TASK - NASDAQ

Good afternoon, and welcome to the TaskUs' Second Quarter 2024 Investor Call. My name is Josh, and I will be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise. After the speaker's remarks, there will be a question-and-answer period. [Operator Instructions] I would now like to introduce Trent Thrash, Senior Vice President of Corporate Development and Investor Relations. Trent, you may begin.

Good afternoon and thank you for joining us for TaskUs' second quarter 2024 earnings call. Joining me on today's call are Bryce Maddock, our Co-Founder and Chief Executive Officer; and Balaji Sekar, our Chief Financial Officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the Investor Relations section of our website at ir.taskus.com. We have also posted supplemental information on our website, including an investor presentation and an Excel-based financial metrics file. Please note that this call is being simultaneously webcast on the Investor Relations section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to statements regarding our future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees, and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements. Factors that could cause actual results to differ from these forward-looking statements can be found in our Annual Report on Form 10-K, which was filed with the SEC on March 8th of 2024. This filing, which may be supplemented with subsequent periodic reports we file with the SEC, is accessible on the SEC's website and our Investor Relations website. Any forward-looking statements made on today's conference call, including responses to questions, are based on current expectations as of today and TaskUs assumes no obligation to update or revise them whether as a result of new developments or otherwise, except as required by law. The following discussion contains non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP metrics, please see our earnings press release, which is available in the IR section of our website. Now, I will turn the call over to Bryce Maddock, our Co-Founder and Chief Executive Officer. Bryce?

