TaskUs, Inc. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
_______________________
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2023
or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from_____________to______________
Commission File Number: 001-40482
_______________________
TaskUs, Inc.
(Exact name of registrant as specified in its charter)
_______________________
| Delaware | 83-1586636 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
1650 Independence Drive, Suite 100 New Braunfels, Texas | 78132 | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
(888) 400-8275
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_______________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Class A Common Stock, par value $0.01 per share | TASK | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | x | |||||||||||
| Non-accelerated filer | o | Smaller reporting company | o | |||||||||||
| Emerging growth company | x | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
As of November 1, 2023, the number of shares outstanding of the registrant’s common stock was as follows: Class A common stock, par value $0.01 per share: 19,286,977; Class B common stock, par value $0.01 per share: 70,032,694.
TASKUS, INC.
Quarterly Report on Form 10-Q
For Quarterly Period Ended September 30, 2023
Table of Contents
| Page No. | ||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which involve certain known and unknown risks and uncertainties. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "predicts," "intends," "trends," "plans," "estimates," "anticipates," "position us," other comparable words, or the negative version of any of these words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Our actual results may differ significantly from any results expressed or implied by any forward-looking statements. A summary of the principal risk factors that might cause our actual results to differ from our forward-looking statements is set forth below. The following is only a summary of the principal risks that may materially adversely affect our business, financial condition and results of operations. This summary should be read in conjunction with the more complete discussion of the risk factors we face, which are set forth under Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2022 (our "Annual Report") as filed with the Securities and Exchange Commission (the "SEC"), as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Such risks and uncertainties include, but are not limited to, the following:
•Our business is dependent on key clients, and the loss of a key client could have an adverse effect on our business and results of operations.
•Our clients may terminate contracts before completion or choose not to renew contracts and a loss of business or non-payment from clients could materially affect our results of operations.
•We may fail to cost-effectively acquire and retain new clients, which would adversely affect our business, financial condition and results of operations.
•If we provide inadequate service or cause disruptions in our clients’ businesses or fail to comply with the quality standards required by our clients under our agreements, it could result in significant costs to us, the loss of our clients and damage to our corporate reputation.
•Unauthorized or improper disclosure of personal or other sensitive information, or security breaches and incidents, whether inadvertent or purposeful, including as the result of a cyber-attack, could result in liability and harm our reputation, each of which could adversely affect our business, financial condition, results of operations and prospects.
•Trust and Safety, including content monitoring and moderation services, is a large portion of our business. The long term impacts on the mental health and well-being of our employees doing this work are unknown. This work may lead to stress disorders and may create liabilities for us. This work is also subject to significant press and regulatory scrutiny. As a result, we may be subject to negative publicity or liability, or face difficulties recruiting and retaining employees, any of which could have an adverse effect on our reputation, business, financial condition and results of operations.
•Our failure to detect and deter criminal or fraudulent activities or other misconduct by our employees, or third parties such as contractors and consultants that may have access to our data, could result in loss of trust from our clients and negative publicity, which would have an adverse effect on our business and results of operations.
•Global economic and political conditions, especially in the social media and meal delivery and transport industries from which we generate significant revenue, could adversely affect our business, results of operations, financial condition and prospects.
•Our business is heavily dependent upon our international operations, particularly in the Philippines and India, and any disruption to those operations would adversely affect us.
•Our business is subject to a variety of U.S. federal and state, as well as international laws and regulations, including those regarding data privacy and security, and we or our clients may be subject to regulations related to the processing of certain types of sensitive and confidential information. Any failure to comply with applicable data privacy and security laws and regulations could harm our business, results of operations and financial condition.
•Our business prospects will suffer if we are unable to continue to anticipate our clients’ needs by adapting to market and technology trends, investing in technology as it develops, and adapting our services and solutions to changes in technology and client expectations.
•Fluctuations against the U.S. dollar in the local currencies in the countries in which we operate could have a material effect on our results of operations.
•Our business depends on a strong brand and corporate reputation, and if we are not able to maintain and enhance our brand, our ability to expand our client base will be impaired and our business and operating results will be adversely affected.
•Pricing pressure may reduce our revenue or gross profits and adversely affect our financial results.
•Our results of operations have been, and could in the future be, adversely affected by volatile, unfavorable or uncertain economic and political conditions, particularly in the markets in which our clients and operations are concentrated, and the effects of these conditions on our clients’ businesses.
•The success of our business depends on our senior management and key employees.
•The COVID-19 pandemic, including the resulting global economic uncertainty and measures taken in response to the pandemic, has adversely impacted our business, financial condition and results of operations.
•Increases in employee expenses as well as changes to labor laws could reduce our profit margin.
•We may fail to attract, hire, train and retain sufficient numbers of skilled employees in a timely fashion at our sites to support our operations, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
•Our business relies heavily on owned and third-party technology and computer systems, which subjects us to various uncertainties.
•Our profitability will suffer if we are not able to maintain asset utilization levels, price appropriately and control our costs.
•Our Sponsor and our Co-Founders control us and their interests may conflict with ours or yours in the future.
•The dual class structure of our common stock has the effect of concentrating voting control with those stockholders who held our common stock prior to the completion of our June 2021 initial public offering ("IPO"), and it may depress the trading price of our Class A common stock.
•The market price of shares of our Class A common stock has been, and may continue to be, volatile and may decline regardless of our operating performance, which could cause the value of your investment to decline.
We urge you to carefully consider the foregoing summary together with the risks discussed under "Risk Factors" in the Annual Report, and in Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report.
1
WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website and our social media outlets, such as Facebook, Instagram, LinkedIn, TikTok, YouTube, and X (formerly known as Twitter) as channels of distribution of Company information. The information we post through these channels may be deemed material. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at ir.taskus.com, its Facebook page at facebook.com/TaskUs/, its Instagram page at instagram.com/taskus/, its LinkedIn page at linkedin.com/company/taskus/, its TikTok page at tiktok.com/@taskusinc, its YouTube account at youtube.com/c/Taskus/, and its X account at twitter.com/taskus. Accordingly, investors should monitor these channels, in addition to following the Company's press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section of our investor relations website at ir.taskus.com. The contents of our website and social media channels are not, however, a part of this Quarterly Report.
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
TASKUS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share data)
| Assets | September 30, 2023 | December 31, 2022 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 114,616 | $ | 133,992 | |||||||
Accounts receivable, net of allowance for doubtful accounts of $1,909 and $3,422, respectively | 179,120 | 178,678 | |||||||||
| Income tax receivable | 5,639 | 2,879 | |||||||||
| Prepaid expenses and other current assets | 25,897 | 25,876 | |||||||||
| Total current assets | 325,272 | 341,425 | |||||||||
| Noncurrent assets: | |||||||||||
| Property and equipment, net | 74,495 | 75,053 | |||||||||
| Operating lease right-of-use assets | 43,297 | 41,510 | |||||||||
| Deferred tax assets | 6,406 | 6,165 | |||||||||
| Intangibles | 197,636 | 212,993 | |||||||||
| Goodwill | 217,170 | 217,382 | |||||||||
| Other noncurrent assets | 6,503 | 7,487 | |||||||||
| Total noncurrent assets | 545,507 | 560,590 | |||||||||
| Total assets | $ | 870,779 | $ | 902,015 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Liabilities: | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable and accrued liabilities | $ | 34,898 | $ | 37,062 | |||||||
| Accrued payroll and employee-related liabilities | 44,898 | 48,663 | |||||||||
| Current portion of debt | 6,372 | 3,334 | |||||||||
| Current portion of operating lease liabilities | 14,723 | 11,614 | |||||||||
| Current portion of income tax payable | 7,082 | 5,730 | |||||||||
| Deferred revenue | 3,199 | 3,481 | |||||||||
| Total current liabilities | 111,172 | 109,884 | |||||||||
| Noncurrent liabilities: | |||||||||||
| Income tax payable | 2,286 | 2,293 | |||||||||
| Long-term debt | 259,446 | 264,225 | |||||||||
| Operating lease liabilities | 31,516 | 32,380 | |||||||||
| Accrued payroll and employee-related liabilities | 2,973 | 2,818 | |||||||||
| Deferred tax liabilities | 34,495 | 34,514 | |||||||||
| Other noncurrent liabilities | 143 | 288 | |||||||||
| Total noncurrent liabilities | 330,859 | 336,518 | |||||||||
| Total liabilities | 442,031 | 446,402 | |||||||||
| Commitments and Contingencies (See Note 10) | |||||||||||
| Shareholders’ equity: | |||||||||||
Class A common stock, $0.01 par value. Authorized 2,500,000,000; 30,328,882 issued and 20,523,884 outstanding and 29,257,651 issued and 27,607,720 outstanding, respectively | 304 | 293 | |||||||||
Class B convertible common stock, $0.01 par value. Authorized 250,000,000; 70,032,694 and 70,032,694 shares issued and outstanding, respectively | 700 | 700 | |||||||||
| Additional paid-in capital | 672,753 | 631,908 | |||||||||
| Accumulated deficit | (106,261) | (135,674) | |||||||||
| Accumulated other comprehensive loss | (14,316) | (10,647) | |||||||||
Treasury stock, at cost. 9,804,998 and 1,649,931 shares, respectively | (124,432) | (30,967) | |||||||||
| Total shareholders’ equity | 428,748 | 455,613 | |||||||||
| Total liabilities and shareholders’ equity | $ | 870,779 | $ | 902,015 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
TASKUS, INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| $ | 225,626 | $ | 232,130 | $ | 690,101 | $ | 718,269 | ||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | 130,139 | 134,544 | 401,455 | 419,364 | |||||||||||||||||||
| Selling, general, and administrative expense | 57,114 | 62,348 | 179,583 | 195,514 | |||||||||||||||||||
| Depreciation | 9,762 | 9,428 | 29,502 | 27,986 | |||||||||||||||||||
| Amortization of intangible assets | 5,027 | 5,087 | 15,276 | 14,765 | |||||||||||||||||||
| Loss (gain) on disposal of assets | 640 | (8) | 772 | (18) | |||||||||||||||||||
| Total operating expenses | 202,682 | 211,399 | 626,588 | 657,611 | |||||||||||||||||||
| Operating income | 22,944 | 20,731 | 63,513 | 60,658 | |||||||||||||||||||
| Other expense, net | 2,895 | 7,612 | 34 | 16,042 | |||||||||||||||||||
| Financing expenses | 5,712 | 3,859 | 16,141 | 7,665 | |||||||||||||||||||
| Income before income taxes | 14,337 | 9,260 | 47,338 | 36,951 | |||||||||||||||||||
| Provision for income taxes | 4,565 | 3,895 | 17,925 | 12,271 | |||||||||||||||||||
| Net income | $ | 9,772 | $ | 5,365 | $ | 29,413 | $ | 24,680 | |||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
| Basic | $ | 0.11 | $ | 0.05 | $ | 0.31 | $ | 0.25 | |||||||||||||||
| Diluted | $ | 0.10 | $ | 0.05 | $ | 0.30 | $ | 0.24 | |||||||||||||||
| Weighted-average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 92,480,316 | 98,299,612 | 95,522,026 | 97,854,944 | |||||||||||||||||||
| Diluted | 94,035,111 | 101,920,413 | 97,729,230 | 103,073,208 | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
TASKUS, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 9,772 | $ | 5,365 | $ | 29,413 | $ | 24,680 | |||||||||||||||
| Retirement benefit reserves | (14) | 28 | 13 | 65 | |||||||||||||||||||
| Foreign currency translation adjustments | (3,559) | (7,613) | (3,682) | (15,490) | |||||||||||||||||||
| Comprehensive income (loss) | $ | 6,199 | $ | (2,220) | $ | 25,744 | $ | 9,255 | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
TASKUS, INC.
