TaskUs (TASK) Q1 2023 Earnings Call Transcript

TaskUs (TASK 1.88%)
Q1 2023 Earnings Call
May 08, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the TaskUs first quarter 2023 investor call. My name is John and I'll be your conference facilitator today. At this time, all lines have been placed on mute to avoid background noise.

After the speakers' remarks, there will be a question-and-answer period. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to introduce Alan Katz, vice president of investor relations. Thank you, Alan, you may begin.

Alan Katz -- Vice President, Investor Relations

Good afternoon and thank you for joining us for the TaskUs first quarter 2023 earnings call. Joining me on the call today are Bryce Maddock, our co-founder and chief executive officer; and Balaji Sekar, our chief financial officer. Full details of our results and additional management commentary are available in our earnings release, which can be found on the investor relations section of our website at ir.taskus.com. We have also posted supplemental information on our website, including an investor presentation and an Excel-based metrics file.

Please note that this call will be simultaneously webcast on the IR section of our website. Before we start, I would like to remind you that the following discussion contains forward-looking statements within the meaning of the Federal Securities Laws, including but not limited to, statements regarding our future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. You should not place undue reliance on any forward-looking statements.

Factors that could cause actual results to differ from those forward-looking statements can be found in our annual report on Form 10-K, which was filed with the SEC on March 6th, 2023. This filing is accessible on the SEC's website and on our website at ir.taskus.com, and may be supplemented with subsequent periodic reports we file with the SEC. 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 development or otherwise, except as required by law. The following discussion contains non-GAAP financial measures.

For a reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP metrics, please see our earnings press release, which is available in the IR section of our website. With that, I will now turn the call over to Bryce Maddock, our co-founder and chief executive officer. Bryce?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Thank you, Alan. Good afternoon everyone and thank you for joining us. In the first quarter, we outperformed both our revenue and adjusted EBITDA guidance ranges. We delivered $235.3 million in revenue compared to the top end of our guidance range of $233 million.

We delivered adjusted EBITDA of $55.2 million for an adjusted EBITDA margin of 23.5%, also well above our guidance of a 21% margin. While our first quarter results were stronger than expectations, we revised our revenue outlook for the remainder of the year as the macro environment has become more challenging. We've seen the continued lengthening of the sales cycle delaying from forecasted revenues for the year. Additionally, our US-based delivery revenues continue to decline.

Here, the largest client we serve from the US lost a large contract significantly impacting our forecasted revenues from this client. Finally, we continue to see volatility at our largest global client as their development priorities evolve. In the first quarter, we took decisive action to drive additional operational efficiency into our own business. As a result, we've improved profitability and now expect to deliver 23.5% and adjusted EBITDA margins for the full year.

At the midpoint of our guidance range, we expect to earn over $220 million in adjusted EBITDA, essentially unchanged from last quarter's guidance. We also continue to expect to deliver over $100 million in free cash flow at any point in our guidance range, excluding an earn-out payment associated with the heloo acquisition. I'll go through the details of our Q1 performance, and provide an update on our three strategic growth drivers, as well as the impact from our efficiency gains. Balaji will then walk through our financials, as well as our updated guidance ranges for Q2 and the remainder of 2023.

Starting with growth with our current clients. Revenue from our top 20 clients declined by 8% year over year in Q1, impacted by the transition of work offshore and our largest client and the declines in volume at our largest crypto and equity trading clients. If we exclude those three clients, our largest 17 clients grew 20% year over year. Revenue from our clients outside of the top 20 grew by 17% year over year.

Looking at our service offerings, digital customer experience revenue declined by 1.6% compared with Q1 of 2022, expansions with existing clients and new client signings were offset by the decline in revenues from crypto and equity trading clients. As a reminder, crypto equity trading clients, which accounted for 15% of total revenues in Q1 of 2022 dropped to just 4% of total revenues in Q1 of this year. In terms of major DCX signings, we continue to win business from the competition. In Q1, we signed a fast-growing direct-to-consumer wellness product.

Their prior outsourcer was not performing. So they turned to us to improve their customer engagement. We're insisting with customer complaints and new product orders be it email, chat and voice. We also signed a sizable contract with the consumer savings app that moved all of their digital support to us from a competitor.

They were looking to partner with a company that utilize technology to drive efficiency and quality in supporting their customers. We also expanded our work during the quarter with the nation's leading home leasing company after a successful pilot last year. Our work with them spans multiple service lines from voice support, for their leasing agents, to digital support for their residents to moderation of their social media and online reviews. Finally, we signed two new contracts in the health tech space for digital customer experience.