Thank you, Trent. Good afternoon, everyone, and thank you for joining us. In the second quarter, we generated $237.9 million, outperforming the top end of our revenue guidance by approximately $6 million or 2.6%. I'm proud of our team, which has worked tirelessly throughout the challenges of the past 18 months. Their efforts paid off, and we returned to year-over-year growth in Q2, delivering nearly 4% revenue growth in the quarter. Our investments in sales and marketing are paying off. In Q2, we had our best bookings quarter since 2022. As a result of this and continued sales momentum in early Q3, we have even greater confidence that our year-over-year revenue growth rate will continue to accelerate in Q3 and Q4 of this year. Accordingly, we're increasing both the bottom and top end of our annual revenue guidance and now expect revenue of $955 million to $975 million for the year. In just one quarter, we've increased the midpoint of our full year guidance by $27.5 million. The acceleration of revenue growth requires additional investments in operations, facilities, hiring and training, which impacts our margins and cash flow. On a sequential basis, we grew adjusted EBITDA in the quarter to $51.3 million for an adjusted EBITDA margin of 21.5%. This was below our margin guidance. As our growth rate accelerates in the back half of 2024, we expect this trend to continue. We now expect to deliver approximately 22% adjusted EBITDA margins and approximately $120 million in free cash flow for the full year 2024. In summary, we've emerged from the challenges we faced in 2023. We are experiencing robust global demand from new and existing clients. We expect our revenue growth rate to accelerate in the back half of the year. In fact, at the top end of both our Q3 and updated annual guidance, we would expect to return to double-digit revenue growth in Q4. This is a tremendous accomplishment for our global team. With the increase in our growth rate, we will see a temporary reduction in margins as we invest to support our scaling operations. As we look towards 2025, our goal is to continue driving growth while improving our margin and cash flow profile. Next, I'll spend time going through some of the highlights of our Q2 performance. Balaji will then walk through our Q2 financials and Q3 outlook and our increased full year 2024 guidance. Q2 revenue was $237.9 million, an increase of 3.8% on a year-over-year basis. The 4.6% sequential quarterly revenue increase was reflective of quarter-over-quarter growth in all three of our service lines and continued strength in revenue and bookings from our top 20 clients generated 68% of total revenue during the quarter. In particular, we have seen strong demand from our largest client who contributed approximately 20% of total revenue in Q2 of 2024. In terms of delivery geographies, as expected, revenue from US delivery declined 32% in Q2 on a year-over-year basis. As a result, US revenue was approximately 11% of total revenue during Q2. Our offshore geographies continue to demonstrate strong revenue results growing by approximately 11% year-over-year. While Q2 saw rapid growth in Latin America, again, at more than 40% year-over-year, we also delivered year-over-year growth in all of our major delivery geographies, including the Philippines, India and the rest of the world. We ended the quarter with approximately 51,700 global teammates, an increase of approximately 2,100 teammates from the end of Q1. In Q2, our sales and client service teams once again delivered strong performance. Like Q1, the majority of sales were driven by bookings from existing clients, which accounted for approximately 66% of total signings. This marked a positive shift towards growth in new client bookings, which made up 34% of total signings compared to 28% in Q1. The size, quality and depth of pipeline opportunities across our service lines from new and existing clients of all sizes continue to be encouraging and supportive of our commitment to accelerate growth throughout the remainder of 2024. During Q2, we again made progress on our strategic goal of cross-selling our suite of specialized services to our client base. The number of clients using, multiple services increased by more than 10% year-over-year. We also continued expanding our presence in new markets, including adding notable use cases for clients in the FinTech and HealthTech industries as well as with fast-growing clients in the generative AI and technology verticals. Shifting focus to our service lines, in Q2 of 2024, digital customer experience revenue declined by 1.7%, compared with Q2 of 2023. In DCX, year-over-year growth from new clients was more than offset by the prior year's termination of a travel industry client and other client cost optimization initiatives, which we've discussed on prior calls. However, compared to a sequential decline of 5.6% in Q1, sequential quarterly growth accelerated to an increase of approximately 3.4% in Q2. We now expect DCX to return to year-over-year growth during the second half of the year. In terms of DCX signings in Q2, we saw broad-based strength in bookings across most of our vertical markets, including our on-demand travel and transportation, technology, media and entertainment, HealthTech and FinTech verticals. Consistent with recent quarters, crypto and equity trading-related revenue remained below 5% of total revenues for Q2. In connection with our health care expansion strategy, in Q2, we signed two new multimillion-dollar DCX contracts. One, with a provider of consumer healthcare and pharmacy services, leveraging our on-shore, work-from-home solutions and the second delivering provider and patient support and revenue cycle management services