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
(in thousands, except share data)
| Capital stock and additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B convertible common stock | Additional paid-in capital | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | 27,431,264 | $ | 275 | 70,032,694 | $ | 700 | $ | 556,418 | $ | (176,096) | $ | (2,163) | — | $ | — | $ | 379,134 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | 137,794 | 1 | — | — | (1) | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (45,389) | (1) | — | — | (1,468) | — | — | — | — | (1,469) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 19,605 | — | — | — | — | 19,605 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 11,586 | — | — | — | 11,586 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (1,756) | — | — | (1,756) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2022 | 27,523,669 | $ | 275 | 70,032,694 | $ | 700 | $ | 574,554 | $ | (164,510) | $ | (3,919) | — | $ | — | $ | 407,100 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | 450,304 | 5 | — | — | 915 | — | — | — | — | 920 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (76,908) | (1) | — | — | (1,307) | — | — | — | — | (1,308) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued in acquisition of heloo | 200,103 | 2 | — | — | 7,194 | — | — | — | — | 7,196 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 18,933 | — | — | — | — | 18,933 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 7,729 | — | — | — | 7,729 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (6,084) | — | — | (6,084) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2022 | 28,097,168 | $ | 281 | 70,032,694 | $ | 700 | $ | 600,289 | $ | (156,781) | $ | (10,003) | — | $ | — | $ | 434,486 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | 774,758 | 8 | — | — | 1,289 | — | — | — | — | 1,297 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (60,694) | (1) | — | — | (1,159) | — | — | — | — | (1,160) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | 738,911 | (13,702) | (13,702) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 16,226 | — | — | — | — | 16,226 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 5,365 | — | — | — | 5,365 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (7,585) | — | — | (7,585) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2022 | 28,811,232 | $ | 288 | 70,032,694 | $ | 700 | $ | 616,645 | $ | (151,416) | $ | (17,588) | 738,911 | $ | (13,702) | $ | 434,927 | ||||||||||||||||||||||||||||||||||||||||||
| Capital stock and additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Total shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common stock | Class B convertible common stock | Additional paid-in capital | Treasury stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 | 29,257,651 | $ | 293 | 70,032,694 | $ | 700 | $ | 631,908 | $ | (135,674) | $ | (10,647) | 1,649,931 | $ | (30,967) | $ | 455,613 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | 246,537 | 2 | — | — | 207 | — | — | — | — | 209 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (14,293) | — | — | — | (257) | — | — | — | — | (257) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | 389,801 | (6,374) | (6,374) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 13,464 | — | — | — | — | 13,464 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 9,509 | — | — | — | 9,509 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 3,591 | — | — | 3,591 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2023 | 29,489,895 | $ | 295 | 70,032,694 | $ | 700 | $ | 645,322 | $ | (126,165) | $ | (7,056) | 2,039,732 | $ | (37,341) | $ | 475,755 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | 338,035 | 3 | — | — | 187 | — | — | — | — | 190 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (23,705) | — | — | — | (293) | — | — | — | — | (293) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | 3,223,283 | (38,338) | (38,338) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 15,040 | — | — | — | — | 15,040 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 10,132 | — | — | — | 10,132 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (3,687) | — | — | (3,687) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2023 | 29,804,225 | $ | 298 | 70,032,694 | $ | 700 | $ | 660,256 | $ | (116,033) | $ | (10,743) | 5,263,015 | $ | (75,679) | $ | 458,799 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of equity awards | 661,158 | 7 | — | — | 148 | — | — | — | — | 155 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld related to net share settlement | (136,501) | (1) | — | — | (1,484) | — | — | — | — | (1,485) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | — | — | 4,541,983 | (48,753) | (48,753) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | 13,833 | — | — | — | — | 13,833 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 9,772 | — | — | — | 9,772 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (3,573) | — | — | (3,573) | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2023 | 30,328,882 | $ | 304 | 70,032,694 | $ | 700 | $ | 672,753 | $ | (106,261) | $ | (14,316) | 9,804,998 | $ | (124,432) | $ | 428,748 | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
TASKUS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
| Nine months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 29,413 | $ | 24,680 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 29,502 | 27,986 | |||||||||
| Amortization of intangibles | 15,276 | 14,765 | |||||||||
| Amortization of debt financing fees | 447 | 420 | |||||||||
| Loss (gain) on disposal of assets | 772 | (18) | |||||||||
| Provision for losses on accounts receivable | — | 1,329 | |||||||||
| Unrealized foreign exchange losses on forward contracts | 6,020 | 13,522 | |||||||||
| Deferred taxes | (255) | (39) | |||||||||
| Stock-based compensation expense | 42,337 | 54,764 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (680) | (6,995) | |||||||||
| Prepaid expenses and other current assets | (4,403) | (8,022) | |||||||||
| Operating lease right-of-use assets | 10,670 | 9,762 | |||||||||
| Other noncurrent assets | (123) | (522) | |||||||||
| Accounts payable and accrued liabilities | (9,063) | (3,941) | |||||||||
| Accrued payroll and employee-related liabilities | (4,093) | 10,477 | |||||||||
| Operating lease liabilities | (10,217) | (9,146) | |||||||||
| Income tax payable | (1,278) | (13,918) | |||||||||
| Deferred revenue | (278) | (738) | |||||||||
| Other noncurrent liabilities | (152) | 98 | |||||||||
| Net cash provided by operating activities | 103,895 | 114,464 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property and equipment | (22,904) | (36,010) | |||||||||
| Acquisition, net of cash acquired | — | (23,235) | |||||||||
| Investment in loan receivable | (1,000) | — | |||||||||
| Net cash used in investing activities | (23,904) | (59,245) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowings, Revolving credit facility | — | 32,500 | |||||||||
| Proceeds from long-term debt | — | 270,000 | |||||||||
| Payments for deferred business acquisition consideration | (145) | — | |||||||||
| Payments on long-term debt | (2,025) | (272,403) | |||||||||
| Payments for debt financing fees | — | (1,821) | |||||||||
| Proceeds from employee stock plans | 554 | 2,217 | |||||||||
| Payments for taxes related to net share settlement | (2,035) | (3,937) | |||||||||
| Payments for stock repurchases | (92,683) | (13,702) | |||||||||
| Net cash provided by (used in) financing activities | (96,334) | 12,854 | |||||||||
| Increase (decrease) in cash and cash equivalents | (16,343) | 68,073 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (3,033) | (9,166) | |||||||||
| Cash and cash equivalents at beginning of period | 133,992 | 63,584 | |||||||||
| Cash and cash equivalents at end of period | $ | 114,616 | $ | 122,491 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
TASKUS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Organization
TaskUs, Inc. ("TaskUs," together with its subsidiaries, the "Company," "we," "us" or "our") was formed by investment funds affiliated with Blackstone Inc. (“Blackstone”) as a vehicle for the acquisition of TaskUs Holdings, Inc. ("TaskUs Holdings") on October 1, 2018 (the "Blackstone Acquisition"). Prior to the Blackstone Acquisition, TaskUs had no operations and TaskUs Holdings operated as a standalone entity. TaskUs, Inc. was incorporated in Delaware in July 2018, and is headquartered in New Braunfels, Texas.
The Company is a provider of outsourced digital services and next-generation customer experience to the world’s most innovative companies, helping its clients represent, protect and grow their brands. The Company’s global, omni-channel delivery model is focused on providing its clients three key services - Digital Customer Experience, Trust and Safety and Artificial Intelligence ("AI") Services. The Company has designed its platform to enable it to rapidly scale and benefit from its clients’ growth. Through its agile and responsive operational model, the Company delivers services from multiple delivery sites that span globally from the United States, Philippines, India and other parts of the world.
The Company’s major service offerings are described in more detail below:
•Digital Customer Experience: Principally consists of omni-channel customer care services, primarily delivered through digital (non-voice) channels.
•Trust and Safety: Principally consists of review and disposition of user and advertiser generated visual, text and audio content for purposes which include removal or labeling of policy violating, offensive or misleading content. Also included in this area are our offerings for risk management, compliance, identity management and fraud.
•AI Services: Principally consists of high-quality data labeling services, annotation, context relevance and transcription services performed for the purpose of training and tuning machine learning algorithms, enabling them to develop cutting-edge AI systems.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). Our Annual Report on Form 10-K for the year ended December 31, 2022 (the "Annual Report"), as filed with the Securities and Exchange Commission (the "SEC"), includes a discussion of the significant accounting policies used in the preparation of our consolidated financial statements. There have been no changes to the Company’s significant accounting policies described in the Annual Report that have had a material impact on the Company’s condensed consolidated financial statements and related notes.
These unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with US GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Annual Report. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2023 and its results of operations, comprehensive income (loss) and shareholders’ equity for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022. The condensed consolidated balance sheet as of December 31, 2022, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
The Company has made certain reclassifications to prior period consolidated financial statements to conform to current period presentation. India, which was previously included in Rest of World, is now reported separately within revenue disaggregation by geographical location. Other receivables, Prepaid expenses and Other current assets have been combined into Prepaid expenses and other current assets.
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(b) Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include: the determination of useful lives and impairment of fixed assets; allowances for doubtful accounts and other receivables; the valuation of deferred tax assets; the measurement of lease liabilities and right-of-use assets; valuation of forward contracts; valuation of stock-based compensation; valuation of acquired intangible assets and goodwill, as well as related impairment assessments; and reserves for income tax uncertainties and other contingencies.
(c) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has no variable interest entities in its corporate structure.
(d) Concentration Risk
Most of the Company’s clients are located in the United States. Clients outside of the United States are concentrated in Europe.
For the three and nine months ended September 30, 2023 and 2022, the following client represented greater than 10% of the Company’s service revenue:
| Client | Service revenue percentage | |||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| A | 19 | % | 22 | % | 19 | % | 23 | % | ||||||||||||||||||
As of September 30, 2023 and December 31, 2022, the following clients represented greater than 10% of the Company’s accounts receivable:
| Accounts receivable percentage | ||||||||||||||
| Client | September 30, 2023 | December 31, 2022 | ||||||||||||
| A | 17 | % | 17 | % | ||||||||||
| B | 10 | % | 13 | % | ||||||||||
The Company’s principal operations, including the majority of its employees and the fixed assets owned by its wholly owned subsidiaries, are located in the Philippines.
(e) Recent Accounting Pronouncements
The Company currently qualifies as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. The Company has elected to adopt new or revised accounting guidance within the same time period as private companies.
Recently adopted accounting pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The revised standard relates to measurement of credit losses on financial instruments, and requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The guidance replaces the incurred loss model with an expected loss model referred to as current expected credit loss ("CECL"). The CECL model requires us to measure lifetime expected credit losses for financial instruments held at the reporting date using historical experience, current conditions and reasonable supportable forecasts. The guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The company adopted this standard as of January 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements.
9
3. Business Combination
On April 15, 2022 (the "Closing Date"), the Company completed the acquisition of 100% of the equity interests of Parsec d.o.o. and Q Experience d.o.o. (collectively, "heloo") for $35.4 million. The former shareholders of heloo are also eligible to receive contingent earn-out payments not to exceed €20 million, based on performance compared to prescribed EBITDA targets outlined in the purchase agreement during each of the one year periods ending April 30, 2023 and 2024, respectively. The total fair value of remaining contingent earn-out payments was determined to be immaterial and $14.9 million as of September 30, 2023 and December 31, 2022, respectively, based on a Monte Carlo simulation model, utilizing a discounted payout analysis based on probabilities and timing of achieving the prescribed targets. Since these payments were contingent on future service conditions, they were recognized as compensation expense ratably over the required service period. Since the service conditions have been met, future changes will be based only on updates to the expected achievement. The Company recognized compensation expense related to the contingent earn-out payments included in selling, general, and administrative expenses of $(0.1) million and $7.9 million for the three and nine months ended September 30, 2023, respectively, and $3.6 million and $5.0 million for the three and nine months ended September 30, 2022. The Company paid $18.3 million related to the contingent earn-out during the nine months ended September 30, 2023, which is included in net cash provided by operating activities. The Company paid $0.1 million related to holdback cash consideration during the nine months ended September 30, 2023, which is included in payments for deferred business acquisition consideration.
