WNS (Holdings) Ltd (WNS) 2021 Q4 法說會逐字稿

Good morning, and welcome to the WNS Holdings Fiscal 2021 Fourth Quarter and Full Year Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Now I'd like to turn the call over to David Mackey, WNS' Executive Vice President of Finance and Head of Investor Relations. David?

Thank you, and welcome to our fiscal 2021 fourth quarter and full year earnings call. With me today on the call, I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our COO, Gautam Barai.

A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.wns.com.

Today's remarks will focus on the results for the fiscal fourth quarter and full year ended March 31, 2021. Some of the matters that will be discussed on today's call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those factors set forth in the form -- company's Form 20-F. The document is also available on the company website.

During this call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliations of these non-GAAP financial measures to GAAP results can be found in the press release issued earlier today. Some of the non-GAAP financial measures management will discuss are defined as follows: net revenue is defined as revenue less repair payments; adjusted operating margin is defined as operating margin excluding amortization of intangible assets, share-based compensation and goodwill impairment; adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets, share-based compensation, goodwill impairment and all associated taxes. These terms will be used throughout the call.

I would now like to turn the call over to WNS' CEO, Keshav Murugesh. Keshav?

Thank you, David, and good morning, everyone. We are pleased with our financial and operational performance in the fiscal fourth quarter and the resiliency our business has shown over the past year in the midst of a global pandemic.

Net revenue for Q4 came in at $228.3 million, representing a year-over-year decrease of 3.2% on a reported basis and a 6% constant currency reduction. Sequentially, net revenue increased by $4 million or 1.7% on a reported basis and 0.3% constant currency.

Our delivery capability moved closer to full capacity during this quarter with supply averaging over 99% of client demand. In Q4, WNS' sales efforts continued to lay the foundation for future growth with the addition of 9 new logos and the expansion of 27 existing relationships.

Hiring accelerated in support of these opportunities as the company added 1,167 global employees during the quarter. WNS also posted strong adjusted operating margins of 20.8% and generated free cash of $70 million. Sanjay will provide further details on our fourth quarter and full year financial performance in his prepared remarks.

I would like to take a few minutes today to review the past fiscal, which proved to be volatile and challenging, but also transformative and inspiring. In March of 2020, WNS encountered significant operational and financial headwinds as the global pandemic impacted our clients, employees and business model. Lockdowns impeded our ability to service clients, and declining transaction volumes in verticals like travel and auto claims created further top line pressure.

In response to the delivery challenges, WNS rapidly shifted more than 40,000 employees in 12 countries to a work-from-home model, which had never been tested or attempted in the BPM industry. The difficulty and complexity of this effort cannot be overstated as WNS supports unique processes for over 375 clients in 8 different verticals spread across front, middle and back-office operations.

The company worked closely with each of our clients to address their specific challenges and co-create new remote solutions, including customized hardware, software, collectivity and security configurations. We were able to quickly innovate and execute as delivery ramped to 95% of demand by the end of June, enabling WNS to maintain support of our clients' core mission-critical processes.

From a demand perspective, while reduced volumes in some verticals quickly rebounded, other hard-hit industries such as travel has yet to fully recover. In Q4, our travel business remained more than 25% below pre-pandemic levels. We expect that as global vaccinations programs progress, our travel volumes will return. In fact, we are happy to report that over the past few months, WNS clients have begun forecasting modest improvements in activity levels. While supply challenges and reduced volumes created revenue headwinds early in the year, we continue to see both new and existing clients willing to move forward with their BPM initiatives despite the impacts of the pandemic.

In fiscal 2021, WNS added 33 new logos and expanded 71 existing relationships, representing year-over-year increases of 14% and 51%, respectively. As a result, as the fiscal year progressed, our revenues grew, headcount aligned with volumes and margins improved. We closed full year fiscal 2021 down only 3% in constant currency revenue, and delivered full year adjusted operating margins of 21.5%.