from our operations in Colombia through, a company in the mental health industry. Lastly, as an example of the continued strength and demand we have seen for Latin American-based delivery, we signed a DCX contract with a leading provider of cloud-based website and e-commerce solutions for services to be delivered from Columbia. Moving on to trust and safety, which includes our risk and response solutions, revenue growth in this service line was again accretive to our overall growth rate, increasing 3.7% year-over-year and 6.9% quarter-on-quarter. This quarter, we again saw broad-based growth, including strong performance with our largest client as well as the certain FinTech, Social Media and On-Demand Travel And Transportation clients. During Q2, growth from our risk and response offering was again accretive to the overall growth rate of the trust and safety service line. I want to take a moment to highlight the success we have had in growing the financial crimes and compliance work that we classify as risk and response. Revenue from this sub-service line doubled year-over-year. From a sales perspective, we continue to see strong demand for our trust and safety services. Based on recent booking trends and the increasing number of clients utilizing this service line, we expect trust and safety to continue outpacing DCX and AI services growth rate, resulting in trust and safety, representing an increasing percentage of total revenue in future quarters. Notably, during Q2, we signed an expansion of European language content moderation and platform integrity operations with our largest client. We also increased the scope of work we provide to a global marketplace for unique and creative goods and the world's leading multi-channel social and gaming communications platform. Turning to AI services. While revenues declined approximately $2.5 million or 7.7% on a year-over-year basis, we were pleased with the improved trajectory of this service line when compared to the 23.6% year-over-year decline we saw in Q1. As discussed last quarter, Q2 year-over-year AIS revenue comparisons continue to be impacted by declines at our largest client and our largest autonomous vehicle client. Despite the year-over-year decline, we were pleased that our AI service line returned to growth on a sequential basis in Q2, generating sequential growth of approximately 6.3%. As noted on our Q1 call, we anticipate AI services revenue to continue to stabilize over the course of 2024 as difficult comparisons last and recent signings continue to ramp. Moving to sales. We continue to see strong demand for our AI services across multiple client verticals, including from clients in the social media and generative AI industries. We signed multiple new statements of work supporting our largest clients Generative AI development initiatives and an expansion of our relationship with the world's leading large language model developer in Q2. We continue to support this client across all three of our service lines in multiple geographies. Given this recent success selling AI services, we now anticipate a return to year-over-year growth in this service line during the second half of the year. Before moving on to our updated 2024 outlook, I want to provide a brief update on our own generative AI initiatives. We continue to see success deploying our TaskGPT solutions to increase the efficiency and accuracy of our teammates. In the near-term, we believe the biggest impact from Generative AI will come from combining these technologies with well-trained teammates to deliver results that improve the customer experience on behalf of our clients. Many clients have been slow to launch customer-facing Generative AI initiatives, citing concerns with accuracy and data security. Thus far, we believe GenAI has created more opportunity than risk for TaskUs. Having said that, we recognize that over the next few years, clients will use GenAI to automate basic customer interactions. We've embraced this and are working hard to support our client automation efforts. We have and will continue to focus our offerings on the more complex and sensitive customer interactions and content types that we believe are less likely to be automated. Additionally, we will continue pursuing opportunities to support the emerging business process needs of companies in the GenAI industry. Before handing it over to Balaji to provide more details on our Q2 results, I want to touch briefly on our 2024 outlook. In light of our strong operational execution and sales momentum, we're increasing our full year revenue guidance to between $955 million and $975 million. This represents a $27.5 million increase to a midpoint of $965 million. We expect our revenue growth rate to continue to accelerate in the back half of the year. As such, we will be investing in new facilities, hiring and training initiatives during the back half of 2024, which will have some impact on our margins this year. Additionally, we have seen an increase in pricing pressure as some of our competitors who have excess capacity reduce their rates. We believe we are a premium provider of specialized services. As such, we've been able to maintain adjusted EBITDA margins that are among the best in the industry, but we expect to continue to price our services competitively in order to achieve above market growth rates. As a result of these factors, we now expect full year adjusted EBITDA margins of approximately 22% and free cash flow of approximately $120 million. As we look to 2025, our team is working tirelessly to lead the industry on adjusted EBITDA margins and revenue growth. With that, I'll hand it over to Balaji to go through the Q2 financials and our 2024 outlook in more detail.

