Spruce Point Capital Management Announces Investment Opinion: Releases Report and Strong Sell Research Opinion on TaskUs, Inc. (NASDAQ: TASK)
Spruce Point Capital Management, LLC ("Spruce Point" or "we" or "us"), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled "Moderating The Bull Case Content" that outlines why we believe shares of TaskUs, Inc. (NASDAQ: TASK) ("TaskUs" or the "Company") face up to 25% to 50% long-term downside risk, or $17.80 ? $26.70 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
Spruce Point Report Overview
Founded in 2008 by Bryce Maddock and Jaspar Weir, TaskUs is a Texas-based business process outsourcing ("BPO") company focused on serving high growth digital technology companies. In 2018, TaskUs received an approximately $250 million investment from Blackstone to accelerate its growth, which valued the Company at more than $500 million.1 In June 2021, TaskUs made its stock market debut on the NASDAQ at $23 per share, valuing the Company at approximately $2.3 billion.2 Key findings from our report on the Company include:
- Evidence of embellished business claims consistent with a Chief Executive Officer known to exaggerate. Spruce Point finds evidence that CEO and co-founder Bryce Maddock made four different claims about his undergraduate degree majors and has acknowledged exaggerating circumstances in the past. In reviewing TaskUs' reporting and business claims, we found that the Company repeatedly embellished the size of its workforce and made overly optimistic revenue growth claims that failed to materialize in two of the three years it provided revenue guidance as a private company. Furthermore, in 2014, TaskUs claimed to have generated between $15.0 ? $17.5 million of revenue, however, a former Company executive told us 2014 revenue was just $8 million. Notably, TaskUs' IPO prospectus fails to provide pre-2015 revenues.
- We believe TaskUs is covering up growing financial strains. TaskUs conspicuously ceased disclosing annual contract value as a key business metric during its registration process with the U.S. Securities and Exchange Commission ("SEC"). When questioned by the SEC, TaskUs commented that it didn't want investors to place undue reliance and certainty on an estimated metric that could be misinterpreted. When we asked a former TaskUs business development professional for an opinion on this matter, the response was, "Would you buy a company that wasn't transparent about their projected revenue? It's obviously a negative number or they'd be having a parade around it." TaskUs also modified its definition of "win rate," a measure of its success obtaining new clients. Additionally, TaskUs doesn't disclose other key metrics that industry peers deem relevant, such as revenue and cost per employee. Based on our analysis, TaskUs' revenue per employee has been in decline since 2018, while its cost of service per employee has risen over the same period. This suggests to us that TaskUs is facing a margin squeeze, which we expect to continue in the face of rising labor costs and fixed-price contracts for major customers.
- Evidence of increasing margin pressure from Facebook, which accounts for 28% of revenue as TaskUs' largest customer. TaskUs provides content security services to Facebook, which involve moderating controversial social media content. We find evidence that revenue per employee in this business segment is down 22% over the past three quarters. When questioned by the SEC about disclosing Facebook's agreements, TaskUs pushed back, saying it's not substantially dependent on Facebook and that the risks are substantially the same as other client contracts. We believe the Facebook business is under a fixed-price contract, which means TaskUs is likely absorbing added costs to keep its client happy, while consolidated EBITDA margins are now being pressured. TaskUs has not publicly stated that Facebook is a driver of margin decline for the Company. Facebook revenues increased 34% in the first nine months of 2021 compared to the same period in 2020, while Facebook receivables were up 112% YTD. In 2021, The New York Times reported that Facebook uses multiple firms and TaskUs' recent content security segment quarterly growth rate showed signs of business slowing.3 This could suggest that Facebook is insourcing some of the work or consolidating or redistributing it to other vendors.