4. Revenue from Contracts with Customers
Disaggregation of Revenue
The Company's revenues are derived from contracts with customers related to business outsourcing services that it provides. The following table presents the breakdown of the Company’s revenues by service offering:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Digital Customer Experience | $ | 145,952 | $ | 151,474 | $ | 454,004 | $ | 478,625 | |||||||||||||||
| Trust and Safety | 48,687 | 43,910 | 134,494 | 136,093 | |||||||||||||||||||
| AI Services | 30,987 | 36,746 | 101,603 | 103,551 | |||||||||||||||||||
| Service revenue | $ | 225,626 | $ | 232,130 | $ | 690,101 | $ | 718,269 | |||||||||||||||
The majority of the Company’s revenues are derived from contracts with customers who are located in the United States. However, the Company delivers its services from geographies outside of the United States. The following table presents the breakdown of the Company’s revenues by geographical location, based on where the services are provided from:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Philippines | $ | 126,419 | $ | 127,507 | $ | 380,539 | $ | 371,909 | |||||||||||||||
| United States | 32,421 | 49,040 | 116,318 | 202,444 | |||||||||||||||||||
| India | 29,379 | 27,057 | 86,617 | 74,692 | |||||||||||||||||||
| Rest of World | 37,407 | 28,526 | 106,627 | 69,224 | |||||||||||||||||||
| Service revenue | $ | 225,626 | $ | 232,130 | $ | 690,101 | $ | 718,269 | |||||||||||||||
Contract Balances
Accounts receivable, net of allowance for doubtful accounts includes $79.8 million and $80.8 million of unbilled revenues as of September 30, 2023 and December 31, 2022, respectively.
5. Forward Contracts and Fair Value Measurement
The Company transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency exchange rate risk. During 2023 and 2022, the Company entered into foreign currency exchange rate forward contracts, with three commercial banks as the counterparties, with maturities of generally 12 months or less, to reduce the volatility of cash flows primarily related to forecasted costs denominated in Philippine pesos and Indian rupees. In addition, the Company utilizes foreign currency exchange rate contracts to mitigate foreign currency exchange rate risk associated with foreign currency-denominated assets and liabilities, primarily intercompany balances. The Company does not use foreign currency exchange rate contracts for trading purposes. The exchange rate forward contracts entered into by the Company are not designated as hedging instruments. Any gains or losses resulting from changes in the fair value of these contracts are recognized in other expense, net in the statements of operations.
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The forward contract receivable (payable) resulting from changes in fair value was recorded under prepaid expenses and other current assets (accounts payable and accrued liabilities).
The following table presents the Company's settled forward contracts and realized and unrealized losses (gains) associated with derivative contracts:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Notional amount of settled forward contracts in Philippine pesos | $ | 46,800 | $ | 51,247 | $ | 175,050 | $ | 139,646 | ||||||||||||||||||
| Notional amount of settled forward contracts in Indian rupees | 11,447 | — | 18,545 | — | ||||||||||||||||||||||
| Total notional amount of settled forward contracts | $ | 58,247 | $ | 51,247 | $ | 193,595 | $ | 139,646 | ||||||||||||||||||
| Realized losses (gains) from settlement of forward contracts | $ | (3,386) | $ | 4,474 | $ | (3,561) | $ | 8,017 | ||||||||||||||||||
| Unrealized losses on forward contracts | $ | 7,669 | $ | 6,070 | $ | 6,020 | $ | 13,522 | ||||||||||||||||||
The following table presents the Company's outstanding forward contracts:
| (in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Notional amount of outstanding forward contracts in Philippine pesos | $ | 133,618 | $ | 175,050 | |||||||
| Notional amount of outstanding forward contracts in Indian rupees | 35,298 | — | |||||||||
| Total notional amount of outstanding forward contracts | $ | 168,916 | $ | 175,050 | |||||||
By entering into derivative contracts, the Company is exposed to counterparty credit risk, or the failure of the counterparty to perform under the terms of the derivative contract. For the periods presented, the non-performance risk of the Company and the counterparties did not have a material impact on the fair value of the derivative instruments.
The Company has implemented the fair value accounting standard for those assets and liabilities that are re-measured and reported at fair value at each reporting period. This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value based on inputs used, and requires additional disclosures about fair value measurements. This standard applies to fair value measurements already required or permitted by existing standards.
In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset and include situations where there is little, if any, market activity for the asset.
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For financial statement presentation purposes, the Company offsets assets and liabilities for forward contracts with the same counterparty that it has the right and intent to net settle upon maturity; however, it does not offset assets and liabilities under master netting arrangements that it does not intend to net settle. The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value, at September 30, 2023 and December 31, 2022:
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
| Fair value measurements using | Total Gross Fair Value | Effect of Counter-party Netting | Net Amounts on Balance Sheet | Effect of Master Netting Arrangements | Net Amounts | ||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Level 1 inputs | Level 2 inputs | Level 3 inputs | ||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Forward contracts receivable | $ | — | $ | 62 | $ | — | $ | 62 | $ | — | $ | 62 | $ | (62) | $ | — | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Forward contracts payable | $ | — | $ | 4,286 | $ | — | $ | 4,286 | $ | — | $ | 4,286 | $ | (62) | $ | 4,224 | |||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Fair value measurements using | Total Gross Fair Value | Effect of Counter-party Netting | Net Amounts on Balance Sheet | Effect of Master Netting Arrangements | Net Amounts | ||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Level 1 inputs | Level 2 inputs | Level 3 inputs | ||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | 6,069 | $ | — | $ | — | $ | 6,069 | $ | — | $ | 6,069 | $ | — | $ | 6,069 | |||||||||||||||||||||||||||||||
Forward contracts receivable | $ | — | $ | 4,845 | $ | — | $ | 4,845 | $ | (518) | $ | 4,327 | $ | (1,778) | $ | 2,549 | |||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Forward contracts payable | $ | — | $ | 3,049 | $ | — | $ | 3,049 | $ | (518) | $ | 2,531 | $ | (1,778) | $ | 753 | |||||||||||||||||||||||||||||||
The Company’s derivatives are carried at fair value using various pricing models that incorporate observable market inputs, such as interest rate yield curves and currency rates, which are Level 2 inputs. Derivative valuations incorporate credit risk adjustments that are necessary to reflect the probability of default by the counterparty or by the Company.
6. Property and Equipment, net
The components of property and equipment, net as of September 30, 2023 and December 31, 2022 were as follows:
| (in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Leasehold improvements | $ | 65,331 | $ | 53,950 | |||||||
| Technology and computers | 100,842 | 95,189 | |||||||||
| Furniture and fixtures | 6,446 | 6,173 | |||||||||
| Construction in process | 3,173 | 4,640 | |||||||||
| Other property and equipment | 13,550 | 10,828 | |||||||||
| Property and equipment, gross | 189,342 | 170,780 | |||||||||
| Accumulated depreciation | (114,847) | (95,727) | |||||||||
| Property and equipment, net | $ | 74,495 | $ | 75,053 | |||||||
The Company’s principal operations are in the Philippines where the majority of property and equipment resides under its wholly owned subsidiaries. The table below presents the Company’s total property and equipment by geographic location as of September 30, 2023 and December 31, 2022:
| (in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Philippines | $ | 33,462 | $ | 42,153 | |||||||
| United States | 8,618 | 9,136 | |||||||||
| India | 19,209 | 15,482 | |||||||||
| Rest of World | 13,206 | 8,282 | |||||||||
| Property and equipment, net | $ | 74,495 | $ | 75,053 | |||||||
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7. Goodwill and Intangibles
The changes in the carrying amount of goodwill during the period were as follows:
| (in thousands) | |||||
Balance as of December 31, 2022 | $ | 217,382 | |||
| Foreign currency translation | (212) | ||||
Balance as of September 30, 2023 | $ | 217,170 | |||
The components of intangible assets as of September 30, 2023 and December 31, 2022 were as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| (in thousands) | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | Intangibles, Gross | Accumulated Amortization | Intangibles, Net | ||||||||||||||||||||||||||||||||
| Customer relationships | $ | 251,433 | $ | (81,817) | $ | 169,616 | $ | 251,539 | $ | (68,987) | $ | 182,552 | ||||||||||||||||||||||||||
| Trade names | 42,219 | (14,199) | 28,020 | 42,222 | (11,986) | 30,236 | ||||||||||||||||||||||||||||||||
| Other intangibles | 372 | (372) | — | 410 | (205) | 205 | ||||||||||||||||||||||||||||||||
| Total | $ | 294,024 | $ | (96,388) | $ | 197,636 | $ | 294,171 | $ | (81,178) | $ | 212,993 | ||||||||||||||||||||||||||
8. Long-Term Debt
The balances of current and noncurrent portions of debt consist of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Current | Noncurrent | Total | Current | Noncurrent | Total | |||||||||||||||||||||||||||||
| Term Loan | $ | 6,750 | $ | 260,550 | $ | 267,300 | $ | 3,712 | $ | 265,613 | $ | 269,325 | |||||||||||||||||||||||
| Less: Debt financing fees | (378) | (1,104) | (1,482) | (378) | (1,388) | (1,766) | |||||||||||||||||||||||||||||
| Total | $ | 6,372 | $ | 259,446 | $ | 265,818 | $ | 3,334 | $ | 264,225 | $ | 267,559 | |||||||||||||||||||||||
2022 Credit Agreement
On September 7, 2022, the Company entered into a credit agreement (the "2022 Credit Agreement") with both new and existing lenders which amended and restated its previous credit agreement. The 2022 Credit Agreement includes a $270.0 million term loan (the "2022 Term Loan Facility") and a $190.0 million revolving credit facility (the "2022 Revolving Credit Facility" and, together with the 2022 Term Loan Facility, the "2022 Credit Facilities").
The 2022 Term Loan Facility matures on September 7, 2027, and commencing with the fiscal quarter ending December 31, 2022, requires quarterly principal payments of 0.25% of the original principal amount through September 30, 2023, 0.625% of the original principal amount through September 30, 2024, 1.25% of the original principal amount through September 30, 2025, 1.875% of the original principal amount through September 30, 2026 and 2.50% of the original principal amount thereafter, with the remaining principal due in a lump sum at the maturity date. Voluntary principal prepayments are permitted.
The 2022 Revolving Credit Facility provides the Company with access to a $15.0 million letter of credit facility and a $15.0 million swing line facility, each of which, to the extent used, reduces borrowing availability under the 2022 Revolving Credit Facility. The 2022 Revolving Credit Facility terminates on September 7, 2027. As of September 30, 2023, we had no balance outstanding and $190.0 million of borrowing availability under the 2022 Revolving Credit Facility.
Borrowings under the 2022 Credit Agreement, with the exception of swing line borrowings, bear interest, at our option, either at (i) an adjusted Term Secured Overnight Financing Rate ("SOFR rate") plus a margin of 2.25% per annum, subject to a Term SOFR rate floor of 0.00% or (ii) an alternative base rate plus a margin of 1.25% per annum, subject to an alternative base rate floor of 1.00%. Any borrowings under the swing line will be subject to the base rate. The 2022 Revolving Credit Facility also requires a commitment fee of 0.40% per annum of undrawn commitments to be paid quarterly in arrears. We have elected to pay interest on borrowings under the 2022 Term Loan Facility based on the SOFR rate. The interest rate in effect for the 2022 Term Loan Facility as of September 30, 2023 was 7.674% per annum.
The 2022 Credit Agreement contains a financial covenant requiring compliance with a maximum total net leverage ratio and certain other covenants, including, among other things, covenants restricting additional borrowings, investments (including acquisitions) and distributions. We were in compliance with all debt covenants as of September 30, 2023. Substantially all assets of our direct wholly owned subsidiary TU MidCo, Inc., its wholly owned subsidiary, TU BidCo, Inc. and its material wholly owned domestic subsidiaries are pledged as collateral under the 2022 Credit Agreement, subject to certain customary exceptions.
13
9. Leases
The following table presents operating lease costs recorded to cost of services:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Operating lease costs - Cost of services | $ | 4,266 | $ | 3,739 | $ | 12,801 | $ | 11,351 | ||||||||||||||||||
Operating lease costs recorded to selling, general, and administrative expenses were immaterial.