Thank you, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the second quarter of 2024. Please note that some of these items are non-GAAP measures and the relevant reconciliations are attached to the press release we issued earlier today. In the second quarter, we earned total revenues of $237.9 million, once again beating our guidance range of $230 million to $232 million. Revenues increased by 3.8% compared to the previous year, delivering on our promise to return to year-over-year growth in Q2. We outperformed our guidance as a result of new client trends and existing client volumes, both of which came in stronger than we expected. In the second quarter, our DCX offering generated $148.4 million for a year-over-year decline of 1.7%. As Bryce covered earlier, the decline was primarily attributable to a US travel industry clients who lost a large contract and certain client cost optimization initiatives, including the Q1 2023 project ramp downs from our largest clients, both of which we have discussed on prior calls. These declines were largely offset by a mix of existing client growth and strong new client revenue performance, including seeing positive results from our strategic focus on the fintech, health tech and generative industries. Our trust and safety business, which includes our risk and response solutions grew by 13.7% compared to Q2 of 2023, resulting in $59.1 million of revenue. Sequential growth also accelerated from 5.8% in Q1 to 6.9% in Q2. As discussed earlier, we are excited about the progress in this service line, which included a return to year-over-year growth by our largest client as well as certain new and existing clients across our on-demand travel and transportation, social media and fintech verticals. Our AI services business declined by 7.7% year-over-year for revenues of $30.5 million due to contraction at our largest client and our largest autonomous vehicle client. We have seen demand from our AI services pick up among Generative AI and social media clients. This increased demand and a return to sequential growth of approximately 6.3% in Q2 gives us confidence that the service line will return to growth in the back half of the year as we lap the difficult year-over-year comparisons from client-driven cost optimization programs in 2023. In Q2, revenue concentration with our largest client was approximately 20%, up from 19% in Q2 of 2023. With strong bookings in Q1 and Q2, we have returned to growth with our largest clients and now expect our revenue concentration with our largest client to increase for the remainder of the year. Our top 10 and top 20 clients accounted for 55% and 68%, respectively, compared to 55% and 69% in Q2 of the previous year. We continue to see strength from our clients outside of our top 20, which grew 6.2% year-over-year. In the second quarter, we generated 58% of our revenues in the Philippines, 11% in the United States and 12% in India and 19% from the rest of the word. We saw a particularly strong year-over-year revenue growth in excess of 40% in Latin America. For the full year 2024, we now expect to see year-over-year revenue growth in all of our delivery geographies with the exception of United States. Our cost of service as a percentage of revenue was 60.5% in the second quarter compared to 58.3% in Q2 of the prior year. The increase was due to typical base and benefits cost inflation, competitive pricing pressures and the higher recruiting and facilities expansion cost to support revenue expansion as a result of our improved revenue outlook. These increased expenses were partially offset by ForEx improvements in the Philippines, Colombia and Mexico versus the prior year due to a slightly stronger US dollar. In the second quarter, our SG&A expenses were $56.3 million or 23.7% of revenue. This compares to SG&A in Q2 of 2023 of $58.2 million or 25.4% of revenue. Earn on consideration and stock compensation expenses decreased by $1.3 million and $3.4 million, respectively, compared to the previous year. These reductions were partially offset by our ongoing investments in sales, marketing and technology that we discussed on prior calls and higher bonus expense primarily due to better company performance. Q2 of 2024 also included an increase of $2.3 million related to depiction costs that are unbroken and outside the ordinary course of business. In the second quarter of 2024, we earned adjusted EBITDA of $51.3 million, a 21.5% margin. This compares to $54.3 million in the previous year and $50.6 million in Q1 of 2021. While roughly in line on a dollar basis, we came in lower than our adjusted EBITDA margin guidance, partially due to the ramp expenses associated with the higher-than-expected revenue growth for the year. We are also increasing our investments in operational leadership to take advantage of the momentum in the business. Adjusted net income for the quarter was $28.6 million, and adjusted earnings per share was $0.31. By comparison, in the year ago period, we earned adjusted net income of $31.8 million and adjusted EPS of $0.32. Our adjusted EPS included the impact of our lower share count resulting from our stock repurchase program. Now, moving on to the balance sheet. Cash and cash equivalents were $171.1 million as of June 30, 2024, compared with the December 31, 2023 balance of $125.8 million. In the quarter, we bought back approximately a million shares at an average price of $11.36. As of quarter end, we had approximately $42.2 million of authorization left on our plan. Given the programmatic design of our share repurchase plan, we repurchased a limited number of shares during Q2. Our net leverage ratio continues to be healthy and was 0.4 times as of the quarter end. Cash generated from operations was $30 million for the second quarter of 2024, as compared to $38.5 million in Q2 of 2023. The decline was primarily driven by an increase in accounts receivables related to the sequential growth in revenues from Q1 to Q2 of 2024, and an increase in tax payments compared to the prior year. Our capital expenditure decreased in the second quarter of 2024 to $4.5 million, compared to $9.8 million in Q2 of 2023. The strength of our anticipated client ramp will continue driving an increase in investments during the remainder of 2024. As a result, we now expect CapEx to be approximately $42 million for the year. Year-to-date free cash flow was $73.1 million, or 71.8% of adjusted income. As noted in Q1, we expect lower free cash flow conversion due to increased capital expenditures and the buildup of working capital associated with our accelerating revenues during the remainder of 2024. In terms of our financial outlook for the remainder of the year, we now anticipate full year 2024 revenues to be in the range of $955 million to $975 million. We expect to earn full year adjusted EBITDA margin of approximately 22%. The revision in adjusted EBITDA margin guidance captures the impact of ramp costs to deliver the increased revenue forecast, additional investment in operations, and the impact of competitive pricing environment that we are currently in. Including the additional investments supporting our improved outlook, we expect to generate free cash flow of approximately $120 million for the year. This implies a conversion rate of over 50% from adjusted EBITDA, a great demonstration of our financial discipline. Our free cash flow guidance excludes the impact of certain litigation costs, which are non-recurring and outside the ordinary course of business. In the first half of 2024, we incurred approximately $2.6 million related to these litigation matters. We will continue to exclude these costs from our adjusted EBITDA calculations. For the third quarter, we expect revenues to be in the range of $244 million to $246 million, and we expect our adjusted EBITDA margin to be approximately 21.5%. The adjusted EBITDA margin guidance for the third quarter and full year is based on current forex rates. So any change to currency rates would impact our margins. As a reminder, the majority of our revenues is built and collected in US dollars, so we do not see the impact of US dollar fluctuation in our revenues. I will now hand it back to Bryce.