Both of these clients are AI-enabled provider platforms that we're looking to leverage our global delivery model to drive efficiency, while simplifying practice management and improving the patient experience. We'll be serving one of these clients out of Latin America and another one out of the Philippines. Moving on to trust and safety. Revenues in this service offering declined by 11.5% compared with Q1 of 2022, driven by the impact from our largest client moving work to our locations in the Philippines and India.

Despite this, volumes continue to grow within our trust and safety offering. The number of trust and safety teammates at TaskUs, increased by 16% year over year, as volumes grew at our clients. Our relationship with our largest client remains strong. We expect that their trust and safety volumes will grow again this year as we continue to take share from competitors.

However, given the onshore to offshore ships, and the deprioritization of certain R&D projects, we expect that revenue will decline with this client year over year in 2023. Looking at our other clients and signings in our trust and safety offering, we signed a new risk and response engagement with a high-growth FinTech company. We're supporting their chargebacks and disputes, know your customer and fraud monitoring work, taking share from another provider. Another milestone for our trust and safety service offering came last month, when we were named both a leader and the star performer in Everest Group's Trust and Safety Services Peak Matrix assessment for 2023.

The recognition reflects our continued progress in delivering on our vision for trust and safety clients around the world, as well as our significant investments, building a hybrid solution of technology and talent to detect and remove harmful content. Our inclusion is a leader among a small handful of large providers is humbling. To further renamed the Star Performer demonstrates the trust we've earned from clients as we invest in the best technology and people to protect their platforms. Moving on to our AI service offering.

Revenues grew 10.2% in Q1 compared with Q1 of 2022, driven primarily by expansions with our current clients, including growth in the generative AI space. Volumes continue to grow in the service line as well demonstrated by over 17% growth in the number of teammates providing AI services to our clients. Within the service line, we signed expansion agreements with clients in the social media space and we signed an exciting new generate an AI start-up that has raised hundreds of millions of dollars in venture funding. We will be providing adversarial testing to prevent their model from providing harmful or misleading responses.

After a successful pilot in Europe with this client, we have already expanded to the US, our deep understanding of generative AI and our industry-leading wellness program is what differentiated us from the competition and won us this business. We also signed an expansion with a dating app to provide additional trust and safety support. We'll be leveraging our TaskVerse offering to provide a portion of these services. This will allow for flexibility for the client and is an attractive use case of our game platform.

Turning to revenue growth within our industry verticals. We're seeing particular strength from our technology and entertainment and gaming verticals, both of which grew 40% year over year. Additionally, our on-demand travel and transportation vertical, which includes food delivery clients, grew almost 30% year over year. We continue to see clients turning to us to take on volumes as they optimize their internal cost structures.

One of our largest clients, one of the world's leading e-commerce platforms expanded their efficiency efforts recently. They've reduced the size of their in-house team and are scaling with us. In addition to scaling our core support offerings, this client relocated multiple strategic business lines to our teams. This year, we expect revenues from this client to nearly double from 2021, and we're now supporting this client from five different countries.

Another one of our large clients, who we migrated to an outcome-based pricing model has turned to us to drive cost savings. In order to ensure that this is a win-win, we made significant progress in the quarter, leveraging automation and process reengineering to reduce our teammate count and improve margins. This increase in efficiency drove the majority of the reduction in our global teammate count over the past quarter. As Balaji will discuss, this was also one of the drivers of our margin improvement in Q1 as margins with this client increased by 4 percentage points over the course of the quarter.

We expect to see an increase in client interest for outcome-based pricing underpinned by automation in this environment. I'll spend a few minutes discussing our teammates and the environment for talent before I move on to an update on our growth drivers. We ended Q1 with 47,700 teammates, up by 4% compared with Q1 of last year. We grew year over year in all geographies with the exception of the US and Ireland.

As I mentioned, we also grew the number of teammates year over year in both our trust and safety NII service lines by 16% and 17%, respectively. Despite a competitive environment for talent, we continue to attract new teammates to task us in the quarter, and we're able to meet all of our hiring SLAs. We exited the quarter with TaskUs teammates rating us 4.5 stars on Glassdoor. Moving on to our growth strategy.

I discussed three initiatives to accelerate revenue over the course of 2023 on our last earnings call. Growing with our large global technology and traditional enterprise clients expanding to serve increasingly global clients and new geographies and increasing our focus on specialized services. First, we continue to expand with the large global technology and traditional enterprise clients that we signed in 2022. To take just one example.

In Q4, we ramped to support the holiday volumes of one of the world's largest technology companies. Typically, the majority of these volumes would ramp down in Q1, but our team delivered excellent customer satisfaction and efficiency in our first year supporting this client. As a result, not only do we retain all the volume we had over the holiday season, but we've since doubled the size of this team. We expect to see continued growth with this client this year.