The following table presents the weighted average remaining lease term and weighted average discount rate for the Company's operating leases as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| Weighted average remaining lease term | 3.7 years | 4.1 years | ||||||||||||
| Weighted average discount rate | 6.0 | % | 5.3 | % | ||||||||||
The following table presents supplemental cash flow information related to the Company's operating leases:
| Nine months ended September 30, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 12,487 | $ | 10,822 | ||||||||||
| ROU assets obtained in exchange for operating lease liabilities | 14,725 | 7,041 | ||||||||||||
The future lease payments on the Company's operating lease liabilities as of September 30, 2023 were as follows:
| (in thousands) | ||||||||
| 2023-remainder of year | $ | 4,471 | ||||||
| 2024 | 16,128 | |||||||
| 2025 | 13,661 | |||||||
| 2026 | 8,704 | |||||||
| 2027 | 5,189 | |||||||
| Thereafter | 3,774 | |||||||
| Total lease payments | 51,927 | |||||||
| Less: imputed interest | (5,688) | |||||||
| Total lease liabilities | $ | 46,239 | ||||||
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10. Commitments and Contingencies
We are subject to various legal proceedings, claims, and litigation arising in the ordinary course of business. Although the outcomes of such matters cannot be predicted with certainty, we believe that resolution of all such pending matters will not, either individually or in the aggregate, have a material adverse effect on the Company’s business, operating results, cash flows, or financial condition.
On February 23, 2022, a purported class action lawsuit captioned Lozada v. TaskUs, Inc. et al., No. 22-cv-1479-JPC, was filed in the United States District Court for the Southern District of New York against the Company, our Chief Executive Officer, our President, and our Chief Financial Officer. The complaint alleges that the registration statement filed in connection with the Company’s IPO and the Company’s second and third quarter 2021 earnings calls contained materially false and misleading information in violation of the federal securities laws. On October 20, 2022, the Court entered an order appointing Humberto Lozada as lead plaintiff in the lawsuit. On December 16, 2022, lead plaintiff filed an amended complaint, alleging additional misstatements in certain of the Company’s 2021 earnings releases filed on Form 8-K and at an investor conference, and asserting additional securities claims, including against members of TaskUs’s board of directors as well as BCP FC Aggregator L.P. The complaint seeks unspecified damages and an award of costs and expenses, including reasonable attorneys’ fees, as well as equitable relief. We believe that the lawsuit is without merit and intend to defend the lawsuit vigorously. On February 17, 2023, TaskUs filed a motion to dismiss, which is currently pending. On September 28, 2023, the court heard oral argument on the motion to dismiss. On September 29, 2023, the court issued a stay of this action. On October 16, 2023, the plaintiffs voluntarily dismissed with prejudice certain claims based on certain theories of liability. On October 17, 2023, the Court lifted the stay of the action. We cannot predict at this point the length of time that this action will be ongoing or the liability, if any, which may arise therefrom.
The Company is currently defending two lawsuits that present in large degree the same legal or factual issues, with allegations that are similar in nature. We believe that these two lawsuits are without merit and intend to defend each vigorously. We cannot predict at this point the length of time that these actions will be ongoing or the liability, if any, which may arise therefrom. As these actions are still in preliminary phases, any potential loss or impact on financial position or results of operations cannot yet be estimated:
On April 1, 2022, a purported class action lawsuit captioned Gregory Forsberg, Christopher Gunter, Samuel Kissinger, and Scott Sipprell vs. TaskUs, Inc. and Shopify, Inc., Shopify Holdings (USA), Inc., Shopify (USA) Inc., No. 1:22-cv-00436-UNA, was filed in the United States District Court for the District of Delaware. The complaint alleges the named defendants failed to exercise reasonable care in securing and safeguarding consumer information in connection with a 2020 data breach impacting Ledger SAS cryptocurrency hardware wallets, resulting in the unauthorized public release of approximately 272,000 pieces of detailed personally identifiable information, including Plaintiffs’ and class members’ full names, email addresses, postal addresses, and telephone numbers. The four named plaintiffs allege aggregate losses of approximately $140,000, and allege that the damages exceed $5 million for purposes of class action jurisdiction. On April 8, 2022, we filed a motion to dismiss, which is currently pending. This case is currently stayed.
On September 16, 2022, a lawsuit captioned My Choice Software, LLC vs. TaskUs, Inc., Tassilo Heinrich, Shopify, Inc., Shopify Holdings (USA) Inc., Shopify (USA) Inc., Does 1-50, No. 22-cv-1710 was filed in the United States District Court, Central District of California. The complaint alleges the defendants profited off of the plaintiff's information. The complaint seeks unspecified damages and an award of costs and expenses, including reasonable attorneys’ fees, as well as equitable and injunctive relief. On February 13, 2023, we filed a motion to dismiss the amended complaint. In May 2023, the Court issued an Order dismissing certain parties, staying the case as to the Company and denying as moot the Company's previously filed motion to dismiss. This case is currently stayed.
Indemnification
In addition, in the ordinary course of business, we enter into agreements of varying scope and terms pursuant to which we agree to indemnify clients, vendors and other business partners with respect to certain matters, including, but not limited to, losses arising out of breach of such agreements, cybersecurity breach, services to be provided by us or from intellectual property infringement claims made by third parties. Historically, we have not experienced significant losses on these types of indemnification obligations.
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11. Stock-Based Compensation
The following table summarizes the stock option and restricted stock unit ("RSU") activity for the nine months ended September 30, 2023:
| Options | RSUs | ||||||||||||||||||||||
| Number of options | Weighted - average exercise price | Number of RSUs | Weighted - average grant date fair value | ||||||||||||||||||||
Outstanding at January 1, 2023 | 7,723,711 | $ | 12.98 | 3,895,224 | $ | 28.00 | |||||||||||||||||
Granted | 770,937 | $ | 18.11 | 1,671,414 | $ | 17.03 | |||||||||||||||||
| Exercised or released | (140,216) | $ | 3.95 | (1,105,514) | $ | 25.68 | |||||||||||||||||
| Forfeited, cancelled or expired | (741,741) | $ | 7.61 | (360,702) | $ | 25.25 | |||||||||||||||||
Outstanding at September 30, 2023 | 7,612,691 | $ | 14.19 | 4,100,422 | $ | 24.39 | |||||||||||||||||
The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2023 was $8.85. There were 3,373,417 performance stock units ("PSUs") outstanding at January 1, 2023 and September 30, 2023.
The following table summarizes the components of stock-based compensation expense recognized for the periods presented:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Cost of services | $ | 687 | $ | 1,149 | $ | 2,602 | $ | 2,689 | |||||||||||||||
| Selling, general, and administrative expense | 13,146 | 15,077 | 39,735 | 52,075 | |||||||||||||||||||
| Total | $ | 13,833 | $ | 16,226 | $ | 42,337 | $ | 54,764 | |||||||||||||||
As of September 30, 2023, there was $10.2 million, $44.2 million and $3.0 million of unrecognized compensation expense related to the Company’s unvested stock options, RSUs and PSUs, respectively, that is expected to be recognized over a weighted-average period of 1.0 year, 1.3 years and 1.4 years.
12. Income Taxes
In determining its interim provision for income taxes, the Company used an estimated annual effective tax rate, which is based on expected income before taxes, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Certain significant or unusual items are separately recognized in the period in which they occur and can be a source of variability in the effective tax rate from quarter to quarter.
The Company recorded provision for income taxes of $4.6 million and $3.9 million in the three months ended September 30, 2023 and 2022, respectively. The effective tax rate was 31.8% and 42.1% for the three months ended September 30, 2023 and 2022, respectively.
The Company recorded provision for income taxes of $17.9 million and $12.3 million in the nine months ended September 30, 2023 and 2022, respectively. The effective tax rate was 37.9% and 33.2% for the nine months ended September 30, 2023 and 2022, respectively. The difference between the effective tax rate and the 21% federal statutory rate in the nine months ended September 30, 2023 was primarily due to nondeductible compensation of officers and Global Intangible Low-Taxed Income ("GILTI") inclusion. The difference between the effective tax rate and the 21% federal statutory rate in the nine months ended September 30, 2022 was primarily due to GILTI inclusion, tax benefits of income tax holidays in foreign jurisdiction, nondeductible earn-out consideration and nondeductible compensation of officers.
13. Earnings Per Share
The Company has Class A common stock and Class B common stock outstanding. Because the only difference between the two classes of common stock are related to voting, transfer and conversion rights, the Company has not presented earnings per share under the two-class method, as earnings per share are the same for both Class A common stock and Class B common stock.
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The following table summarizes the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2023 and 2022:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands, except share and per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | 9,772 | $ | 5,365 | $ | 29,413 | $ | 24,680 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding – basic | 92,480,316 | 98,299,612 | 95,522,026 | 97,854,944 | |||||||||||||||||||
| Effect of dilutive securities | 1,554,795 | 3,620,801 | 2,207,204 | 5,218,264 | |||||||||||||||||||
| Weighted-average common shares outstanding – diluted | 94,035,111 | 101,920,413 | 97,729,230 | 103,073,208 | |||||||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
| Basic | $ | 0.11 | $ | 0.05 | $ | 0.31 | $ | 0.25 | |||||||||||||||
| Diluted | $ | 0.10 | $ | 0.05 | $ | 0.30 | $ | 0.24 | |||||||||||||||
The Company excluded 6,487,091 and 5,809,048 potential common stock equivalents from the computation of diluted EPS for the three and nine months ended September 30, 2023, respectively, and 3,486,107 and 2,696,701 potential common stock equivalents from the computation of diluted EPS for the three and nine months ended September 30, 2022, respectively, because the effect would have been anti-dilutive. There were 5,208,719 and 4,657,008 potential common stock equivalents outstanding as of September 30, 2023 and 2022, respectively, with market conditions which were not met at that date, that were excluded from the calculation of diluted EPS.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report"), the financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the "Annual Report"), as filed with the Securities and Exchange Commission (the "SEC") and the information included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report. In addition to historical data, the following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in our forward-looking statements as a result of various factors, including but not limited to those discussed under "Cautionary Note Regarding Forward-Looking Statements" in this Quarterly Report and under Part I, Item 1A, "Risk Factors" in the Annual Report.
This Quarterly Report includes certain historical consolidated financial and other data for TaskUs, Inc. ("we," "us," "our" or the "Company"). The following discussion provides a narrative of our results of operations and financial condition for the three and nine months ended September 30, 2023 and 2022. India, which was previously included in Rest of World, is now reported separately within revenue disaggregation by geographical location. As a result, the comparison of service revenue by delivery geography for the three and nine months ended September 30, 2022 has been recast for comparability.
Overview
We are a provider of outsourced digital services and next-generation customer experience to the world's most innovative companies, helping our clients represent, protect and grow their respective brands. We serve our clients to support their end customers’ urgent needs, navigate an increasingly-complex compliance landscape, handle sensitive tasks, including online content moderation and enable artificial intelligence technology and automation.
Our global, omni-channel delivery model is focused on providing our clients three key services – Digital Customer Experience ("Digital CX"), Trust and Safety and Artificial Intelligence ("AI") Services. We have designed our platform to enable us to rapidly scale and benefit from our clients’ growth. We believe our ability to deliver “ridiculously good” outsourcing will enable us to continue to grow our client base.
At TaskUs, culture is at the heart of everything we do. Many of the companies operating in the Digital Economy are well-known for their obsession with creating a world-class employee experience. We believe clients choose TaskUs in part because they view our company culture as aligned with their own, which enables us to act as a natural extension of their brands and gives us an advantage in the recruitment of highly engaged frontline teammates who produce better results.
Recent Financial Highlights
For the three months ended September 30, 2023, we recorded service revenue of $225.6 million, a 2.8% decrease from $232.1 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, we recorded service revenue of $690.1 million, a 3.9% decrease from $718.3 million for the nine months ended September 30, 2022.
