2023-03-31 06:20:43 ET
Summary
- TASK delivered strong 4Q22 results, beating estimates for both revenue and earnings, but the FY23 guidance fell short.
- I applaud management's focus on diversifying its client base and positioning itself to capture incremental offshore volume from its price-conscious client base.
- The sluggish macro environment may cause disruption in prolonged sales cycles on large deals in 1Q23, but the trend towards greater vendor consolidation may offer countervailing factors.
Investment thesis
4Q22 results for TaskUs ( TASK ) beat estimates for both revenue and earnings, but FY23 guidance fell short. Given the robust pipeline and expected growth from recently signed contracts, I believe the updated guidance are leaning towards being conservative. I'm also becoming more optimistic as TASK is taking steps to broaden its client base and position itself to profit from the current AI trend. I continue to believe that the stock is undervalued; however, I do not believe that the market will re-rate the stock positively until it is convinced that management can drive double-digit growth. Therefore, I advise current holders to maintain their positions, while potential new investors may wish to wait it out.
Latest results
The company's fourth-quarter 2022 revenue of $242 million was up 7% year-over-year and surpassed its own guidance of $231 million to $233 million. The increased revenue was explained by the management as a result of higher than usual seasonal benefits and a delay in outsourcing some tasks. But management did mentioned that these positive factors are unlikely to happen again. In addition, the adjusted EBITDA margin in 4Q22 came in at 23.9%, exceeding guidance as well. When comparing TIXT's 9% growth to TASK's 2% growth in 4Q22, it is clear that TIXT benefits from a more diversified revenue source. So, it's good to know that the management is working to diversify its client base.
Headwinds
The $940 million to $990 million revenue forecast for FY23 from management indicates a negative organic growth rate of -2.5% to 2.5% for the year. Given that cryptocurrency and equity trading clients are forecasted to remain weak and should remain as headwinds to overall growth, I suppose this is to be expected. In addition, I anticipate that the trend of the US delivery mix declining toward 15% as clients move work offshore will persist through 1Q/2Q23. Fortunately, it's possible that neither of these headwinds will have much of an impact after this year. The only silver lining I can see is that the easier comparisons in FY24 will make it seem like growth is accelerating, albeit optically.
Sales cycle
In one respect, I applaud management's efforts to secure contracts with the large tech firms of the world, as doing so would drive upside to FY23 guidance. On the other hand, I do not anticipate a speedy resolution to the disruption caused by prolonged sales cycles on large, transformational deals in 1Q23. Even if TASK only manages to close one major deal in 1H23, I will be satisfied. However, if the economy improves in 2H23, these major technology firms may resume previously paused projects, which would be good news for TASK. However, I expect TASK to gain from the trend toward greater vendor consolidation as businesses look to cut costs in the face of an unstable economic climate. Therefore, there appears to be a countervailing factor in this sluggish macro environment.
Offshore volume
I anticipate TASK will maintain its focus on offshore volume for growth, specifically by positioning itself to capture incremental offshore volume from its price-conscious client base. Colombia, India, and the Philippines are examples of such offshore regions. However, management needs to take into account the fact that offshore unit economics are less favorable compared to domestic volumes. In fact, considering that TASK's total headcount increased by 23% compared to 4Q21, they now need to ensure that they can capture offshore volume to offset the rise in fixed cost. If this is not executed well, it could result in huge decremental margin.
Growth and margin
I believe the goal of all of TASK's efforts is to restore double-digit growth. Given that I believe more clients are focused on costs, I think the road to this is plausible. With this priority comes the need for massive internal offshoring and other massive cost-cutting projects. This is reflected in TASK's numbers as well, as the company closed out 4Q22 with its largest pipeline ever. Aside from this, it all comes down to execution, with TASK having to increase its reach among large enterprise clients, expand its presence abroad, and back the burgeoning generative AI sector. While this growth should ultimately lead to expanded margins, I anticipate that wage inflation, unfavorable FX, and the cost associated with returning to offices will all weigh on margins this year. Despite these challenges, management has launched a $20 million cost-cutting initiative that, combined with the rising offshore mix, ought to allow them to maintain a flat EBITDA margin in FY23 when compared to the prior year.
Conclusion
While TASK delivered strong 4Q22 results that beat estimates for both revenue and earnings, the FY23 guidance fell short. However, I believe the updated guidance leans towards being conservative, given the robust pipeline and expected growth from recently signed contracts. Additionally, TASK is taking steps to broaden its client base and position itself to profit from the current AI trend. The sluggish macro environment may cause disruption in prolonged sales cycles on large deals in 1Q23, but the trend towards greater vendor consolidation may offer countervailing factors. Overall, I advise current holders to maintain their positions, while potential new investors may wish to wait it out until TASK can drive sustained double-digit growth.
For further details see:
TaskUs: Headwinds Continue In FY23