Second, we continue to focus on expanding our global client base, particularly in Europe and Asia. We signed two new engagements and an expansion deal with European clients this past quarter. We have a solid pipeline of global opportunities for clients in Europe and Southeast Asia. Our European base sales team has been integrated with Halo's go-to-market organization and they've begun to cross-sell our capabilities and offerings.

Finally, we continue to see demand for specialized services where we have a distinct competitive advantage. We continue to sign new clients in the HealthTech space, adding two new healthcare clients in Q1. Healthcare continues to be a growth opportunity for us. We've also seen an increase in demand for our generative AI services.

We're now supporting the development of two out of the three leading large language models. We've developed adversarial testing and prompt engineering teams. In the past quarter, we've doubled the size of the team supporting the industry's leader, and we see significant demand for these services ahead.Beyond the support that we're providing to generative AI companies, there are significant strategic questions about what generated AI means for the BPO industry in general and our business more specifically. As I said on our last call, we're very excited about the generative AI revolution.

We've been using this technology for nearly two years. Recently, we've seen a significant uptick in client interest. we've launched TaskGPT, our Open AI power platform that supercharges the productivity of our teammates. Since the start of the year, we've engaged with multiple clients to implement TaskGPT to improve the efficiency and quality of their workflows.

While we're early in this journey, this type of dynamic, rapidly changing environment is where TaskUs thrives. We've consistently demonstrated an ability to quickly discover and launch services in new markets as they grow exponentially. Generative AI represents our next opportunity to do this. We believe the future of generative AI is one of augmentation rather than automation.

Our talented teammates will leverage these tools to meaningfully improve customer outcomes and operational efficiencies. Over the next few years, there are large revenue opportunities for system integrators and service providers to successfully build, integrate and deploy this technology for our clients. Finally, every new technology produces demand for novel unexpected services. A decade ago, no one would have guessed that tens of thousands of people would be employed moderating political ads on social media or coordinating between restaurants, drivers and hungry customers to ensure food was delivered hot and on time.

We believe that the same will be true of generative AI. For example, we expect to see enormous demand for trust and safety services in a world of infinite content creation and deep fake technology. Many other demands are impossible to predict today, but TaskUs is well-positioned to discover these service needs and deliver them for our innovative clients. Despite progress across these three initiatives, since our last call, we've seen a lengthening sales cycle, lower volumes at our largest US client and shifting priorities, impacting projects for our largest global clients.

These factors have led us to lower our revenue outlook for the remainder of the year. We now expect that revenue for the full year will be between $925 million to $950 million. We expect to return to year-over-year revenue growth in the fourth quarter at the midpoint of our range. In light of the changed revenue outlook, we've taken immediate action to improve our margins and cash generation.

We're executing well on our multiyear efficiency program as demonstrated in our adjusted EBITDA margins for Q1. As a result of these decisive actions, we've increased our guidance for adjusted EBITDA margins to 23.5% for the year, leading to an outlook for adjusted EBITDA dollars that is essentially unchanged. We've also reaffirmed our guidance of at least $100 million of free cash flow for the year. We're using this cash to drive shareholder value.

We've repurchased over 2.5 million shares since the start of our share repurchase program in September of last year. You'll see that we were even more active in the market during the second quarter, driven by our dynamic repurchase plan that allows us to purchase more shares at lower prices. We see repurchasing our stock as a very attractive use of capital. As a result, our board has approved an increase in our repurchase authorization of another $100 million through the end of 2024.

Our three strategic growth initiatives, coupled with our focus on cost, will underpin our results for the remainder of 2023 and gives us confidence that we will achieve the revenue, adjusted EBITDA and free cash flow outlook that we've provided today. With that, I'll hand it over to Balaji to go through the Q1 financials in a bit more detail and provide our outlook for Q2 and the year ahead.

Balaji Sekar -- Chief Financial Officer

Thanks, Bryce, and good afternoon, everyone. I'm going to discuss our financial results for the first quarter of 2023. 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 first quarter, we earned total revenues of $235.3 million a decrease of 1.8% compared to Q1 of 2022.

We outperformed compared to our guidance as a result of client volumes coming in stronger than expected, primarily within our digital customer experience service line. In the first quarter, our digital customer experience offering generated $157.1 million for a year-over-year decline of 1.6%, driven by the impact of lower revenue from our crypto and equity trading clients. Our trust and safety business declined by 11.5% compared to Q1 of 2022, resulting in $40.6 million of revenue. This decline was as a result of the geographic mix shift from our largest client moving volumes offshore.

Our AI services business grew 10.2% year over year for revenues of $37.6 million, as a result of expansion with both existing and new clients. Our client base has continued to diversify in Q1. Our revenue concentration with our largest client was approximately 20%, down from 22% in Q4 2022 and 24% in Q1 of 2022, primarily driven by the shift from onshore to offshore. Our top 10 and top 20 clients accounted for 58% and 71%, down from 61% and 75% in Q1 of last year.