Thank you, Balaji. Before we open for questions, I'd like to share a story about one of our dedicated TaskUs teammates. Bulbul Saigal is a team leader at our site in Indore, India. She loves working for TaskUs because we're deeply committed to the health, well-being and career development of our employees. We strive to create a supportive environment where teammates can thrive and build fulfilling careers. Bulbul has been actively utilizing our academy learning platform to advance her career and prepare for her next role. She's enrolled in our TaskUs Operations Manager Preparatory Academy and aspires to be promoted to an Ops Manager after gaining the necessary experience. When it comes to health and wellness, Bulbul shares that our wellness team in Indore has been incredibly supportive of her needs. They are well equipped to help teammates navigate both their personal and professional lives. Bulbul has regular one-on-one sessions with one of our local wellness counselors until the guidance and support to receive as a critical part of her success. Bulbul story is a testament of our focus on personal and professional growth and our unwavering commitment to our teammates. I'll be traveling to our sites in India later this month, where I look forward to meeting Bulbul and many of our hard-working and talented teammates in person. With that, I'll ask the operator to open our lines for our question-and-answer session. Operator?

Thank you. [Operator Instructions] Our first question comes from Jonathan Lee with Guggenheim Securities. You may proceed.

Great. Thanks for taking our question. It's tremendous to see the inflection of your top client. You touched on some of the uptick there, but can you help unpack some of the moving pieces, how you're thinking about the durability there, perhaps whether that's a share shift dynamic or maybe the client just is doing more work broadly?

Sure. Yes, our relationship with our largest client continues to be incredibly strong. We've won multiple large pieces of business with this client this year. We're scaling operations in every country where we operate with them and are expanding our operations into two new countries. We're supporting them on vital initiatives like their investments in Gen AI and trust and safety. And also note that while we're supporting them on this year's election, that is not the source of the recent growth, and we don't anticipate any reductions at this client post November. In some cases, this business is being taken from the competition, as I outlined in the annual call start of this year, the first growth lever that we're focused on is going after our competition and trying to take business from them, and we've been successful in doing that at this client along with other clients. But in other cases, we're just getting net new business that our team has completed form one. So given the success here, we expect our revenue growth with this client to outpace the rest of the business and the revenue concentration would decline to increase over the next few quarters.

Got it. Appreciate your insight there. And as a follow-up, can you help decompose some of the pricing pressure you're seeing across your service lines and customer base, especially as you look to expand into the enterprise customer base. I want to also understand if you've seen maybe AI augment your pricing discussions in the quarter?

Yes. It's an interesting environment right now because if you look at the broader market, the growth rates that we saw in the post-COVID era had really slowed down. And so, as I said, we, this year, have decided to focus exclusively on one goal, and that goal was to return to growth. We spent 15 years doing nothing but growing at TaskUs. In the past 18 months, we stopped growing and started shrinking. And having experienced both growth and decline, I can tell you growth is a lot more fun. It may not solve all of our problems, but it certainly is a much better position to be in than to have declining revenues. So we've invested heavily in sales and marketing and aligned our teams with a single focus on growth. Because the overall growth rate of the industry slowed, we've gone after our competitors, and we outlined earlier that we're going to go and take share from the competition. And since then, we've been successful in taking tens of millions of dollars of business from our competitors. But in those pursuits, we have made the strategic decision to be more aggressive on price. As you mentioned, another part of our growth strategy was going after enterprise client going to be banking financial services and health care spaces. And here too, we've priced our offerings competitively to drive growth. So the strategy has worked. It's returned us to accelerating revenue growth with the possibility of achieving double-digit growth by the end of this year, but it's also impacted our margins. And even though it impacts our margins, we continue to have the best or among the best EBITDA margins in the industry, so we're proud of that fact. But we recognize that we're going to have to continue to work hard to get back to a growth rate that's better than the industries while maintaining those margins.