While COVID-19 created significant business challenges in fiscal 2021, I want to highlight 4 positive takeaways from this past year. First, WNS' ability to operationally and financially manage the pandemic's impacts on our business highlights the strategic nature of our solutions and the resiliency of the BPM model. This was evidenced by the stability of our client relationships, revenues, margins and cash flow in the face of a generational crisis.

Second, clients, now more than ever, recognize they must digitally transform their business models in order to enhance the customer experience, drive operating efficiencies, improve decision-making and compete in their respective markets. This explains why both pipeline activity levels and deal signings remain healthy over the past year.

Third, that WNS' nimble, innovative and collaborative culture is an increasingly important differentiator. The company's ability to quickly and safely pivot our business model to manage an unforeseen and unprecedented global crisis demonstrated to clients our commitment to ensure their success. This has increased confidence in our capabilities and helped further strengthen our strategic relationships.

As a result, over the past year, WNS has leveraged our active discussions with clients to extend key contracts, some well ahead of their anniversary dates. These renewals give us added revenue visibility in the coming years and provide clients with the benefits of increased productivity and business transformation.

In the past few quarters, WNS has renewed 9 of our top 25 relationships, including our 2 largest clients. This represents 25% of total company revenue, which has been extended at a weighted average term of 5 years.

And finally, the past year has reinforced my belief that WNS' 40,000-plus employees are really and truly our greatest asset. I'm amazed and grateful for their dedication, sacrifice and teamwork, which has enabled WNS and our clients to navigate the impacts of the pandemic and position our businesses for future success.

As we enter fiscal 2022, we are excited about the opportunities in front of us. Despite COVID-19, the BPM industry remains healthy, and the addressable market continues to expand, driven by client needs for digital transformation and cost reduction. WNS begins the fiscal year with good momentum from last year's deal signings and a healthy broad-based pipeline of both new logos and existing client requirements. That being said, we must remain vigilant and flexible to adjust our services and delivery models to the clients' changing business requirements and to any pandemic-related volatility.

In fiscal 2022, WNS will continue to invest in core areas such as digital solutions, hyperautomation, advanced analytics and domain expertise. These investments will include internal R&D efforts, strategic partnerships, specialized hiring and employee training. Our investment approach will also look to leverage our strong balance sheet via capability-based tuck-in acquisitions. We expect to do this while maintaining our disciplined approach to M&A.

In summary, WNS remains confident that our strategic vision, differentiated capabilities, solid business momentum and proven ability to execute will continue to drive the long-term sustainable value for all of our key stakeholders.

I would now like to turn the call over to our CFO, Sanjay Puria, to further discuss our results as well as outlook. Sanjay?

Thank you, Keshav. In the fiscal fourth quarter, WNS net revenue came in at $228.3 million, down 3.2% from $235.8 million posted in the same quarter of last year and down 6% on a constant currency basis. Sequentially, net revenue increased by 1.7% on a reported basis and 0.3% on a constant currency basis. Broad-based sequential revenue improvement across verticals, services and geographies was partially offset by a reduction in short-term revenue. In the fourth quarter, WNS recorded $2 million of short-term revenue, which was booked at company average margins.

Adjusted operating margin in quarter 4 was 20.8% as compared to 22% reported in the same quarter of fiscal 2020 and 24% last quarter. Year-over-year adjusted operating margin reduced as a result of COVID-related impacts, including lower volumes, delivery constraints and business continuity costs. Margins were also pressured by an $8 million reduction in high-margin short-term revenue as compared to quarter 4 of last year.

These headwinds were partially offset by proactive management of discretionary spending, lower travel and facility-related costs and favorable currency movements, net of hedging. Sequentially, margins declined as a result of reduced high-margin short-term revenue, increased costs associated with facility utilization and business enablement, additional compensation costs, including hiring in advance of revenue and employee promotions and accelerating digital investments. These headwinds were partially offset by operating leverage on higher volume and favorable currency movements, net of hedging.