Net income for the three months ended September 30, 2023 increased to $9.8 million from $5.4 million for the three months ended September 30, 2022. This increase is due primarily to the impact of foreign currency exchange rate changes, as well as lower earn-out consideration, lower stock-based compensation expense, and cost optimization, partially offset by rising interest rates. Adjusted Net Income for the three months ended September 30, 2023 decreased 16.3% to $30.0 million from $35.8 million for the three months ended September 30, 2022. Adjusted EBITDA for the three months ended September 30, 2023 decreased 4.6% to $52.9 million from $55.5 million for the three months ended September 30, 2022. Adjusted Net Income and Adjusted EBITDA are non-GAAP financial measures. For definitions and reconciliations to net income, the most directly comparable measure in accordance with GAAP, see "Non-GAAP Financial Measures."
Net income for the nine months ended September 30, 2023 increased to $29.4 million from $24.7 million for the nine months ended September 30, 2022. This increase is due primarily to the impact of foreign currency exchange rate changes as well as lower stock-based compensation expense and cost optimization, partially offset by rising interest rates, higher income taxes and earn-out consideration. Adjusted Net Income for the nine months ended September 30, 2023 decreased 13.9% to $94.3 million from $109.5 million for the nine months ended September 30, 2022. Adjusted EBITDA for the nine months ended September 30, 2023 decreased 1.5% to $162.8 million from $165.3 million for the nine months ended September 30, 2022.
The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
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2023 Developments
Macroeconomic Trends
Macroeconomic factors, including global economic and geopolitical developments, increased inflation rates, interest rate increases, and foreign currency exchange rate changes, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify. Due to market uncertainty and potential recession or other economic challenges, many of our customers have increased their focus on cost reduction resulting in certain customers electing to shift work from our onshore locations to our offshore delivery locations, partnering with service providers to find cost-efficient arrangements, or reducing vendor spend across the board. These factors contributed to a deceleration in our revenue growth rate and an increase in our operating costs. We expect some or all of these factors to continue to impact our operations in the near term; however, we believe that the increased cost focus also creates meaningful opportunities with both new and existing clients.
Cost management and financial flexibility
During the nine months ended September 30, 2023, we continued to focus on cost management and financial flexibility. We reviewed our cost structure in order to drive efficiencies across functions. While we incurred certain costs associated with these changes, including severance in some cases, we believe these actions will have long-term benefits to the goal of enabling our future growth and profitability. We generated net cash flow from operating activities of $103.9 million and Free Cash Flow of $81.0 million, respectively.
Generative AI
Generative AI, including Large Language Models (“LLMs”), has developed significantly in recent years and has had further advancement in 2023. We believe this technology has the potential to impact most industries, including business process outsourcing, further automating simple, repeatable tasks, and even streamlining some more sophisticated workflows. Certain of our clients have begun experimenting with this technology. As this technology develops, demand for certain service offerings could decrease, further reducing our clients' spend, which could have a negative impact on our revenue.
We also believe that this technology will provide new opportunities and workflows. We have historically differentiated our value proposition with a frontline first culture, which aligns with and allows us to be an extension of our clients’ brands, as well as our focus on driving efficiency, seeking opportunities to eliminate simple, routine work so our teammates can deliver higher value services. We have been using Generative AI for nearly two years and believe the future of this technology is one of augmentation rather than automation, enabling our talented teammates to leverage these tools and continue to meaningfully improve client outcomes and operational efficiencies. During the nine months ended September 30, 2023, we launched TaskGPT, a next generation customer support technology, enabling rapid expansion and enhancements to our customer service capabilities by leveraging AI technology.
New technology also produces demand for novel services. We have demonstrated an ability to quickly discover and launch services in new markets and believe we are well positioned to discover these needs and deliver them for our innovative clients. We believe that there is an opportunity to integrate Generative AI throughout our offerings, including:
•AI Services: TaskUs provides annotation and evaluation support services to help train algorithms, improving the models’ performance and aligning them with human values. We built a Prompt Engineering team that creates and refines prompts for AI systems.
•Trust and Safety: We expect to see increased demand for Trust and Safety services in a world of infinite content creation and deepfake technology. We also work with Generative AI companies to ensure the safety and soundness of their AI (e.g., ensuring responses of LLMs do not violate company policies).
•Digital Customer Experience: We believe that there may be a decrease in volumes of certain workflows; however, there may also be revenue opportunities for systems integrators and service providers to build, integrate and deploy this technology. We have launched a consultative model that helps leading enterprises innovate by building new capabilities powered by Generative AI across a spectrum of tasks, from automating the routine to assisting in creative work. TaskUs consults with companies to drive customer engagement, improve customer service and enhance operations through the use of technology.
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Results of Operations
Comparison of the Three Months Ended September 30, 2023 and 2022
The following tables set forth certain historical consolidated financial information for the three months ended September 30, 2023 and 2022:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Service revenue | $ | 225,626 | $ | 232,130 | $ | (6,504) | (2.8) | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | 130,139 | 134,544 | (4,405) | (3.3) | % | ||||||||||||||||||
| Selling, general, and administrative expense | 57,114 | 62,348 | (5,234) | (8.4) | % | ||||||||||||||||||
| Depreciation | 9,762 | 9,428 | 334 | 3.5 | % | ||||||||||||||||||
| Amortization of intangible assets | 5,027 | 5,087 | (60) | (1.2) | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | 640 | (8) | 648 | NM | |||||||||||||||||||
| Total operating expenses | 202,682 | 211,399 | (8,717) | (4.1) | % | ||||||||||||||||||
| Operating income | 22,944 | 20,731 | 2,213 | 10.7 | % | ||||||||||||||||||
| Other expense, net | 2,895 | 7,612 | (4,717) | (62.0) | % | ||||||||||||||||||
| Financing expenses | 5,712 | 3,859 | 1,853 | 48.0 | % | ||||||||||||||||||
| Income before income taxes | 14,337 | 9,260 | 5,077 | 54.8 | % | ||||||||||||||||||
| Provision for income taxes | 4,565 | 3,895 | 670 | 17.2 | % | ||||||||||||||||||
| Net income | $ | 9,772 | $ | 5,365 | $ | 4,407 | 82.1 | % | |||||||||||||||
NM = not meaningful
Service revenue
Service revenue for the three months ended September 30, 2023 and 2022 was $225.6 million and $232.1 million, respectively. Service revenue for the three months ended September 30, 2023 decreased by $6.5 million, or 2.8%, when compared to the three months ended September 30, 2022.
Service revenue by service offering
The following table presents the breakdown of our service revenue by service offering for each period:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Digital Customer Experience | $ | 145,952 | $ | 151,474 | $ | (5,522) | (3.6) | % | |||||||||||||||
| Trust and Safety | 48,687 | 43,910 | 4,777 | 10.9 | % | ||||||||||||||||||
| AI Services | 30,987 | 36,746 | (5,759) | (15.7) | % | ||||||||||||||||||
| Service revenue | $ | 225,626 | $ | 232,130 | $ | (6,504) | (2.8) | % | |||||||||||||||
The period over period declines in Digital Customer Experience and AI Services contributed 2.4% and 2.5%, respectively, partially offset by growth in Trust and Safety which contributed a 2.1% reduction, of the total decrease of 2.8% for the three months ended September 30, 2023.
The 3.6% decline in Digital Customer Experience was primarily driven by a decrease from existing clients in On Demand Travel + Transportation, Social Media and FinTech. These decreases were partially offset by an increase from existing clients in Technology and new clients in Retail + E-Commerce and FinTech.
The 10.9% growth in Trust and Safety was primarily driven by an increase from existing clients in On Demand Travel + Transportation and new clients in FinTech, partially offset by a decrease from existing clients in FinTech.
The 15.7% decline in AI Services was primarily driven by a decrease from existing clients in Social Media and On Demand Travel + Transportation.
Service revenue by delivery geography
We deliver our services from multiple locations around the world; however, the majority of our service revenues are derived from contracts that require payment in United States dollars, regardless of whether the clients are located in the United States.
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The following table presents the breakdown of our service revenue by geographical location, based on where the services are provided, for each period:
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Philippines | $ | 126,419 | $ | 127,507 | $ | (1,088) | (0.9) | % | |||||||||||||||
| United States | 32,421 | 49,040 | (16,619) | (33.9) | % | ||||||||||||||||||
| India | 29,379 | 27,057 | 2,322 | 8.6 | % | ||||||||||||||||||
| Rest of World | 37,407 | 28,526 | 8,881 | 31.1 | % | ||||||||||||||||||
| Service revenue | $ | 225,626 | $ | 232,130 | $ | (6,504) | (2.8) | % | |||||||||||||||
Revenue generated from services provided from our delivery sites in the Philippines declined primarily from declines in two of our service offerings. Digital Customer Experience contributed 2.3% of the total decrease primarily driven by clients in On Demand Travel + Transportation and FinTech, partially offset by clients in Technology. AI Services contributed 2.2% of the total decrease primarily driven by clients in Social Media. These decreases were mostly offset by a 3.6% increase contributed by Trust and Safety primarily driven by clients in FinTech and On Demand Travel + Transportation.
Revenue generated from services provided from our delivery sites in the United States declined primarily from declines in all three of our service offerings. Digital Customer Experience contributed 22.6% of the total decrease primarily driven by clients in Social Media, FinTech and Entertainment + Gaming. Trust and Safety contributed 6.3% of the total decrease primarily driven by clients in FinTech. AI Services contributed 5.0% of the total decrease primarily driven by clients in On Demand Travel + Transportation and Social Media.
Revenue generated from services provided from our delivery sites in India grew primarily from expansion in two of our service offerings. Trust and Safety contributed 14.4% of the total increase primarily driven by clients in On Demand Travel + Transportation. The increase was partially offset by a 3.8% decrease contributed by Digital Customer Experience driven by clients in On Demand Travel + Transportation, partially offset by clients in Technology, and a 2.0% decrease by AI Services.
Revenue generated from services provided from our delivery sites in the Rest of World grew from expansion in Digital Customer Experience. Digital Customer Experience contributed 32.9% of the total increase primarily driven by clients in FinTech, Retail + E-Commerce, Entertainment + Gaming, On Demand Travel + Transportation and HealthTech, partially offset by clients in Social Media. The increase was partially offset by a 1.4% decrease contributed by Trust and Safety and a 0.4% decrease contributed by AI Services. Growth in the Rest of World was led by Latin America.
Operating expenses
Cost of services
Cost of services for the three months ended September 30, 2023 and 2022 was $130.1 million and $134.5 million, respectively. Cost of services for the three months ended September 30, 2023 decreased by $4.4 million, or 3.3%, when compared to the three months ended September 30, 2022. The decrease was primarily driven by lower personnel costs of $3.4 million, including the impact of certain clients electing to shift work from the United States to the Philippines and India. The remaining decrease included a reduction of costs previously incurred while transitioning to a hybrid model.
Selling, general, and administrative expense
Selling, general, and administrative expense for the three months ended September 30, 2023 and 2022 was $57.1 million and $62.3 million, respectively. Selling, general, and administrative expense for the three months ended September 30, 2023 decreased by $5.2 million, or 8.4%, when compared to the three months ended September 30, 2022. The decrease was primarily driven by lower personnel costs of $5.7 million, due primarily to a reduction in earn-out compensation and stock-based compensation expense, as well as the impact of optimization efforts as we drive efficiencies across functions. The remaining decrease was associated with our optimization efforts, including lower insurance expense based on renegotiated rates, as well as bad debt expense. These decreases were partially offset by higher software and travel costs.
Loss (gain) on disposal of assets
Loss on disposal of assets for the three months ended September 30, 2023 was $0.6 million, associated with optimizing our footprint in the United States.
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Other expense, net
Other expense, net for the three months ended September 30, 2023 and 2022 was $2.9 million and $7.6 million, respectively. Changes are driven by our exposure to foreign currency exchange risk resulting from our operations in foreign geographies, primarily the Philippines, offset by economic hedges using foreign currency exchange rate forward contracts. See Part I, Item 3., "Quantitative and Qualitative Disclosures About Market Risk" in this Quarterly Report for additional information on how foreign currency impacts our financial results.