Thanks very much for the detail there.

Thank you. Our next question comes from Maggie Nolan with William Blair. You may proceed.

Hi. Thank you. Building on the margin commentary there, Bryce, so you brought the guidance down, you mentioned needing to make some investments in people and facilities. I'm curious, if those investments are for revenue that you expect to materialize in the remainder of this year or more so to prepare you for next year? And how much visibility do you have into those expected ramp-ups?

Yeah. The answer is both. We've got good visibility, because what we're building for now is business that we've been awarded. Either we signed contracts or we've been verbally awarded the business. And so those investments, which include we see new office space, ramping up our recruitment efforts, investing heavily in the training period. Those investments are well underway. We will see revenue growth from those investments in Q3 and Q4, and we'll also see continued revenue growth into 2025. So does that answer your question, Maggie?

Yeah. Thank you. And then one on the competitive pricing that you both mentioned, the environment has been a little bit competitive. Can you elaborate on that? Is that broad-based across the competitor set? Is it a particular clients or within specific geographies or solution offerings?

Yeah. Let me elaborate a bit more. So I think ultimately, we're seeing the majority of this come in new deal pursuits. As I mentioned on the call, we had our best new logo sales quarter in Q2 that we had since 2022. And we're seeing an environment in which buyers has more pricing power than they have had historically. My sense is that, that may be because the growth rate of the industry has slowed and there's excess capacity in the system so some of our competitors are slashing their rates just to fill that capacity. Ultimately, tasks have always priced ourselves as a premium provider and we've been able to do that, because we deliver for our clients. But we recognize in this space that getting back to growth and getting back to growth its better than our competitors is the most important thing we can do. And so to do that, we've had to price our offering competitively

Thank you. Appreciate it.

Thanks, Maggie.

Thank you. Our next question comes from Kathy Chan with Bank of America. You may proceed.

Hi. Just wanted to follow up on the strong bookings commentary that you mentioned. I guess, just any more detail about the type of contract length of it. Are they utilizing multiple specialized services? Just I would like to say that I just wanted a little bit more color?

Yes. Thanks so much, Kathy. We've seen a lot of really exciting, both new logos and existing clients signing new statements of work. On the digital customer experience front, I mentioned on the call, a very large provider of e-commerce and website building solutions. And that was a competitive takeaway. So I'm very proud of the team for doing that. Inside trust and safety, we're seeing expansion in our risk and response offering. So here, primarily fintech clients are using us to do [indiscernible] laundering and know your customer work. And then the broader trust and safety offering continues to expand. Obviously, at social media clients and our largest client, we're seeing an acceleration in growth. But inside trust and safety, we're also seeing meaningful demand from our generative AI clients and from clients in different industries where trust and safety maybe isn't as apparent as a need, but the net has definitely expanded across many industries now. Lastly, inside AI services last quarter was pretty frustrated with the fact that our business was declining in a market that was growing so rapidly. And obviously, we saw another year-over-year decline this quarter, but I'm proud of the fact that we got back to sequential quarterly growth. I'm also very proud of the fact that we will get back to year-over-year growth in the back half of 2024. Again, that growth is being driven by new generative AI initiatives at our largest client, along with success selling into many other generative AI companies. So I think we're getting back to -- back on the right foot when it comes to our AI service business. And I hope that, that will be a big lever of growth in 2025.

Got it. That's helpful. And I guess just to pivot a bit, another question on margins. I guess is there any way that we can sort of think about what the lower margin guidance profile is relative to the different pieces like maybe mix in terms of the different -- is there a difference in the margin profile for AI services versus DCX versus trust and safety? And then the reinvestment -- additional reinvestments that you're making versus some of the pricing pressures that you're talking about. So I guess I can ask two questions. Thanks.