The company's net other income expense was $0.2 million of net expense in the fourth quarter as compared to less than $0.1 million of net expense reported in quarter 4 of fiscal 2020 and $1 million of net expense last quarter. Year-over-year, the unfavorable variance is attributable to reduced interest income driven by lower rates, which more than offset $0.8 million of nonrecurring interest income on a tax rate refund and lower interest expense resulting from scheduled debt repayments. Sequentially, the decrease in net expense is due to the nonrecurring interest income on a tax refund.

WNS tax -- WNS effective tax rate for quarter 4 came in at 22.6%, up from 18.3% [last year and up] slightly from 22.5% last quarter. Changes in the quarterly tax rate are primarily due to the mix of profits between geographies and the mix of work delivered from tax incentive facilities.

The company's adjusted net income for quarter 4 was $36.7 million compared with $42.4 million in the same quarter of fiscal 2020 and $41 million last quarter.

Adjusted diluted earnings were $0.71 per share in quarter 4 versus $0.82 in the fourth quarter of last year and $0.79 last quarter.

As of March 31, 2021, WNS balances in cash and investments totaled $395.2 million, and the company had $16.7 million of debt. WNS generated $75.6 million of cash from operating activities this quarter, made scheduled debt payments of $8.4 million and incurred $5.6 million in capital expenditures.

During the quarter, the company repurchased 694,716 shares of stock at an average price of $73.61, which impacted quarter 4 cash by $50.9 million.

DSO in the fourth quarter came in at 30 days as compared to 31 days last year and 34 days last quarter.

With respect to other key operating metrics, total headcount at the end of the quarter was 43,997, and our attrition rate in the fourth quarter increased to 30%, up from 28% reported in quarter 4 of last year and up from 23% in the previous quarter. Built seat capacity at the end of the fourth quarter remained relatively steady at 34,365. The seat utilization metrics, which the company typically provides as a measure of infrastructure productivity are not meaningful given the current work-from-home environment.

I would now like to provide you with a brief financial summary of fiscal 2021 before discussing our outlook for the coming year. Net revenue in fiscal 2021 came in at $868.7 million, down 3.1% on a reported basis and 3.3% on a constant currency basis. Full year revenue was adversely impacted by the COVID-19 pandemic, which created supply challenges during the first half of the year and resulted in lower transaction volumes throughout the year for verticals such as travel and auto claims. These headwinds were partially offset by healthy growth in both new logo signings and expansions of existing relationships.

The company's fiscal 2021 adjusted operating margin came in at 21.5%, down from 22% -- 22.7% reported in fiscal 2020. Pandemic-related margin headwinds associated with lower revenue, business continuity and carrying cost of excess resources were partially offset by reduced expenditures for travel, facilities and other discretionary items.

Margins also benefited from favorable currency movements, net of hedging. Our effective tax rate for the year was 23.3%, up from 19.8% last year as a result of a change in the mix of profits by geography. This profit shift was primarily driven by the pandemic-related costs of carrying of excess resource and business continuity in lower tax geographies, including India and the Philippines.

As a result of the reduced revenue and margin levels and the higher effective tax rate, full year adjusted net income and adjusted diluted earnings per share declined 12% in fiscal 2021, coming in at $141.7 million and $2.72, respectively. The company generated $213.7 million in cash from operations and $187.2 million in free cash.

During the year, WNS repurchased 1.1 million shares of stock at a cost of $78.6 million or $71.42 per share, spent $26.5 million on capital expenditures and made scheduled debt payments of $16.8 million. We ended the year with a net cash balance of $378.4 million or approximately $7.26 per diluted share.

In our press release issued earlier today, WNS provided our initial full year guidance for fiscal 2022. Based on the company's current visibility levels, we expect net revenue to be in the range of $945 million to $997 million, representing a year-over-year growth of 9% to 15% on a reported basis or 7% to 13% on a constant currency basis.

Revenue guidance assumes an average British pound to U.S. dollar exchange rate of 1.38 for fiscal 2022. Consistent with our guidance approach in previous years, we currently have 90% visibility to the midpoint of the range, and our projections do not include any uncommitted short-term revenue. Guidance assumes a top line headwind of approximately 9%, which factors in normal year-over-year productivity commitments, known project ramp-downs and the impact of the early contract renewals.