Financing expenses
Financing expense for the three months ended September 30, 2023 and 2022 was $5.7 million and $3.9 million, respectively. Changes in financing expense are primarily driven by the rate of SOFR and LIBOR used to calculate the interest rate of our debt, as well as additional borrowings during 2022.
Provision for income taxes
Provision for income taxes for the three months ended September 30, 2023 and 2022 was $4.6 million and $3.9 million, respectively. The effective tax rate for the three months ended September 30, 2023 and 2022 was 31.8% and 42.1%, respectively. Costs related to the issuance of stock-based compensation and costs related to the acquisition of heloo within the provision for income taxes calculation are adjusted for Non-GAAP purposes. If those costs are removed, the provision for income taxes would have been $7.5 million and $6.4 million and the effective tax rate would have been 26.5% and 20.9% for the three months ended September 30, 2023 and 2022, respectively.
Comparison of the Nine Months Ended September 30, 2023 and 2022
The following tables set forth certain historical consolidated financial information for the nine months ended September 30, 2023 and 2022:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Service revenue | $ | 690,101 | $ | 718,269 | $ | (28,168) | (3.9) | % | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of services | 401,455 | 419,364 | (17,909) | (4.3) | % | ||||||||||||||||||
| Selling, general, and administrative expense | 179,583 | 195,514 | (15,931) | (8.1) | % | ||||||||||||||||||
| Depreciation | 29,502 | 27,986 | 1,516 | 5.4 | % | ||||||||||||||||||
| Amortization of intangible assets | 15,276 | 14,765 | 511 | 3.5 | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | 772 | (18) | 790 | NM | |||||||||||||||||||
| Total operating expenses | 626,588 | 657,611 | (31,023) | (4.7) | % | ||||||||||||||||||
| Operating income | 63,513 | 60,658 | 2,855 | 4.7 | % | ||||||||||||||||||
| Other expense, net | 34 | 16,042 | (16,008) | (99.8) | % | ||||||||||||||||||
| Financing expenses | 16,141 | 7,665 | 8,476 | 110.6 | % | ||||||||||||||||||
| Income before income taxes | 47,338 | 36,951 | 10,387 | 28.1 | % | ||||||||||||||||||
| Provision for income taxes | 17,925 | 12,271 | 5,654 | 46.1 | % | ||||||||||||||||||
| Net income | $ | 29,413 | $ | 24,680 | $ | 4,733 | 19.2 | % | |||||||||||||||
NM = not meaningful
Service revenue
Service revenue for the nine months ended September 30, 2023 and 2022 was $690.1 million and $718.3 million, respectively. Service revenue for the nine months ended September 30, 2023 decreased by $28.2 million, or 3.9%, when compared to the nine months ended September 30, 2022.
Service revenue by service offering
The following table presents the breakdown of our service revenue by service offering for each period:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Digital Customer Experience | $ | 454,004 | $ | 478,625 | $ | (24,621) | (5.1) | % | |||||||||||||||
| Trust and Safety | 134,494 | 136,093 | (1,599) | (1.2) | % | ||||||||||||||||||
| AI Services | 101,603 | 103,551 | (1,948) | (1.9) | % | ||||||||||||||||||
| Service revenue | $ | 690,101 | $ | 718,269 | $ | (28,168) | (3.9) | % | |||||||||||||||
22
The year over year declines in Digital Customer Experience, Trust and Safety, and AI Services contributed 3.4%, 0.2%, and 0.3% respectively, of the total decrease of 3.9% for the nine months ended September 30, 2023.
The 5.1% decline in Digital Customer Experience was primarily driven by a decrease from existing clients in FinTech, Social Media and HealthTech. These decreases were partially offset by an increase from existing clients in Technology and Entertainment + Gaming, as well as new clients in Retail + E-Commerce, FinTech, Technology, HealthTech and On Demand Travel + Transportation.
The 1.2% decline in Trust and Safety was primarily driven by a decrease from existing clients in Social Media and FinTech. These decreases were mostly offset by an increase from existing clients in On Demand Travel + Transportation, Entertainment + Gaming, Technology and Retail + E-Commerce, as well as new clients in FinTech.
The 1.9% decline in AI Services was primarily driven by a decrease from existing clients in Social Media and HealthTech, partially offset by an increase from existing clients in Entertainment + Gaming and new clients in HealthTech.
Service revenue by delivery geography
We deliver our services from multiple locations around the world; however, the majority of our service revenues are derived from contracts that require payment in United States dollars, regardless of whether the clients are located in the United States.
The following table presents the breakdown of our service revenue by geographical location, based on where the services are provided, for each period:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Philippines | $ | 380,539 | $ | 371,909 | $ | 8,630 | 2.3 | % | |||||||||||||||
| United States | 116,318 | 202,444 | (86,126) | (42.5) | % | ||||||||||||||||||
| India | 86,617 | 74,692 | 11,925 | 16.0 | % | ||||||||||||||||||
| Rest of World | 106,627 | 69,224 | 37,403 | 54.0 | % | ||||||||||||||||||
| Service revenue | $ | 690,101 | $ | 718,269 | $ | (28,168) | (3.9) | % | |||||||||||||||
Revenue generated from services provided from our delivery sites in the Philippines grew primarily from expansion in two of our service offerings, including the impact of certain clients electing to shift work from the United States. Trust and Safety contributed 5.4% of the total increase primarily driven by clients in Social Media, On Demand Travel + Transportation, FinTech and Technology. AI Services contributed 0.3% of the total increase. These increases were partially offset by a 3.4% decrease contributed by Digital Customer Experience primarily driven by clients in On Demand Travel + Transportation, FinTech, Retail + E-Commerce and HealthTech, partially offset by clients in Technology.
Revenue generated from services provided from our delivery sites in the United States declined primarily from certain of our clients electing to shift work from the United States to the Philippines and India as well as decreased spending from clients in FinTech, particularly crypto and equity trading clients. Digital Customer Experience contributed 24.7% of the total decrease primarily driven by clients in FinTech, Social Media, HealthTech and Entertainment + Gaming, partially offset by clients in On Demand Travel + Transportation and Technology. Trust and Safety contributed 15.5% of the total decrease primarily driven by clients in Social Media and FinTech. AI Services contributed 2.3% of the total decrease primarily driven by clients in Social Media, Retail + E-Commerce and On Demand Travel + Transportation, partially offset by clients in HealthTech.
Revenue generated from services provided from our delivery sites in India grew primarily from expansion in all three of our service offerings, including the impact of certain clients electing to shift work from the United States. Trust and Safety contributed 12.6% of the total increase primarily driven by clients in On Demand Travel + Transportation and Social Media. Digital Customer Experience and AI Services each contributed 1.7% of the total increase.
Revenue generated from services provided from our delivery sites in the Rest of World grew from expansion in all three of our service offerings. Digital Customer Experience contributed 53.1% of the total increase primarily driven by clients in FinTech, On Demand Travel + Transportation, Entertainment + Gaming and Retail + E-Commerce, partially offset by clients in Social Media. AI Services contributed 0.7% of the total increase. Trust and Safety contributed 0.2% of the total increase. Growth in the Rest of World was due to consistent growth across Latin America, Asia and Europe.
23
Operating expenses
Cost of services
Cost of services for the nine months ended September 30, 2023 and 2022 was $401.5 million and $419.4 million, respectively. Cost of services for the nine months ended September 30, 2023 decreased by $17.9 million, or 4.3%, when compared to the nine months ended September 30, 2022. The decrease was primarily driven by lower personnel costs of $16.6 million, including the impact of certain clients electing to shift work from the United States to the Philippines and India. The remaining decrease was associated with a reduction of costs previously incurred while transitioning to a hybrid model, and lower recruiting and professional development costs, partially offset by site expansions and certain teammates operating on-site.
Selling, general, and administrative expense
Selling, general, and administrative expense for the nine months ended September 30, 2023 and 2022 was $179.6 million and $195.5 million, respectively. Selling, general, and administrative expense for the nine months ended September 30, 2023 decreased by $15.9 million, or 8.1%, when compared to the nine months ended September 30, 2022. The decrease was primarily driven by lower personnel costs of $12.2 million, due primarily to a reduction in stock-based compensation expense and the impact of optimization efforts as we drive efficiencies across functions, partially offset by earn-out consideration recognized as compensation expense. The remaining decrease was associated with our optimization efforts, including reductions in recruiting and professional development costs, professional fees and services and lower insurance expense based on renegotiated rates, as well as bad debt expense. These decreases were partially offset by higher software and travel costs.
Depreciation
Depreciation for the nine months ended September 30, 2023 and 2022 was $29.5 million and $28.0 million, respectively. The increase in depreciation is a result of capital expenditures for leasehold improvements associated with site expansions.
Amortization of intangible assets
Amortization of intangible assets for the nine months ended September 30, 2023 and 2022 was $15.3 million and $14.8 million, respectively. The increase in amortization is due to the acquisition of heloo on April 15, 2022.
Loss (gain) on disposal of assets
Loss on disposal of assets for the nine months ended September 30, 2023 was $0.8 million, associated with optimizing our footprint in the United States.
Other expense, net
Other expense, net for the nine months ended September 30, 2023 and 2022 was immaterial and $16.0 million, respectively. Changes are driven by our exposure to foreign currency exchange risk resulting from our operations in foreign geographies, primarily the Philippines, offset by economic hedges using foreign currency exchange rate forward contracts. See Part I, Item 3., "Quantitative and Qualitative Disclosures About Market Risk" in this Quarterly Report for additional information on how foreign currency impacts our financial results.
Financing expenses
Financing expense for the nine months ended September 30, 2023 and 2022 was $16.1 million and $7.7 million, respectively. Changes in financing expense are primarily driven by the rate of SOFR and LIBOR used to calculate the interest rate of our debt and additional borrowings during 2022.
Provision for income taxes
Provision for income taxes for the nine months ended September 30, 2023 and 2022 was $17.9 million and $12.3 million, respectively. Our effective tax rate for the nine months ended September 30, 2023 and 2022 was 37.9% and 33.2%, respectively. Costs related to the issuance of stock-based compensation and costs related to the acquisition of heloo within the provision for income taxes calculation are adjusted for Non-GAAP purposes. If those costs are removed, the provision for income taxes would have been $22.9 million and $20.1 million and the effective tax rate would have been 23.0% and 20.8% for the nine months ended September 30, 2023 and 2022, respectively.
24
Revenue by Top Clients
The table below sets forth the percentage of our total service revenue derived from our largest clients for the three and nine months ended September 30, 2023 and 2022:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Top ten clients | 55 | % | 56 | % | 55 | % | 58 | % | |||||||||||||||
| Top twenty clients | 67 | % | 70 | % | 69 | % | 72 | % | |||||||||||||||
Our clients are part of the rapidly growing Digital Economy and they rely on our suite of digital solutions to drive their continued success. For our existing clients, we benefit from our ability to grow as they grow and to cross sell new solutions, further deepening our entrenchment.
For the three months ended September 30, 2023 and 2022, we generated 19% and 22%, respectively, of our service revenue from our largest client. For the nine months ended September 30, 2023 and 2022, we generated 19% and 23%, respectively, of our service revenue from our largest client.
We continue to identify and target high growth industry verticals and clients. Our strategy is to acquire new clients and further grow with our existing ones in order to achieve meaningful client and revenue diversification over time.
Foreign Currency
As a global company, we face exposure to movements in foreign currency exchange rates. Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts into U.S. dollars. See Part I, Item 3., "Quantitative and Qualitative Disclosures About Market Risk" in this Quarterly Report for additional information on how foreign currency impacts our financial results.
Non-GAAP Financial Measures
We use Adjusted Net Income, Adjusted Earnings Per Share ("EPS"), EBITDA, Adjusted EBITDA, Free Cash Flow and Conversion of Adjusted EBITDA, as key measures to assess the performance of our business.