Yes. Let me make two comments, and then I'm going to hand it to Balaji to fill in the details. Firstly, the majority of what we're seeing in terms of the decline in the adjusted EBITDA margin is because of the investments that we're making for growth. So I just want to be very, very clear. We're acknowledging that we are seeing some pricing pressure, but that is certainly not the majority of the reason why our adjusted EBITDA margins have come down somewhat. So I think that's an important point. And then as far as the margin mix, historically, we've had similar margins across our service line, but the biggest differentiator for margin has been geographic delivery area. We have a large business in the Philippines and India where margins tend to be highest. Our business in the US is shrinking where margins tend to be lowest. But we are seeing significant growth in Latin America and Europe. And typically, the margins in Latin America and Europe tend to be kind of in between the US and the offshore geographies in the Philippines and India. So there's some dilutive effect to the overall margin when we're seeing that kind of growth, but we're very happy that we're strengthening our global footprint. So I'll hand it to Balaji to add some more color.

Yes. Thanks, Ben just to add on to what Bryce said, a couple of things that we also see from a year-over-year perspective beyond the investments that we are making in sales, marketing and technology that we spoke about in the Q1 call is also the impact of annual labor and benefit cost inflation that we typically see is mostly in our offshore locations, which is where it is higher. But that's why like Bryce mentioned, the margins also tend to be higher. And like Brice discussed earlier, and we spoke about it in the prepared remarks, is that cost that we're recurring currently to deliver to the ramp that we saw in Q2, where we beat our revenue guidance and then the increase in guidance for the rest of the year in bands. So those are some of the other contributing factors that is leading to the 22% adjusted EBITDA for the full year.

Got it. Really helpful. Thanks, guys.

Thank you. Our next question comes from Jim Schneider with Goldman Sachs. You may proceed.

Good afternoon. Thanks for taking my question. Just to return to the AI services market for a moment, can you maybe comment on just the broader market? And what you're seeing in terms of client priorities? Are leading to a point where some of the models out there are getting more fully trained and thus, there's kind of the gut of what's being asked of you in terms of incremental work? Or are you seeing an expansion of the overall number of clients who are doing these, kind of training activities and just a broader kind of sweep of opportunity sets?

Yeah. Thanks for the question, Jim. I mean, certainly, we have not done as well in this space as others. What we've seen is the sophistication of the demand has increased markedly. In the past, we used to do basic data tagging and indication for autonomous vehicles, looking at images of street teams and essentially anteing was in those images. Now we're recruiting people with Masters and PhD in particular subjects to look at the answers that large language models are producing and rate their accuracy or in some cases, free write those answers from scratch. So I think it is a fundamentally market shift in terms of just the complexity of the work that we're doing. We've certainly not seen any abatement in demand. I mean there is a large and rapidly growing market for AI services. I think the combination of the biggest players is continuing to invest more in quality training data. And the number of players in the space continues to grow exponentially. So we're going to get back to growth in this service line in the back half of the year. And I think if we execute properly, it will be a good growth story for 2025.

Thank you. And then relative to the increased cost to support the new growth ramps, can you maybe give us a sense, is that sort of tied to incremental headcount is it tied to specific projects? And I guess, more broadly speaking, is there a point at which you get to a certain amount of absolute cost addition and then you're able to kind of get more leverage off of that increased cost or is it more proportionally headcount?

Yeah. I think what's happened here is we've gone through a bit of a 180. At the end of last year, we were actively looking to remove capacity. We were getting out of leases, closing facilities, really focusing on how can we cut costs in order to protect our margins. And in the beginning of this year, as we went back to investing heavily in growth, we knew that if we were successful, we would have to do a rapid about-face and build a bunch of new offices very, very quickly. And so that's what we've had to do. And we're building offices on four different continents right now, and they're all being done at a breakneck pace. And as a result of the focus on speed, perhaps not as efficiently as they could be done if we went through a proper procurement process. So that's just an example. When we're doing these large ramps, we're also getting very aggressive in terms of trying to meet our hiring timeline, needing to provide for extra things like sign-on bonuses, or in the case of our European business, relocation packages. And then in some of these ramps, we're also providing free training to our clients so that can artificially reduce margins at least in the beginning of an engagement. So yeah, to answer the question, I mean, I think it's fair to ask, you look back and you're like, hey, you grew faster than this before, and your margins were better. What's different this time? I really think it's just the abruptness with which we've had to turn the ship around and some of the concessions that we've made in order to win business.