In the first quarter, we generated 54% of our revenues in the Philippines, 20% of our revenues in the United States, 12% of our revenues in India and 14% of our revenues from the rest of the world. As Bryce discussed, we expect to see a continued shift of revenues to our near-shore and offshore geologies. As a result, we now expect the revenues from our US operations to account for approximately 10% of total revenue in the second half of the year. Our cost of service as a percentage of revenue was 58.5% in the first quarter compared to 58.9% in Q1 of the prior year.

The decline was primarily driven by the stronger dollar in the current quarter compared with Q1 of 2022 and the transition of work from our onshore to offshore locations which have lower cost of service. This was primarily offset by wage inflation and return to office expenses, as we have more people back in the office compared with last year. Quarter over quarter, we have seen our cost of service increase as a percentage of revenues from 57.5% in Q4 to 58.5% this quarter. This is a result of a weaker US dollar as well as, wage inflation, partially offset with the margin benefits from our operational efficiency gains.

In the first quarter, our SG&A expenses were $64.3 million or 27.3% of revenue, this compares to SG&A in Q1 2022 of $64.2 million or 26.8% of revenue. Excluding the impact of severance costs, the earnout approval associated with our heloo acquisition and stock-based compensation for the quarter, SG&A as a percent of revenue would have been 18.6%. As we realize the impact of cost optimization and other efficiency efforts compared with revenue trends, we will expect this percentage to decline. In the first quarter of 2023, we earned adjusted EBITDA of $55.2 million, a 23.5% margin, compared to $54.1 million and 22.6% in the first quarter of 2020, driven by lower cost of service and in reduction in SG&A, as I just discussed.

We outperformed compared with guidance, driven by our strong revenue performance and operational efficiency gains. Adjusted net income for the quarter was $32.5 million, and adjusted earnings per share was $0.32. By comparison in the year ago period, we earned adjusted net income of $35 million and adjusted EPS of $0.34. The decline in adjusted net income was primarily due to higher financing expenses compared to last year due to the impact of higher interest rates, offset by the improvement we saw in adjusted EBITDA margins.

Now, moving on to the balance sheet. Cash and cash equivalents were $167 million as of March 31st, 2023, compared with the December 31, 2022 balance of $134 million. In the quarter, we utilized approximately $6.4 million for share repurchases, buying back approximately 390,000 shares at an average price of $16.35. As of quarter end, we had approximately $62.7 million of authorization left on our plan.

With today's board authorization, we now have approximately $155 million remaining in our plan. Cash generated from operations was $43.7 million for the first quarter of 2023 as compared to $36.9 million in Q1 of 2022. Our capital expenditure decreased in the first quarter of 2023 to $5.2 million compared to $17.8 million in Q1 of 2022. The decrease was primarily driven by lower technology-related expenses as employees have returned to the office and the timing of spend within the year.

We would expect capex to be higher in the second quarter. Free cash flow was $38.4 million or 69.6% of adjusted EBITDA. This quarter's conversion rate was particularly high given the lower capex spend and reduction in working capital. In terms of our financial outlook for the remainder of the year, we have updated our guidance, we now anticipate full year 2023 total revenues to be in the range of $925 million to $950 million.

As a result of the efficiency gains that we have realized since the start of the year, we have increased our margin outlook and now expect to earn a full year 2023 adjusted EBITDA margin of 23.5% implying an adjusted EBITDA guide that is essentially unchanged at the midpoint. We continue to expect free cash flow, which we define as cash flow from operations less capex to be $100 million, excluding the earn-out payment associated with -- heloo acquisition. For the second quarter, we expect revenue to be in the range of $226 million to $228 million, and we expect our adjusted EBITDA margin to be approximately 23% for the quarter. This adjusted EBITDA margin guidance for the second quarter and full year is based on current ForEx rates.

So in change to currency rates would impact our margins. As a reminder, the majority of our revenue is billed and collected in U.S. dollars. So we do not see the impact of U.S.

dollar fluctuation in our revenues. I will now hand it back to Bryce before we take your questions.

Bryce Maddock -- Co-Founder and Chief Executive Officer

Thank you, Balaji. Before we open for questions, I want to share another TaskUs teammate story. In March, I visited five of our 10 sites in the Philippines. Our strategy of building sites and locations outside large metro areas, and close to where teammates live, meant I got to visit our beautiful facility on the island of Bohol.

The location of the Bohol site proved to be very attractive for tourists, a teammate who joined us after working in Manila for 13 years. Originally from the Bohol, Juris is overjoyed to learn that we were opening a facility on the island. Her parents were getting older and she wanted to be closer to them. But prior to TaskUs, she hadn't been able to find companies with good salaries and benefits near her hometown.