- Signs of cash flow issues at TaskUs. TaskUs' Chief Financial Officer's biography fails to state that he previously worked as an accountant at Sify Technologies, a company founded and controlled by Satyam Computer Service's B. Ramalinga Raju. Mr. Raju went to prison for orchestrating Satyam's financial fraud. An analyst later pointed to unusual fluctuations in Satyam's unbilled revenues and difficulties in cash collection as early indicators of Satyam's problems. We observe that TaskUs' unbilled receivables to last twelve months revenues had been rising steadily for 18 months. This trend suggests that TaskUs may have been booking revenue ahead of receiving collections. In the first quarter of 2021, the percentage of unbilled receivables to total receivables spiked to 63.8%, only to fall precipitously over the following two quarters. On the Company's third quarter 2021 earnings call, TaskUs' CFO said the Company was implementing a new order to cash process as new clients are onboarded to improve cash collection and reduce days sales outstanding. However, a closer look shows that of the $29.7 million total increase in receivables for the quarter, $23.1 million (78%) came from Facebook. Why didn't the CFO draw attention to this and explain the issue?
- We believe TaskUs is not an industry leader in an already slowing content security market. TaskUs cited a September 2019 market report from the Everest Group throughout its IPO process ? which concluded in June 2021 ? which valued the content security market at $5.8 billion in 2021 with 40?50% projected market growth through 2021. However, Majorel Group, a key competitor which TaskUs fails to disclose, cites Everest Group data from May 2021, valuing the content security market at between $4 ? $5 billion and projects growth at just 30 ? 40% from 2020 to 2023. Furthermore, in its 2021 Trust and Safety Content Moderation Services Peak® Matrix Assessment report, the Everest Group merely refers to TaskUs as a "major contender" while TaskUs references its "leadership in content security" in its IPO prospectus.
- TaskUs appears to dramatically understate employee attrition and recruitment costs. TaskUs claims its "competitive strength" derives from its company culture, which leads to lower industry attrition and recruitment costs. TaskUs cites that annualized attrition rates for employees who were employed for more than 180 days were 32.0% and 14.9% in 2019 and 2020, respectively. However, based on an interview of a former TaskUs executive, we learned that most turnover occurs in the first 90 days, calling into question why TaskUs cites 180 days as relevant. Furthermore, TaskUs modified a key sentence in its IPO registration process that eliminated gross employee additions in 2019. Using this data point, we estimate TaskUs' 2019 annual attrition rate was 46%. In subsequent investor communications, TaskUs has referred to "net" employee additions, which make it impossible to estimate TaskUs' true attrition rate. TaskUs also doesn't disclose recruitment expenses. We find evidence that TaskUs' internal employee referral rate has declined materially from 61% in 2018 to 48% in 2019 to 38% in 2020. This decline would likely lead to higher recruitment expenses.
- We estimate 25% ? 50% downside risk to TaskUs' share price and believe investing in Concentrix Corp and Majorel Group are better ways to gain exposure to the technology BPO sector. Analysts are unanimously bullish on TaskUs with "buy" or "overweight" recommendations, but we believe they have not conducted a rigorous forensic review that would unearth the growing financial strains we have observed. TaskUs is currently trading on the expectation of 27% sales growth in 2022 and 25% long-term EBITDA margins. TaskUs also trades at a premium to industry peers at 4.4x and 20x 2022E sales and EBITDA. However, our research indicates TaskUs' ability to increase margins without the kind of differentiated product offering increasingly being marketed by competitors will be challenged. Instead, we favor Concentrix Corp (NASDAQ: CNXC), a recent spinoff, and Majorel Group (AMS: MAJ), a recent European IPO. Both companies provide similar exposure to the high growth technology outsourcing market with lower customer concentration risk and compelling capital return policies. While both are projected to grow revenues by low double digits, these stocks trade at an undeserved discount of approximately 1.5x and 9.5x 2022E sales and EBITDA. As a result, we estimate a minimum of 20% and 35% upside to Concentrix Corp and Majorel Group, respectively.
Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point's full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.
As disclosed, Spruce Point has a short position in TaskUs, Inc. and owns derivative securities that stand to net benefit if its share price falls. Furthermore, as disclosed, Spruce Point has long positions in Concentrix Corp and Majorel Group and owns derivative securities that stand to benefit if each company's respective shares rise.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities. Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
1 Bloomberg article dated August 9, 2018.
2 Company press release dated June 10, 2021.
3 The New York Times article dated August 31, 2021.
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