Thank you.

Thank you. Our next question comes from Matt VanVliet with BTIG. You may proceed.

Good afternoon. Thanks for taking the question. I guess when you look at some of the growth and you highlighted Latin America as a big growth area. Are you seeing any shifting of business that maybe historically was serviced from the Philippines and looking at more similar time zones with some of your customers? Is that helping a little bit of the revenue driving growth here or anything you're going to have in terms of customers moving, relocating their work?

Yeah. We've seen a huge demand in the last 12 to 18 months for near shore delivery. By near shore, I mean, Latin America operations in Mexico and in Colombia. Part of that demand is coming from people who had previous operations in the US and they see the near shore opportunity to reduce cost, stay in the same time zone, get bilingual coverage. There's also, I think, among some clients an overexposure to the Philippines for English language support. They've been interested in Colombia and Mexico as a VCP strategy. It's multifaceted, but it's very encouraging. I think we'll have a triple digit revenue business in Latin America this year, which is just incredible when you think where we're coming from.

Very helpful. And then as you look at a number of your very large tech clients that maybe had a fair amount of reduction in their own headcount over the last year and a half or two. As we've seen those headlines at least slow down, do you feel like that's helping drive some of the growth in the business, maybe a stabilization of their own internal expectations and now understanding how TaskS plays into that equation, or would you point to maybe other drivers that are seeing more of this return of growth here?

Again, 2022 was the year of efficiency. We all saw the headlines and certainly, we felt it directly ourselves as our clients reduce internal headcount and spend on external vendors. At the start of this year, it felt like clients have optimized just about as much as they could. And there was a lot of new excitement in areas like Generative AI, where investment dollars were being freed up, and so we've capitalized on that opportunity and I think have done a really good job of selling our value proposition to clients that are back in growth mode.

Great. Thank you.

Thank you. Our next question comes from Jacob Haggarty with Baird. You may proceed.

Hey, guys. Thanks for taking my question. I just have a question about the shift to offshore. So US was the same percent of revenue as last quarter, it looks like. So are you guys seeing that stabilizing then furthermore, are you seeing the shift in onshore as sort of a stepping stone to the Philippines and India? So are clients using LatAm and then eventually shifting over to Philippines and India, as they progress. Thanks.

Yes. So we've said historically, we don't think our US business is going to get below 10% of total revenue. I think at this point, it will be between 11% and 12% for the rest of the year. It would indicate that we're seeing some sequential quarterly growth in our US business, which is great. We continue to have both existing and new clients that we want onshore delivery either for regulatory reasons or just the individual client preference. And as far as the nearshore piece goes, I don't know if it's a stepping stone. Historically, getting people started in the US always seem like a good stepping stone to leveraging our global footprint. But once people get into Philippines -- into Mexico and Colombia, we haven't seen as much movement to places like Philippines and India. Again, our business in Philippines is by far our largest geography. And on a headcount basis, India is definitely our second largest geography. So we've got strong businesses there, and we're excited about the business that we're growing in Latin America.

Got you. That's helpful. And then I just wanted to follow-up on some of the AI services. So as you see this grow, is this going to be mostly in the Philippines and India as well? And then kind of on top of that, is that going to start to drive a meaningful increase in revenue per employee, especially with like tools implemented internally?

Yes. AI servicing has been a global effort. As far as revenue per employee, it really depends on the level of sophistication of the task. So a lot of the work we're talking about doing with experts is being done onshore. And certainly, there should be an increase in revenue per employee. Some of the work continues to be done by our teammates in places like the Philippines and India, where revenue per employee may not go up quite as much just depending on the sophistication of the demand for us.