TaskUs Stock: A Risky Play on Offshoring

Right here’s a query for all you ESG advocates on the market. While you undergo and run your numbers that present how “numerous” a company is, do you classify the staff in rising market facilities as “Asian?” You must, as a result of John in Mumbai and Rosie in Manila are certainly “Asians.” So, isn’t it an issue that these business process outsourcing (BPO) workplaces are totally staffed with Asians? The reality is, no person cares, as a result of India and the Philippines comprise a wealth of low cost labor. Properly, they used to.

Multinational companies allocate annual compensation changes primarily based on financial elements reminiscent of wage inflation knowledge which helps be sure they’re staying aggressive. The under chart from Statista exhibits the typical enhance in Indian salaries from 2018 to 2021.

Primarily based on the above numbers, a Mumbai analyst who value $40,000 a yr in 2017 now prices $61,362 – a rise of greater than 50% in 5 years. When that occurs, you merely discover international locations the place expertise is cheaper – just like the Philippines.

It’s Extra Enjoyable within the Philippines

Operating an operation within the Philippines is difficult since you’re not in Kansas anymore. From the rice allowances on paychecks, to the women taking days off round that point of the month, it takes some getting used to. Throughout hurricane season, anticipate there to be days the place Manila is flooded, and workers can’t get into the workplace. Even on regular day, Manila site visitors will be sure no person arrives on the workplace once they’re anticipated to. Working from house presents its personal set of challenges – intermittent electrical energy, variable Web bandwidth availability and high quality, to not point out household emergencies will create issues. And this may increasingly piss some folks off, however the reality is you’ll typically discover the Filipinas extra competent that the Filipinos.

As for labor legal guidelines, good luck attempting to eliminate unhealthy apples. Employment regulation within the Philippines is so demanding that your managers will spend an excessive amount of time simply making ready documentation wanted to point out somebody the door. And good luck getting your rock stars to stay round. Even within the face of automation instruments like UiPath (PATH), the Philippines is going through an enormous talent scarcity on the subject of tech and center administration expertise. So, when a agency says that 68% of their workforce is within the Philippines – 27,100 headcounts – we’re left questioning simply how sustainable that plan is.

About TaskUs

Our paying subscribers usually are not solely our favourite folks on the earth as a result of they maintain our fridges stocked with Milwaukee’s Beast, additionally they deliver to our consideration corporations that haven’t crossed our radar. A number of of you raised TaskUs (TASK) as a agency that’s price taking a look at so we did. On the tin, it seems to be fascinating sufficient. The corporate dabbles in three areas, one which pertains to synthetic intelligence:

• Digital Buyer Expertise (CX) (64%) – describes omni-channel buyer care providers primarily delivered by means of digital (non-voice) channels
• Content material Safety (22%): Elimination or labeling of coverage violating, offensive or deceptive content material.
• AI Operations (14%): Principally consists of information labeling, annotation and transcription providers carried out for the aim of coaching and tuning AI algorithms.

Whereas TaskUs gives typical software-as-a–service (SaaS) metrics to assist the power of their enterprise, a few of the commentary of their newest 10-Ok implies they’re hardly a typical SaaS agency. Try this line:

Our purchasers’ skill to terminate engagements with or with out trigger, together with for comfort, or go for month to month contracts and our purchasers’ incapability or unwillingness to pay for providers now we have carried out makes our future revenues and profitability unsure.

Credit score: TaskUs

That is coming from an organization with a $163 million accounts receivable stability (an quantity that’s almost doubled year-over-year). We’re not accustomed to listening to companies discuss not with the ability to make their clients pay the payments. There are additionally considerations round seasonality of this “cheap-humans-as-a-service” enterprise which makes the next assertion:

The inelasticity of our labor prices relative to short-term actions in shopper demand might adversely have an effect on our enterprise, monetary situation and outcomes of operations.

Credit score: TaskUs

In different phrases, as a result of it’s so troublesome to ramp up staffing in these rising market facilities of excellence, they’ll’t precisely let folks go when the work isn’t there. So, they find yourself paying the identical prices whereas revenues dip, and this results margins. It additionally factors to the truth that this enterprise can’t scale with out throwing extra our bodies at it which isn’t a fascinating enterprise mannequin. To attain the 59% year-over-year income progress they realized in 2021, they expanded headcount by 70%. Sooner or later, they’re going to expertise rising pains increasing this rapidly.

TaskUs talks about how they’re utilizing know-how to create “next-generation digital outsourcing” which might disrupt the normal BPO mannequin. Improved chatbots, RPA-enabled administration instruments, and browser plugins that assist establish objectionable content material, are all examples of how know-how is getting used to unravel issues.