Full year adjusted net income for fiscal 2022 is expected to be in the range of $152 million to $164 million based on a INR 74 to U.S. dollar exchange rate for fiscal 2022. This implies adjusted EPS of $2.98 to $2.21 (sic - see press release, "$3.21"), assuming a diluted share count of approximately 51.1 million shares. With respect to capital expenditures, WNS currently expects our requirement for fiscal 2022 to be up to $35 million.

We'll now open up the call for questions. Operator?

(Operator Instructions) Our first question comes from the line of Moshe Katri of Wedbush.

Two, I guess, questions here. First, it's a pretty wide range for top line growth for the fiscal year. Is it all predicated on what happens on the -- in the travel vertical? And if so, maybe you can talk a bit about some of the factors that you're tracking, and obviously, some of the airlines are talking about improving bookings. I'm assuming this is a positive proxy for that business. Maybe some more things that you're kind of tracking here.

And then the follow-up is more on margins. What sort of non-GAAP EBIT margins are we kind of factoring in the guidance for fiscal '22?

Sure. So maybe I'll take that -- the first part of that question. This is Keshav. As far as guidance is concerned, all that we are doing is following a very consistent philosophy that we have followed across the years. And we're delighted that after the gap of last year, we have now actually gone back to our traditional way of delivering our revenue guidance. And so it's a visibility-based guidance that we provide. So all that you're seeing there is just going back to a consistent theme. Nothing really to do specifically with travel as an industry. However, since you asked about travel, I mean, I'll request Gautam and Dave to talk a little bit about what we're seeing there as well.

Thanks, Keshav. With regard to the travel industry, as Keshav had also alluded in his prepared remarks earlier, we are starting to see an increased forecast in terms of volume demands from our clients as domestic travel starts improving. Some of these volumes have been adjusted against reduction in cancellations and refunds. But overall, the growth forecast have been included into our guidance figures.

Yes. And let me just add a little bit of color on that, Moshe. I think when you look at the guidance, as Keshav mentioned, the philosophy remains completely unchanged. So we start the year similar to where we had been in the past, which is 90% visibility to the midpoint of the range. There is no short-term revenues. And as Gautam mentioned, the only travel recovery that we have projected is where our clients have forecasted and committed to those increases.

So while there is a little bit of a travel recovery built into these numbers, there is, by no means, a complete recovery of the lost business over the past 1 year, 1.5 years, built into these numbers. If that happens, it certainly gives us opportunity for upside as does the opportunity to have short-term revenues, which we typically see some amount of every quarter.

The second part of your question was around the margins. And I think when you do the math to the EPS guidance range that we've given, what you'll see is that the operating margin assumption for this year is between 21% and 22%, which is at the higher end of that 20% to 22% that we've historically kind of guided people to and consistent with where we were last fiscal. So we feel pretty good overall about the approach being consistent and the fact that we've got some sizable opportunity here if things line up well for us to have a really good year.

Your next question comes from the line of Bryan Bergin of Cowen.

Just a follow-up on growth here for fiscal '22. Can you just dig in a little bit more on some of the underlying factors? How are you thinking about industry attribution in that full year range? And can you give us just a sense of how the growth cadence expectations play out within the fiscal year?

Yes. Look, I think -- thanks for the question, Bryan. I think the good news about our business is when you look at the expectations for fiscal '22, we're really expecting -- with the exception of the utilities vertical, we're expecting good, healthy, broad-based growth, similar to what we've seen pre-COVID. We believe that we'll see a little bit of a rebound here based on what our travel clients are telling us.

Also important to remember that a lot of the headwinds that we saw in fiscal '21 were supply-related in the first half of the year. So we, obviously, took a step down, but what you've seen is that nice healthy sequential progression in our business over the last 2 to 3 quarters. And we see no reason given the new logos that we've added and the expansions that we've signed, including the early renewals of some of our larger contracts in terms of what that does.

