three reasons. If I start with number one, the biggest risks in our business have already been realized. Second, we have tremendous upside opportunities across our portfolio clients, specifically in the largest global tech clients that we signed recently. And third, we have seen significant uptake of our most complex services by clients who are searching for cost savings. So those are the three reasons that we feel very confident in our ability to return to double-digit growth for the back half of the year.

And then are you able to, we heard you on margins and it sounds like the G&A line is starting some cost optimization improvements and so forth. So are you able to give us that level of granularity on your preliminary guidance for next year? I just want to make sure we're able to dot all the I's and cross all the T's on your guidance as it relates to the EPS line, if that's possible at all? If not, then you know we'll wait to hear more, but just wanted to ask.

Balaji, you want to take that?

So like Bryce said, right now, we are not giving any formal guidance on 2023. But when we do that next year then during our Q4 call in February, we will provide that level of detail in terms of some of the assumptions that we are making. But a couple of things to call out that's going to be impacting next year is, one, we spoke about the mix shift from onshore to offshore geography, which is going to be margin accretive. So we'll start seeing the full-year impact of that getting into 2023. And the second is we also spoke about the G&A optimization in the previous quarter, and also we saw the impact of that to adjusted EBITDA in the current quarter, where we reported about 23.9% from an adjusted EBITDA perspective. So we see continued opportunities there in terms of optimizing our G&A spend and driving improvements. So those are things that we'll continue to work on getting into 2023. So what we are currently saying is that we feel confident that 2023 adjusted EBITDA margins to be at or above the current 2022 performance.

And our final question comes from the line of William McNamara with BTIG.

I wanted to see how things are going in Europe in terms of expansion in Poland, Serbia, and Romania, basically from finding talent and getting things going?

So our acquisition of heloo has been a tremendous success. The company is performing ahead of plan, and we are growing headcount in all of the countries that heloo has operations in, primarily Croatia and Serbia. We also continue to grow TaskUs operations in Greece, where we have more than doubled our headcount this year. Going forward, we've hired a new leader for the entire European region, and he's focused on integrating the heloo operations into our TaskUs operations. And we've got a go-to-market team based in the UK that is actively selling into the geography. While the outlook for the economy in Europe is certainly uncertain for 2023, we are finding opportunities much like the opportunities we're finding here in the US to help fast-growing technology companies drive cost savings into their business.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Bryce Maddock for closing remarks.

Well, in closing, I want to thank our clients, our teammates, and our shareholders. We look forward to speaking with all of you again on our Q4 call in February. Good night, everybody.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.