With 90% of their workers working from house, the cloud-based infrastructure they’ve constructed to run their operation is a key a part of the enterprise. One can think about that the 4,800 workers working in america are constructing all these items (together with their Indian counterparts) as a result of tech expertise within the Philippines is extraordinarily missing.

Buyer Focus Dangers

Ten purchasers accounted for 62% of 2021 revenues for TaskUs with two corporations – Fb and Doordash – accounting for 27% and 11% respectively. When 38% of your revenues come from two companies, that’s simply an excessive amount of buyer focus danger for consolation. Additionally contemplate simply how controversial the content material moderation capabilities at Fb have turn out to be. We’ve skilled the thrill of Fb’s recipe-driven strategy to content material moderation and it’s something however efficient. How lengthy will it’s earlier than Fb brings this perform internally and automates it utilizing AI algorithms that merely be taught from all the large knowledge being generated by TaskUs?

As TaskUs continues to develop, their reliance on key clients will lower. In 2021, 62% of revenues got here from their top-ten clients, down from 68% in 2020. It’s necessary to unfold their revenues out as a result of when a shopper accounts for greater than 10% of revenues, they’ve all the ability on the negotiating desk. Good luck attempting to move on elevated labor prices to Fb once they’re accountable for greater than 25% of revenues.

Our Tackle TaskUs

The BPO theme has been round because the dot-bomb period and utilizing low cost labor to carry out process-driven duties is enterprise as ordinary. Repackaging outsourced buyer assist capabilities as “omni-channel digital CX buyer assist” isn’t revolutionary. Whereas TaskUs is having fun with sturdy income progress, it’s depending on their skill to scale headcount on the identical tempo. Growing inflation in rising market facilities will finally erode their value benefit and passing that on to clients will lower the demand for his or her providers.

• Digital CX – They could usher in a agency like UiPath to begin automating some duties, however customer support capabilities will often all the time require a human on the opposite finish sooner or later. The extent to which automation will be utilized appears restricted for buyer assist capabilities.
• Content material Safety – Progress in 2021 was confined to current clients, and we will think about Fb was accountable for chunk of that. Ultimately, AI algorithms can be educated to carry out these duties. And the identical holds true for our subsequent class.
• AI Operations – If you happen to’re serving to AI algorithms be taught, you’ll finally work your approach out of a job. that is exactly why we exited our place in Appen which – a minimum of to date – appears to have been the suitable factor to do.

One attraction of SaaS corporations is that the extra purchasers you deliver on, the upper your margins turn out to be. That’s not the case with TaskUs. In actual fact, one may argue that the larger they get, the extra overhead they’ll must handle the entire operation. This enterprise will scale as quick as the provision of low cost labor, and this isn’t an interesting enterprise mannequin primarily based on our experiences of constructing groups in rising market facilities. If you happen to’re nonetheless eager on BPO as an funding theme, there could also be higher choices on the market.

Different BPO Shares

Earlier this yr, Spruce Capital Administration produced an 80-page report on why they imagine TaskUs isn’t a sensible funding to make. We didn’t even learn a web page of this report till after this text was produced, and it expresses a few of the considerations we’ve raised immediately together with a great deal of different bits. If you happen to’re an investor in TaskUs, you’ll in all probability need to give it a learn, however right here’s the manager abstract.

TASK trades at a wealthy premium to BPO friends on the idea its margins will enhance and it could maintain 25%+ income progress. With each of those objectives in danger, we see 25% – 50% draw back danger to ($18 – $27 per share). We’re lengthy Concentrix (Nasdaq: CNXC) and Majorel Group Luxrmbourg (MAJ NA) as we imagine they’re favorably positioned to succeed in opposition to TASK and commerce at materials valuation reductions on account of being under-covered within the BPO area.

Credit score: Spruce Capital Administration

Since shares of TaskUs now commerce at $23.61 a share, the value goal was hit, and the overvaluation concern is considerably alleviated. If you happen to’re considering BPO as an funding theme (we aren’t), then check out the opposite two companies talked about above – Concentrix and Majorel Group – and see if they supply a decrease danger solution to play BPO. Simply do not forget that finally value benefits can be eroded, and robotic course of automation can be more and more considered as a viable substitute for rising market labor swimming pools.

Conclusion

We’ve all the time emphasised the significance of income progress, and TaskUs checks the containers in that respect. However after we peek below the kimono, we see an organization that may solely scale primarily based on the provision of low cost labor. They’re closely uncovered to the Philippines, a moderately dangerous place to be working. They’re additionally reliant on a number of companies for 38% of their revenues. Regardless of the sturdy progress the agency has been realizing, it is a inventory we might keep away from primarily based on the reasoning introduced on this analysis piece.

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