When you look at the cadence for fiscal '22, the expectation is similar to what we've seen in prior year that the Q1 is relatively soft sequentially because we have productivity improvements, because we have the annual contract renewals and because we also have the wage increases, which are now coming back into play here in April for this fiscal year.

Q1 is going to be sequentially flattish to slightly up on the revenue line, but we are expecting margins to be reduced versus Q4 levels in Q1, similar to the seasonality that we've seen in previous years.

Okay. And then the 9% year-over-year productivity headwind, that seems high relative to the historical range you've had. Can you just dig in a bit more on the primary drivers there? Is it predominantly because you've renewed some of these large engagements, and that's the main driver? Just further color around that, please?

Yes. Look, I think -- and Sanjay can add some color here. But we've typically seen anywhere between 6% and 11% as the productivity project ramp down, project-related work headwinds on a year-over-year basis. We're seeing 9% this year. And the reason it's a little bit larger than it's been in the previous years is exactly what you mentioned, Bryan. It's because we have renewed, as Keshav mentioned in his prepared remarks, 9 of our top 25 clients, several of them early prior to contract renewal expiration, which is a great thing longer term for us. And we have baked in the productivity and transformation improvements that clients are requiring.

So I think some of this is the fact that we've really just renewed these contracts early. And as a result, when you renew 25% of your business in a given year, you're going to see a slightly higher headwind. Obviously, with an average term of 5 years on most of our large contracts, the expectation would be in a normal year, we'd see a 20% of our business being renewed. This year, we've got a much larger percentage because of these early renewals.

Your next question comes from the line of Mayank Tandon of Needham.

I wanted to start with the pace of client signings. I think you had what seems like a record year in terms of client -- new logo wins. And I wanted to just get a sense on either from Keshav or Dave, if you think that the ramp-up times are changing, in other words, accelerating, given there's more pressure on businesses to leverage BPM? And could that ultimately transit into higher growth than you've seen historically, maybe not in fiscal '22 it sounds like based on your guidance, but longer term?

Mayank, yes, thanks for that question. So I think the first thing I want to mention is that we are really excited about these renewals, the pipeline that we spoke about and really the potential for the industry. Now, one of the things I must mention is that while traditionally, we have always led from the front in terms of the transformational agenda and the technology-led agenda, what COVID-19 actually has done for us is it has actually separated the great performance -- performers from the so-called also-rans. And I think that WNS has now got positioned very, very strongly in the minds of existing clients as well as new prospects and -- as well as advisers as a company that actually managed the uncertainty extremely well.

The first thing I will say is there's a lot of comfort in terms of how we managed the crisis. And therefore, with some of these new renewals that we looked at, not only do we have the hunting license to go after the existing areas of business but there's a lot of confidence that we can go after completely new uncharted areas in those client environments.

The second is in terms of just what the advisers and the analysts have been recommending to the prospects is all about the positive agenda that WNS has been driving with clients. And again, we are actually seeing that anyone who has a growth agenda, a transformation agenda or who has not dipped their toes in this model is now scurrying quickly to make sure that this model is part of their overall global model, I would say. And again, in that area, WNS scores very well.

The third thing I will say is nobody expects that the pandemic has disappeared forever, right? I'm sure that even on the client side, there is an expectation that there will be volatility driven by this pandemic. And again, there is a lot of comfort in terms of how WNS handled it in the past, how well we are prepared for the future, and therefore, if there is volatility, how we will manage it. And I think that is what CEOs on the client side are responsible for, to make sure that they introduce certainty into their businesses.

So from my point of view, I will say that we are excited about the future. I actually think that BPM 3.0 is now here. I think the next decade is one of accelerating growth. Let's wait and watch. We have to make the right investments in the right areas, but WNS is well prepared.