As a result of the career that she found with us, Juris was able to spend three years living with her father in Bohol before he passed away last December. She talked about how happy she was to have the time and how grateful she was for the assistance, task is provided for her and her father in his final base. Juris also told me how wonderful it is not to have to deal with Manila's notoriously bad traffic and how grateful she is for weekends at the beach and her mother's home cooking. Listening to Juris was an important reminder to me that our strategy of locating sites outside major metro areas and close to where people actually live is critical, not just to lower our costs and increase our ability to recruit the best talent, but also to enhance our teammates quality of life.

With that, I'll ask the operator to open our line for the question-and-answer session.

Questions & Answers:

Operator

Thank you, sir. We will now be conducting the question-and-answer session. [Operator instructions] Our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.

Maggie Nolan -- William Blair and Company -- Analyst

Thank you. I wanted to ask, Bryce, what needs to happen for you to get back to growth, both from kind of an internal case perspective, as well as what your clients need to see and those kind of demand factors?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yes, Maggie, thanks so much for the question. So I think it's important to remember that our offshore and near-shore businesses continue to grow healthily. If we excluded revenue from the U.S. and Ireland, revenue from our offshore and near-shore locations grew 19% year over year in Q1, and we expect to see continued double-digit revenue growth in these geographies going forward.

Our current guidance includes a significant risk hedge, which takes U.S. revenues to just 10% of total revenues for the back half of the year. And this continues the challenging year-over-year compares that are being driven by the drops in crypto and equity volumes and the onshore to offshore shifts that we began seeing in Q1 of last year. This is the primary driver of the delayed return to revenue growth.

With that said, we expect to return to year-over-year revenue growth in Q4 of 2023 at the midpoint of today's guidance. As the remaining U.S. revenues become a smaller portion of our overall business, we expect sustained demand for our nearshore and offshore services to accelerate this growth into 2024. As I outlined on today's call, there are three factors that are driving this growth.

First, we continue to expand our relationships with the big tech and enterprise claims that we won last year as these clients are ramping up their cost savings initiatives there are meaningful opportunities ahead. Second, we're accelerating our go-to-market efforts in Europe and Asia. And finally, we're delivering on the significant opportunities where we're very well-positioned in the health-tech and generative AI space.

Maggie Nolan -- William Blair and Company -- Analyst

That's helpful. Thank you. And then, biology, I know, the guidance for EBITDA margin has remained strong. Can you talk a little bit about are those cost initiatives deep enough or the incremental things that you're doing deep enough to compensate for a slightly lower revenue expectation going forward? And then, if you were to come in at the lower end of your guidance, how that would impact the margin as well?

Balaji Sekar -- Chief Financial Officer

Yes. So Maggie, as we discussed in the last call, so we keep talk a multiyear program, which is driving efficiencies in our global operating model, leveraging automation and leveraging shared services, which has resulted in millions of dollars in savings. And we quantified that in excess of about $20 million in New Year savings in 2023. So we continue to optimize the spend and continue to drive efficiency in relation to where we are seeing some of the revenue forecast perspective, that's No.

1. And second, just as a reminder, the majority of our cost is variable in nature, which also is linked to revenue. So we're able to continue to drive that efficiency, which is the reason that gives us confidence in increasing our EBITDA guidance to 23.5% for the full year and leaving the dollars, EBITDA dollars unchanged from our previous guidance.

Maggie Nolan -- William Blair and Company -- Analyst

Thanks for taking my question.

Operator

Thank you. [Operator instructions] Thank you. Our next question comes from the line of Puneet Jain with J.P. Morgan.

Please proceed with your question.

Puneet Jain -- JPMorgan Chase and Company -- Analyst

Hi. Thanks for taking my question. Bryce, can you talk a bit more about the work you do for this generative AI start-up? Like what are you doing? How are you providing those services? And can those services be transferred to other clients who intend to launch generative AI-based solutions?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yes. Thank you, Puneet. The work we're doing for generative AI companies is incredibly exciting. We spun up adversarial testing teams.

These are teams of people who are provoking large language models and image generation models to produce offensive content or content that violates in terms of service. We're then documenting those violations, so that generative AI engineering teams can further refine their models to protect their users. In addition to this, we're actually helping to train many of these models answering complex questions, recruiting experts in particular areas of subject matter expertise to help build the future of large language models. Today, we work for two of the three leading large language models.

In the first quarter, we doubled the size of our team supporting the industry's clear leader. We also signed a contract with a very exciting generative AI start-up that has raised hundreds of millions of dollars. So we see this as a rapidly growing area that cases is perfectly suited to support.