Each of the measures are not recognized under accounting principles generally accepted in the United States of America ("GAAP") and do not purport to be an alternative to net income or cash flow as a measure of our performance. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under GAAP. Additionally, Adjusted Net Income, Adjusted EPS, EBITDA, and Adjusted EBITDA exclude items that can have a significant effect on our profit or loss and should, therefore, be used in conjunction with profit or loss for the period. Our management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, these measures may not be comparable to other similarly titled measures of other companies.
Adjusted Net Income
Adjusted Net Income is a non-GAAP profitability measure that represents net income or loss for the period before the impact of amortization of intangible assets and certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, we excluded from Adjusted Net Income amortization of intangible assets, transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, non-recurring severance costs, stock-based compensation expense and employer payroll tax associated with equity-classified awards and the related effect on income taxes of certain pre-tax adjustments, which include costs that are required to be expensed in accordance with GAAP. Our management believes that the inclusion of supplementary adjustments to net income applied in presenting Adjusted Net Income are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.
The following table reconciles net income, the most directly comparable GAAP measure, to Adjusted Net Income for the three months ended September 30, 2023 and 2022:
25
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Net income | $ | 9,772 | $ | 5,365 | $ | 4,407 | 82.1 | % | |||||||||||||||
| Amortization of intangible assets | 5,027 | 5,087 | (60) | (1.2) | % | ||||||||||||||||||
Transaction costs(1) | — | 39 | (39) | (100.0) | % | ||||||||||||||||||
Earn-out consideration(2) | (53) | 3,648 | (3,701) | NM | |||||||||||||||||||
Foreign currency losses(3) | 3,494 | 7,713 | (4,219) | (54.7) | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | 640 | (8) | 648 | NM | |||||||||||||||||||
Severance costs(4) | 60 | — | 60 | NM | |||||||||||||||||||
Stock-based compensation expense(5) | 13,946 | 16,430 | (2,484) | (15.1) | % | ||||||||||||||||||
Tax impacts of adjustments(6) | (2,925) | (2,469) | (456) | 18.5 | % | ||||||||||||||||||
| Adjusted Net Income | $ | 29,961 | $ | 35,805 | $ | (5,844) | (16.3) | % | |||||||||||||||
Net Income Margin(7) | 4.3 | % | 2.3 | % | |||||||||||||||||||
Adjusted Net Income Margin(7) | 13.3 | % | 15.4 | % | |||||||||||||||||||
NM = not meaningful
| (1) | Represents professional service fees related to the acquisition of heloo in 2022. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles. | ||||
| (5) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (6) | Represents tax impacts of adjustments to net income which resulted in a tax benefit during the period, including stock-based compensation expense and earn-out consideration. | ||||
| (7) | Net Income Margin represents net income divided by service revenue and Adjusted Net Income Margin represents Adjusted Net Income divided by service revenue. | ||||
The following table reconciles net income, the most directly comparable GAAP measure, to Adjusted Net Income for the nine months ended September 30, 2023 and 2022:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Net income | $ | 29,413 | $ | 24,680 | $ | 4,733 | 19.2 | % | |||||||||||||||
| Amortization of intangible assets | 15,276 | 14,765 | 511 | 3.5 | % | ||||||||||||||||||
Transaction costs(1) | 245 | 588 | (343) | (58.3) | % | ||||||||||||||||||
Earn-out consideration(2) | 7,863 | 4,976 | 2,887 | 58.0 | % | ||||||||||||||||||
Foreign currency losses(3) | 1,316 | 16,367 | (15,051) | (92.0) | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | 772 | (18) | 790 | NM | |||||||||||||||||||
Severance costs(4) | 1,628 | 821 | 807 | 98.3 | % | ||||||||||||||||||
Stock-based compensation expense(5) | 42,725 | 55,160 | (12,435) | (22.5) | % | ||||||||||||||||||
Tax impacts of adjustments(6) | (4,944) | (7,827) | 2,883 | (36.8) | % | ||||||||||||||||||
| Adjusted Net Income | $ | 94,294 | $ | 109,512 | $ | (15,218) | (13.9) | % | |||||||||||||||
Net Income Margin(7) | 4.3 | % | 3.4 | % | |||||||||||||||||||
Adjusted Net Income Margin(7) | 13.7 | % | 15.2 | % | |||||||||||||||||||
NM = not meaningful
26
| (1) | Represents professional service fees related to the acquisition of heloo in 2022 and other non-recurring transactions. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles. | ||||
| (5) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (6) | Represents tax impacts of adjustments to net income which resulted in a tax benefit during the period, including stock-based compensation expense and earn-out consideration. | ||||
| (7) | Net Income Margin represents net income divided by service revenue and Adjusted Net Income Margin represents Adjusted Net Income divided by service revenue. | ||||
Adjusted EPS
Adjusted EPS is a non-GAAP profitability measure that represents earnings available to shareholders excluding the impact of certain items that are considered to hinder comparison of the performance of our business on a period-over-period basis or with other businesses. Adjusted EPS is calculated as Adjusted Net Income divided by our diluted weighted-average number of shares outstanding, including the impact of any potentially dilutive common stock equivalents that are anti-dilutive to GAAP net income per share – diluted ("GAAP diluted EPS") but dilutive to Adjusted EPS. Our management believes that the inclusion of supplementary adjustments to earnings per share applied in presenting Adjusted EPS are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.
The following table reconciles GAAP diluted EPS, the most directly comparable GAAP measure, to Adjusted EPS for the three and nine months ended September 30, 2023 and 2022:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| GAAP diluted EPS | $ | 0.10 | $ | 0.05 | $ | 0.30 | $ | 0.24 | |||||||||||||||
Per share adjustments to net income(1) | 0.22 | 0.30 | 0.66 | 0.82 | |||||||||||||||||||
| Adjusted EPS | $ | 0.32 | $ | 0.35 | $ | 0.96 | $ | 1.06 | |||||||||||||||
| Weighted-average common shares outstanding – diluted | 94,035,111 | 101,920,413 | 97,729,230 | 103,073,208 | |||||||||||||||||||
| (1) | Reflects the aggregate adjustments made to reconcile net income to Adjusted Net Income, as noted in the above table, divided by the GAAP diluted weighted-average number of shares outstanding for the relevant period. | ||||
EBITDA and Adjusted EBITDA
EBITDA is a non-GAAP profitability measure that represents net income or loss for the period before the impact of the benefit from or provision for income taxes, financing expenses, depreciation, and amortization of intangible assets. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting financing expenses), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).
Adjusted EBITDA is a non-GAAP profitability measure that represents EBITDA before certain items that are considered to hinder comparison of the performance of our businesses on a period-over-period basis or with other businesses. During the periods presented, we excluded from Adjusted EBITDA transaction costs, earn-out consideration, the effect of foreign currency gains and losses, gains and losses on disposals of assets, non-recurring severance costs and stock-based compensation expense and employer payroll tax associated with equity-classified awards, which include costs that are required to be expensed in accordance with GAAP. Our management believes that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future.
The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the three months ended September 30, 2023 and 2022:
27
| Three months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Net income | $ | 9,772 | $ | 5,365 | $ | 4,407 | 82.1 | % | |||||||||||||||
| Provision for income taxes | 4,565 | 3,895 | 670 | 17.2 | % | ||||||||||||||||||
| Financing expenses | 5,712 | 3,859 | 1,853 | 48.0 | % | ||||||||||||||||||
| Depreciation | 9,762 | 9,428 | 334 | 3.5 | % | ||||||||||||||||||
| Amortization of intangible assets | 5,027 | 5,087 | (60) | (1.2) | % | ||||||||||||||||||
| EBITDA | $ | 34,838 | $ | 27,634 | $ | 7,204 | 26.1 | % | |||||||||||||||
Transaction costs(1) | — | 39 | (39) | (100.0) | % | ||||||||||||||||||
Earn-out consideration(2) | (53) | 3,648 | (3,701) | NM | |||||||||||||||||||
Foreign currency losses(3) | 3,494 | 7,713 | (4,219) | (54.7) | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | 640 | (8) | 648 | NM | |||||||||||||||||||
Severance costs(4) | 60 | — | 60 | NM | |||||||||||||||||||
Stock-based compensation expense(5) | 13,946 | 16,430 | (2,484) | (15.1) | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 52,925 | $ | 55,456 | $ | (2,531) | (4.6) | % | |||||||||||||||
Net Income Margin(6) | 4.3 | % | 2.3 | % | |||||||||||||||||||
Adjusted EBITDA Margin(6) | 23.5 | % | 23.9 | % | |||||||||||||||||||
NM = not meaningful
| (1) | Represents professional service fees related to the acquisition of heloo in 2022. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles. | ||||
| (5) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (6) | Net Income Margin represents net income divided by service revenue and Adjusted EBITDA Margin represents Adjusted EBITDA divided by service revenue. | ||||
The following table reconciles net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the nine months ended September 30, 2023 and 2022:
| Nine months ended September 30, | Period over Period Change | ||||||||||||||||||||||
| (in thousands, except %) | 2023 | 2022 | ($) | (%) | |||||||||||||||||||
| Net income | $ | 29,413 | $ | 24,680 | $ | 4,733 | 19.2 | % | |||||||||||||||
| Provision for income taxes | 17,925 | 12,271 | 5,654 | 46.1 | % | ||||||||||||||||||
| Financing expenses | 16,141 | 7,665 | 8,476 | 110.6 | % | ||||||||||||||||||
| Depreciation | 29,502 | 27,986 | 1,516 | 5.4 | % | ||||||||||||||||||
| Amortization of intangible assets | 15,276 | 14,765 | 511 | 3.5 | % | ||||||||||||||||||
| EBITDA | $ | 108,257 | $ | 87,367 | $ | 20,890 | 23.9 | % | |||||||||||||||
Transaction costs(1) | 245 | 588 | (343) | (58.3) | % | ||||||||||||||||||
Earn-out consideration(2) | 7,863 | 4,976 | 2,887 | 58.0 | % | ||||||||||||||||||
Foreign currency losses(3) | 1,316 | 16,367 | (15,051) | (92.0) | % | ||||||||||||||||||
| Loss (gain) on disposal of assets | 772 | (18) | 790 | NM | |||||||||||||||||||
Severance costs(4) | 1,628 | 821 | 807 | 98.3 | % | ||||||||||||||||||
Stock-based compensation expense(5) | 42,725 | 55,160 | (12,435) | (22.5) | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 162,806 | $ | 165,261 | $ | (2,455) | (1.5) | % | |||||||||||||||
Net Income Margin(6) | 4.3 | % | 3.4 | % | |||||||||||||||||||
Adjusted EBITDA Margin(6) | 23.6 | % | 23.0 | % | |||||||||||||||||||
NM = not meaningful
| (1) | Represents professional service fees related to the acquisition of heloo in 2022 and other non-recurring transactions. | ||||
| (2) | Represents earn-out consideration recognized as compensation expense related to the acquisition of heloo. | ||||
| (3) | Realized and unrealized foreign currency losses include the effect of fair market value changes of forward contracts and remeasurement of U.S. dollar-denominated accounts to foreign currency. | ||||
| (4) | Represents severance payments as a result of certain cost optimization measures we undertook during the period to restructure support roles. | ||||
| (5) | Represents stock-based compensation expense associated with equity-classified awards, as well as associated payroll tax. | ||||
| (6) | Net Income Margin represents net income divided by service revenue and Adjusted EBITDA Margin represents Adjusted EBITDA divided by service revenue. | ||||
28
Free Cash Flow
Free Cash Flow is a non-GAAP liquidity measure that represents our ability to generate additional cash from our business operations. Free Cash Flow is calculated as net cash provided by operating activities in the period minus cash used for purchase of property and equipment in the period. Our management believes that the inclusion of this non-GAAP measure, when considered with our GAAP results, provides management and investors with an additional understanding of our ability to generate additional cash for ongoing business operations and other capital deployment
Free Cash Flow (excluding payment for earn-out consideration) is a non-GAAP liquidity measure that represents Free Cash Flow before the payment of earn-out consideration which would hinder comparison of the performance of our business on a period-over-period basis or with other businesses. Our management believes that the inclusion of this supplementary adjustment to Free Cash Flow is appropriate to provide additional information to investors about this unusual item that we do not expect to continue at the same level in the future.