Puneet Jain -- JPMorgan Chase and Company -- Analyst

Got it. Got it. And -- so for your guidance for this year, like for Q2, it implies like a sequential decline from Q1 revenue, but the full year guidance implies like a sequential growth in 3Q and possibly in 4Q also, and you also mentioned that in 4Q, do you expect revenue to be up on a year-on-year basis at the midpoint of the guidance? So can you talk about like what drives that confidence of this sequential increase that you expect in second half? And how much visibility you have on that second half revenue at this point of time?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah. I mean, the confidence comes from the fact that our offshore business is continuing to grow at a very healthy. As I said to Maggie's question earlier, in Q1, our offshore near-shore business grew 19% year over year, and we expect to continue to see strong double-digit revenue growth from our offshore and near-shore locations for the remainder of the year. As you pointed out, unfortunately, since the time of our last call, we've seen some shifts that have impacted our US business.

The largest client that we have in the US business lost a significant customer contract, cutting the size of our business with them roughly in half. When we look at the rest of the year, it's important to note just what we're expecting to happen here. So if we look back at 2022, in Q1 of 2022, our US business was over a $300 million annual run rate business. Today, we expect our annual run rate to drop to under $100 million from US delivery in the back half of 2023.

So we'll have lost about twice as much business as we have left. -- as the percentage of US business declines, the continued growth in our offshore and near-shore locations will outpace the business that we're losing in the US. And that's what gives us confidence about getting back to sequential quarterly revenue growth in Q3 year-over-year revenue growth in Q4 and watching that revenue growth accelerate into 2024.

Puneet Jain -- JPMorgan Chase and Company -- Analyst

Got it. Let me quickly follow up. Like what do you expect for US mix to be in 2Q? I know for the second half, you said you expect 10%. But what would be that number for 3Q?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah. We're not guiding to that number specifically. But as we said, we had 20% of our global revenues come from the US in Q1, by Q3 we expect that to drop to about 10% and so you can kind of do the math and it will be somewhere in between those two numbers.

Puneet Jain -- JPMorgan Chase and Company -- Analyst

Got it. Got it. All right. Thank you.

Operator

And the next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

Unknown speaker

Hey, guys. It's Jonathan on for James. Thanks for taking our question. Good to hear about the utilization of AI in your own operations, especially as you think about potential improvements in productivity -- in that said, can you talk about how that may impact your pricing model going forward, particularly as it relates to efficiency gains you may be recognizing in some of your contracts?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah, it's a great question, Jonathan. Thank you. So obviously, we're very excited about what's taking place in Generative AI. Very excited to announce the TaskGPT platform.

Clearly, what's happening in this space is a step function change about anything we've seen in the past. And over the next couple of years, we will see this technology audit mate simple workflows. But given the complexity of the majority of work that we do, we see Generative AI, primarily as a tool to augment our talented teammates. And so, in terms of our pricing models, as I said, in the first quarter, our largest outcome-based pricing agreement we were able to increase our margins by 4%.

And we did that by driving efficiency with process design and technology. Going forward, leveraging platforms like TaskGPT is going to enable us to enhance our margins and pass on cost savings to our customers. And this will be done with outcome-based pricing and gain share agreements, which we expect to see an increase in demand from our customers.

Unknown speaker

Got it. That's good color. Beyond sort of the company is undertaking a mix shift offshore, are you seeing any changes to like-for-like pricing of deals near term? I mean, how are you thinking about the pricing environment now? And how is that being reflected in your outlook?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah. I mean, the pricing environment today is one where we're seeing our clients continue to look for cost savings. We're able to drive those cost savings for our clients by taking them offshore, leveraging our network of locations in Tier 2 cities and then baking in technology into the solutions that we're offering to our customers. TaskUs has always been a premium service provider.

And so, while pricing is always competitive, it's usually not the real reason that we win or lose business.

Unknown speaker

Appreciate that. Thanks guys.

Operator

And the next question comes from the line of David Koning with Baird. Please proceed with your question.

David Koning -- Robert W. Baird and Company -- Analyst

Hey, guys. Thank you. And I guess my first question, I saw employees were down, I think, 4% sequentially. If I saw that right, and I know for years they've kind of -- they've been building and really revenue isn't declining that much.

So I was just kind of interested in why employees are down a bit?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah. Thanks for the question, Dave. So we did see the number of teammates declined by about 1,800 teammates. About half of that decline was driven by seasonal volumes.

The other half was driven by the efficiency gains that we realized in our largest outcome-based contract with one of our largest clients. And so, this is a situation in which we've been able to increase our productivity significantly and thus use fewer people to deliver on the same amount of work.

David Koning -- Robert W. Baird and Company -- Analyst

Got you. OK. And then, I guess my second question, just when we've done like different surveys, it seems like almost everybody acknowledges like puts and takes of AI. Like if it could be good, there could be some negative.

But net most I think it's positive, what parts of your business do you think are most beneficial and maybe most at risk? And I think content is the one that I say most people worry the most about. But what do you think there?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah. I mean, I think it's worth it to maybe look across our three major service lines and ask the question, what's the impact of generative AI on each of them. So starting with digital CX, Tier 1 customer support is going to be further automated. I think everyone agrees on that.

Educational questions on how to use an app or understand the policy are very unlikely to require human intervention for much longer. The good news is that today, we do very little of this kind of work. Our customer experience work is almost all complex, involving technical questions and interactions with multiple systems to solve urgent issues in real time. So we don't believe that that type of work is likely to be automated anytime soon.

Instead, we're using TaskGPT to augment our talented teammates, supercharging our efficiency and improving the quality of their responses. Further, we believe that the demand for our Trust and Safety Services is going to grow as a result of these technologies. We're already working on moderating images that are produced by a leading Image Generation model. And earlier, I mentioned some of the adversarial testing work that our team is already doing to protect people against harmful responses.

It's hard to imagine today, all of the Trust and Safety workflows that are going to emerge as a result of near-perfect, deep fakes or infinite user prompted content creation, but in general, we expect an exponential increase in Trust and Safety demand as a result of Generative AI. And finally, we continue to see demand for our AI Services to build and refine these Generative AI models. The nature of this work is evolving. We've gone from basic tagging to more complex content creation editing and rating led by global teams of experts in specific subject matter areas.

So as I outlined on the last call, we've already made great progress, sterling both our Trust and Safety Services and our AI Services, to leading Generative AI companies. And we expect that our clients to leverage these services to demand more in the immediate future. So we're excited about the Generative AI, revolution and feel very well positioned to benefit from it.

David Koning -- Robert W. Baird and Company -- Analyst

Great. Thank you, guys.

Operator

And the next question comes from the line of Kathy Cheng from Bank of America. Please proceed with your question.

Kathy Cheng -- Bank of America Merrill Lynch -- Analyst

Hey. So first, I just wanted to dig in a little bit more with your top clients. So it sounds like several projects were de-prioritized. Were they outright canceled? Could you just give us a little bit more color on the type of project that that is? Is it related to like the Trust and Security aspect of your business? So I just wanted to ask about that first.

Thank you.

Bryce Maddock -- Co-Founder and Chief Executive Officer

Thanks, Kathy. So we've got a very strong relationship with our largest client. And fortunately, the core of what we do for them, the Trust and Safety work continues to be stable. In fact, we expect that demand for our Trust and Safety Services that our largest client will grow between here and the end of the year.

We also support certain R&D projects. And so, our largest client has been developing exciting new technologies in many different areas. And on some of these projects, we've seen certain projects, be prioritized and other new projects spun out. But at this stage, while the new projects are taking some time to scale and to basically catch-up to the scale of the old projects that were reduced as part of their overall cost savings initiatives.

So the relationship itself remains very, very strong. We believe that overall, we continue to take share in an environment of declining spending and the core of the work that we do for them in Trust and Safety continues to grow.

Kathy Cheng -- Bank of America Merrill Lynch -- Analyst

Got it. And then, just a follow-up, I wanted to touch back on the U.S. portion, which you're now assuming 10% of revenues in the back half of the year. I mean, could that go to zero? And I believe that your top client is fully offshore now, so they have no presence in the U.S., just wanted to confirm that as well.

But yeah, thank you.

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah. So the U.S. will continue to be an important part of our global delivery network. Obviously, we've seen a significant decline in our U.S.

business from roughly a $300 million revenue run rate business in Q1 of 2022 to about $100 million revenue run rate business in the back half of 2023. What remains in the US, we believe will stay on for because of regulatory reasons, in some cases because the end customer of our client is the US government and in other cases, because of strong client preferences. So at this stage, we feel good about what remains in the US business. And I should mention that to get to that 10% number, we've taken a significant risk hedge based on the trend that we've seen to-date.

As far as our largest customer, almost all of their work has been moved to the Philippines and India TaskUs.

Kathy Cheng -- Bank of America Merrill Lynch -- Analyst

OK. Got it. Thank you.

Operator

And the next question comes from the line of Ryan Potter with Citi. Please proceed with your question.

Ryan Potter -- Citi -- Analyst

Hey. Thanks for taking my question. I want to touch on the international opportunity, particularly the European and Asian growth lag that you mentioned. Can you just highlight your positioning there? How you're kind of viewed versus peers? And I mean, what actions you're taking to kind of accelerate growth there? Is it investments into sales, or is there some kind of regional kind of domain expertise that you're also investing in as well?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yes. Thanks for the question, Ryan. So as you know, we completed our first acquisition last year of a company called heloo, which has operations in Croatia, Serbia and other parts of Eastern Europe. We also have our own operations in Greece and in Ireland.