The following table reconciles net cash provided by operating activities, the most directly comparable GAAP measure, to Free Cash Flow and Free Cash Flow (excluding payment for earn-out consideration) for the nine months ended September 30, 2023 and 2022:
| Nine months ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash provided by operating activities | $ | 103,895 | $ | 114,464 | |||||||
| Purchase of property and equipment | (22,904) | (36,010) | |||||||||
| Free Cash Flow | $ | 80,991 | $ | 78,454 | |||||||
| Payment for earn-out consideration | 18,341 | — | |||||||||
| Free Cash Flow (excluding payment for earn-out consideration) | $ | 99,332 | $ | 78,454 | |||||||
Conversion of Adjusted EBITDA(1) | 49.7 | % | 47.5 | % | |||||||
Conversion of Adjusted EBITDA (excluding payment for earn-out consideration)(1) | 61.0 | % | 47.5 | % | |||||||
| (1) | Conversion of Adjusted EBITDA represents Free Cash Flow divided by Adjusted EBITDA. Conversion of Adjusted EBITDA (excluding payment for earn-out consideration) represents Free Cash Flow (excluding payment for earn-out consideration) divided by Adjusted EBITDA. | ||||
Liquidity and Capital Resources
As of September 30, 2023, our principal sources of liquidity were cash and cash equivalents totaling $114.6 million, which were held for working capital purposes, as well as the borrowing availability under the 2022 Revolving Credit Facility of $190.0 million.
As of September 30, 2023, our total indebtedness, net of debt financing fees was $265.8 million. The interest rate in effect for the 2022 Term Loan Facility as of September 30, 2023 was 7.674% per annum. We were in compliance with all debt covenants as of September 30, 2023. See Note 8, "Long-Term Debt" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report for additional information regarding our debt.
During the nine months ended September 30, 2023, we repurchased 8,155,067 shares of our Class A common stock under the share repurchase program for $92.7 million, which we funded principally with available cash. On May 8, 2023, the Company announced that the Board of Directors of the Company authorized a $100.0 million increase to the Company’s share repurchase program, increasing the total authorization to $200.0 million, with the total amount remaining available after the increase being exclusive of any commissions, fees or excise taxes. As of September 30, 2023, approximately $76.5 million remained available for share repurchases under our share repurchase program.
Historically, we have financed our operations and made investments in supporting the growth of our business primarily through cash provided by operations. We expect to continue to make similar investments in the future. We believe our existing cash and cash equivalents and our 2022 Credit Facilities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
29
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the periods indicated:
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2023 | 2022 | |||||||||
| Net cash provided by operating activities | $ | 103,895 | $ | 114,464 | |||||||
| Net cash used in investing activities | (23,904) | (59,245) | |||||||||
| Net cash provided by (used in) financing activities | (96,334) | 12,854 | |||||||||
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2023 was $103.9 million compared to net cash provided by operating activities of $114.5 million for the nine months ended September 30, 2022. Net cash provided by operating activities for the nine months ended September 30, 2023 reflects net income of $29.4 million, as well as the add back for non-cash charges totaling $94.1 million, partially offset by changes in operating assets and liabilities of $19.6 million. Non-cash charges primarily consisted of $42.3 million in stock-based compensation expense, $29.5 million of depreciation and $15.3 million of amortization related to intangibles. Net cash provided by operating activities for the nine months ended September 30, 2022 reflects net income of $24.7 million, as well as the add back for non-cash charges totaling $112.7 million, primarily driven by $54.8 million in stock-based compensation expense, $28.0 million of depreciation, $14.8 million of amortization related to intangibles and $13.5 million of unrealized foreign exchange losses on forward contracts. These changes were partially offset by changes in operating assets and liabilities of $22.9 million.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2023 was $23.9 million compared to net cash used in investing activities of $59.2 million for the nine months ended September 30, 2022. Purchase of property and equipment decreased primarily due to certain employees returning to the office driving higher utilization of equipment. Net cash used in investing activities for the nine months ended September 30, 2022 included the acquisition of heloo, net of cash received.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023 was $96.3 million compared to net cash provided by financing activities of $12.9 million for the nine months ended September 30, 2022. Net cash used in financing activities for the nine months ended September 30, 2023 consisted primarily of payments to acquire shares under our share repurchase program. Net cash provided by financing activities for the nine months ended September 30, 2022 consisted primarily of proceeds from the 2022 Credit Facilities, borrowings from our 2019 Revolving Credit Facility and proceeds from employee stock plans, partially offset by payments on long-term debt, including the repayment of all outstanding borrowings under the 2019 Credit Facilities, payments to acquire shares under our share repurchase program, payments for taxes related to net share settlement of equity awards and payments for debt financing fees.
Critical Accounting Estimates
There have been no material changes to our critical accounting estimates as reported in our Annual Report.
Recent Accounting Pronouncements
For additional information regarding recent accounting pronouncements adopted and under evaluation, refer to Note 2, "Summary of Significant Accounting Policies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our activities expose us to a variety of financial risks: market risk (includes foreign currency), interest rate risk and credit risk.
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Foreign Currency Risk
Our exposure to market risk arises principally from exchange rate risk. Although substantially all of our revenues are denominated in U.S. dollars, a substantial portion of our expenses were incurred and paid in the Philippine peso and Indian rupee in the nine months ended September 30, 2023 and 2022. We also incur expenses in U.S. dollars, and currencies of the other countries in which we have operations. The exchange rates among the Philippine peso, Indian rupee and the U.S. dollar have changed substantially in recent years and may fluctuate substantially in the future.
The average exchange rate of the Philippine peso against the U.S. dollar increased from 53.56 pesos during the nine months ended September 30, 2022 to 55.48 pesos during the nine months ended September 30, 2023, representing a depreciation of the Philippine peso of 3.6%. Based upon our level of operations during the nine months ended September 30, 2023, and excluding any forward contract arrangements that we had in place during that period, a 10% appreciation/depreciation in the Philippine peso against the U.S. dollar would have increased or decreased our expenses incurred and paid in the Philippine peso by approximately $27.7 million or $22.7 million, respectively, in the nine months ended September 30, 2023.
The average exchange rate of the Indian rupee against the U.S. dollar increased from 77.31 rupees during the nine months ended September 30, 2022 to 82.35 rupees during the nine months ended September 30, 2023, representing a depreciation of the Indian rupee of 6.5%. Based upon our level of operations during the nine months ended September 30, 2023, a 10% appreciation/depreciation in the Indian rupee against the U.S. dollar would have increased or decreased our expenses incurred and paid in the Indian rupee by approximately $6.8 million or $5.6 million, respectively, in the nine months ended September 30, 2023.
In order to mitigate our exposure to foreign currency fluctuation risks and minimize the earnings and cash flow volatility associated with forecasted transactions denominated in certain foreign currencies, and economically hedge our intercompany balances and other monetary assets and liabilities denominated in currencies other than functional currencies, we enter into foreign currency forward contracts. These derivatives have not been designated as hedges under ASC Topic 815, Derivatives and Hedging ("ASC 815"). Changes in the fair value of these derivatives are recognized in the consolidated statements of operations and are included in other expense, net.
For the three and nine months ended September 30, 2023, the realized gains of $3.4 million and $3.6 million, respectively, resulting from the settlement of forward contracts were included within other expense, net.
For the three and nine months ended September 30, 2023, we had outstanding forward contracts. The forward contract receivable (payable) resulting from changes in fair value was recorded under prepaid expenses and other current assets (accounts payable and accrued liabilities). For the three and nine months ended September 30, 2023, the unrealized losses on the forward contracts of $7.7 million and $6.0 million, respectively, were included within other expense, net.
These contracts must be settled on the day of maturity or may be canceled subject to the receipts or payments of any gains or losses, respectively, equal to the difference between the contract exchange rate and the market exchange rate on the date of cancellation. We do not enter into foreign currency forward contracts for speculative or trading purposes. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on the settlement of these derivatives are intended to offset revaluation losses and gains on the assets and liabilities being hedged.
Interest Rate Risk
Our exposure to market risk is influenced by the changes in interest rates paid on any outstanding balance on our borrowings, mainly under our 2022 Credit Facilities. All of our borrowings outstanding under the 2022 Credit Facilities as of September 30, 2023 accrue interest at SOFR plus 2.25%. Our total principal balance outstanding as of September 30, 2023 was $267.3 million. Based on the outstanding balances and interest rates under the 2022 Credit Facilities as of September 30, 2023, a hypothetical 10% increase or decrease in SOFR would cause an increase or decrease in interest expense of approximately $1.4 million over the next 12 months.
Credit Risk
As of September 30, 2023, we had accounts receivable, net of allowance for doubtful accounts, of $179.1 million, of which $49.7 million was owed by two of our clients. Collectively, these clients represented approximately 27% of our gross accounts receivable as of September 30, 2023.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, the design and operation of the our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The information required with respect to this item can be found under Note 10, "Commitments and Contingencies" in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report and is incorporated by reference into this Item 1.
Item 1A. Risk Factors
We are subject to various risks that could have a material adverse impact on our financial position, results of operations or cash flows. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed under "Risk Factors" in the Annual Report. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our financial position, results of operations or cash flows. There have been no material changes to the risk factors included in the Annual Report. You should carefully consider the risk factors set forth in the Annual Report and the other information set forth elsewhere in this Quarterly Report.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Issuer Purchases of Equity Securities
During the three months ended September 30, 2023, our purchases of Class A common stock were as follows:
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in thousands) | |||||||||||||||||||
July 1, 2023 through July 31, 2023 | 1,490,514 | $ | 11.74 | 1,490,514 | $ | 107,256 | |||||||||||||||||
August 1, 2023 through August 31, 2023 | 1,943,930 | 10.36 | 1,943,930 | 87,121 | |||||||||||||||||||
| September 1, 2023 through September 30, 2023 | 1,107,539 | 9.59 | 1,107,539 | 76,496 | |||||||||||||||||||
| Total | 4,541,983 | 10.62 | 4,541,983 | ||||||||||||||||||||
| (1) | On May 8, 2023, the Company announced that the Board of Directors of the Company authorized a $100.0 million increase to the Company's share repurchase program, increasing the total authorization to $200.0 million, with the total amount remaining available after the increase being exclusive of any commissions, fees or excise taxes. Pursuant to our share repurchase program, we may repurchase shares of our Class A common stock from time to time through open market purchases, in privately negotiated transactions or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. Open market repurchases are expected to be structured to occur within the pricing volume requirements of Rule 10b-18. The timing and total amount of stock repurchases will depend upon, business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices, restrictions under the terms of our loan agreements and other relevant considerations. The repurchase program terminates on December 31, 2024, and may be modified, suspended or discontinued at any time at our discretion. The program does not obligate the Company to acquire any amount of Class A common stock. | ||||
| (2) | Average price paid per share excludes commissions and other costs associated with the repurchases. | ||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
Section 13(r) Disclosure
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, we hereby incorporate by reference herein Exhibit 99.1 of this report, which includes disclosures regarding activities at Mundys S.p.A., which may be, or may have been at the time considered to be, an affiliate of Blackstone and, therefore, our affiliate.
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Item 6. Exhibits
| Exhibit No. | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32.1** | |||||
| 32.2** | |||||
| 99.1* | |||||
| 101.INS | XBRL Instance Document– the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
* Filed herewith.
** Furnished herewith.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure except for the terms of the agreements or other documents themselves, and you should not rely on them for other than that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and do not apply in any other context or at any time other than the date they were made.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TASKUS, INC. | |||||||||||
| (Registrant) | |||||||||||
| Date: | November 7, 2023 | By: | /s/ Balaji Sekar | ||||||||
| Balaji Sekar | |||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
| (Authorized Signatory) | |||||||||||
| Date: | November 7, 2023 | By: | /s/ Steven Amaya | ||||||||
| Steven Amaya | |||||||||||
| Senior Vice President—Finance | |||||||||||
| (Principal Accounting Officer) | |||||||||||
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