Over the course of the last year, we fully integrated those operations and our go-to-market efforts. We've got a go-to-market team in Europe that is based in the UK and Croatia, and is actively selling our European solutions and lending multiple clients. We may lend in multiple new logos for -- from Europe in the first quarter. In Asia, we've got delivery locations in Malaysia, Taiwan and Japan, and a really robust group of global technology clients that rely on TaskUs for Asian language support.

This is an area of the business that continues to grow very helpfully. And we plan to make further investments in go-to-market efforts in the region in the months to come.

Ryan Potter -- Citi -- Analyst

Got it. And then, on capital allocation, I guess, can you just discuss what led to the decision to increase the share repurchase authorization as opposed to something more like using capital or M&A. Have your thoughts changed at all around M&A? And could you provide some color, I guess, on how the acquisition pipeline looks for you say?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yes. Thanks for that question. So, we increased our share repurchase authorization by $100 million. And that's on top of the $100 million that our board authorized us to repurchase shares starting in September of last year.

This decision was driven by two factors. The first is that our business continues to create a huge amount of cash. This year, we expect our adjusted EBITDA to be north of $220 million, and we expect to generate over $100 million in free cash flow, excluding the one-time payment for the heloo earn out. We have been purchasing shares actively in the market and have bought 2.5 million shares to-date.

But we are continuing to accrue cash on our balance sheet. We added approximately $30 million in cash from the end of Q4 to the end of Q1. And so, we're looking at our capital allocation strategy. And first, we want to invest in the business.

And we've done this successfully investing in sales and marketing and also in technology. Both of those are areas in which we've continued to increase the amount of money we're spending to drive growth and deliver value for our clients. But despite that, we are on pace to deliver 23.5% adjusted EBITDA margins this year. So second, we're looking for opportunities to acquire businesses to grow inorganically.

Unfortunately, there the valuations of private companies continue to stay severally high, especially when compared to public market multiples. And so, we turned to share repurchases as the most productive use of our capital, given what we believe is a very attractive share price of a -- and current valuation of our business.

Ryan Potter -- Citi -- Analyst

Understood. Thanks again.

Operator

And the next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Matt VanVliet -- BTIG -- Analyst

Good afternoon. Thanks for taking the question. Curious if you could give us a little more color in terms of some of the sales cycles that you're seeing elongate, are there specific areas of the market that just seem to be kind of in a holding pattern waiting to see more things on the macro side, or is it just becoming maybe more signatures, more discussions of the contract, but things are maybe slowly moving along more so than being at an impact?

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yeah. Thanks for the question, Matt. So the pipeline itself is strong, but the sales cycle does continue to elongate. In general, it seems like there's less urgency to sign large new engagements.

And this is definitely the case among innovative technology companies that are growing much slower than they have in the past few years. I will say that in terms of the number of new logos that we've been able to sign Historically, we signed about 10 new logos a quarter. In the first quarter, we signed more than that. But the size of the deals that we've signed is smaller than we have seen in the past.

We have continued to sell successfully into our existing clients. And here, our clients have increased urgency to drive cost savings. So we're helping a number of our clients who reduce the size of their in-house teams to scale in our offshore and nearshore environments. Overall, the pipeline itself is healthy, build with opportunities for nearshore and offshore delivery in our cash GPP-powered solutions.

And so, we expect this to return us to growth later this year.

Matt VanVliet -- BTIG -- Analyst

All right, helpful. And that kind of leads me into a follow-up question. On the generative AI side, obviously a lot of questions and certainly a lot going on there. But is it currently sort of cannibalizing any of the other AI model training that you were doing to this point for some of your clients? Have they now decided to maybe forgo building their own models or at least not as robustly build out their own models and using some of these large language models? Just curious on how any mix shift or trends you're seeing in the existing book of business in that space.

Bryce Maddock -- Co-Founder and Chief Executive Officer

Yes, what's happened is most of the smaller players in the space have shifted to leveraging open AI or one of the other leading large language models. And what we've seen is that the industry's leaders have increased their investment in training and trust and safety. And so, overall, our AI services revenue continues to grow.

Matt VanVliet -- BTIG -- Analyst

All right. Great. Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Alan Katz -- Vice President, Investor Relations

Bryce Maddock -- Co-Founder and Chief Executive Officer

Balaji Sekar -- Chief Financial Officer

Maggie Nolan -- William Blair and Company -- Analyst

Puneet Jain -- JPMorgan Chase and Company -- Analyst

Unknown speaker

David Koning -- Robert W. Baird and Company -- Analyst

Kathy Cheng -- Bank of America Merrill Lynch -- Analyst

Ryan Potter -- Citi -- Analyst

Matt VanVliet -- BTIG -- Analyst

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