Yes. And I think just to add to Keshav's comments, Mayank. Look, we're certainly very pleased with the deal signings this past year and the acceleration of those signings in the midst of the pandemic. But as we always do, our guidance is based on visibility. It's based on what our clients have committed to. So certainly, if we see the pace of acceleration pick up and clients move faster, there is very clearly an opportunity in the next couple of years for the overall growth rate in the company to accelerate. But that's completely predicated on the time lines that clients give us. And how they move from the first wave of processes to the second wave of processes, for example. But yes, we're certainly pleased with the opportunity that we've created for ourselves based on our sales efforts this past year.

That's helpful color. Just a very quick follow-up around pricing. Again, I understand the impact of productivity improvements on the model. But is pricing conversations now turning more favorable given demand seems to be back to at least some level of, call it, normalcy relative to pre-COVID ex travel? And is that something we should maybe consider in the model as well in terms of any pricing impact on new logo wins?

Yes. In terms of pricing impact, in fact, it's the reverse. As clients are demanding more productivity benefits and digital infusion, and for companies such as us who're able to provide those, we are actually starting to see a bit of a premium compared to the pre-COVID days being brought in.

Right. I mean I think it's always important, Mayank, to separate the concepts of pricing and discounts from transformation, productivity and total cost of ownership, right? So I mean, certainly, clients want things to run better. They want things to run faster. They want to improve the customer experience. They want to make better decisions. And those are really what are driving these initiatives.

But at the end of the day, we also know they want to save money. And they're less concerned with unit pricing than they are with the deliverables that their partners are being able to deliver for them. So while there certainly is always going to be an eye on cost, if you will, it's more about the benefits we can deliver in aggregate than it is unit cost. And we have not seen discounting or unit price reductions become an issue with either new logos or renewals of existing relationships.

Your next question comes from the line of Maggie Nolan of William Blair.

I wanted to dig in on those renewals that you saw a little bit further. Were there any changes in terms of the nature of these contracts or the term of these contracts when you think about things like the delivery method or just kind of the nature of the relationship and how that ramps over time or any other areas of interests?

Yes. Each of the renewals, Maggie, have been associated with increased transformation and digitization. That's a common theme across every renewal. And the fact that most of these renewals have happened a few years ahead of the term speaks about the fact that we understand the domain. We are able to manage the end-to-end processing capabilities and then infuse digitization, which enables them to actually gain more productivity benefits, that's gotten a favor. And at the same time, what that has done, as Keshav alluded to a previous question, opened the doors in uncharted territories where we actually were not playing in earlier.

Yes. And if I may just add, Maggie, as Gautam said, I think the key change is the expectation of this digital transformation based on what they have seen with us across the years and the acceleration they saw around some of these themes in the last 1 year. The whole hyperautomation kind of theme is something which is critical to all of these clients. And again, a lot of comfort from a WNS point of view.

The other thing I will say is, in the model, work from home has also been established. I think the comfort that they drew from us over the last 1 year is something that they would like to have in the long-term model as well, and increasingly, the ability for them to move towards much more transaction and outcome-based pricing model. I think all of this put together means the opportunity for us to actually drive a greater kind of wallet share with all of these clients is now much higher.

I think at the end of the day, too, Maggie, it's important to understand that these early renewals with very large clients show their confidence and comfort in not only what we've been able to do for them in the past but what they believe we can do for them in the future. And by going this route, we're able to avoid competitive RFPs. We're able to sit down with the client, understand what they're trying to accomplish and help them chart out a path or road map for them to get there. And they view us as a partner and not as a vendor. And I think when you can change that kind of a dynamic, you're going to be very well positioned to drive your relationship forward with that client.

Okay. And then to build up on some of Keshav's comments. Do you think it's necessary post COVID to go back to in-person transitions, particularly for new clients? And then what are your thoughts on this from a cost perspective as well?

Yes, from a transitions perspective, Maggie, in fact, the last year, we have actually done multiple thousands of roles in terms of new clients and growth in work from existing clients all and entirely virtually. And as a company, what we do is track voice of transitions as a score with all our clients. And in fact, the company has had amongst the highest voice of transition scores from our clients than in the past 10 years.

So the transition model from a virtual perspective is here to stay, whilst the costs associated with transitioning have actually dropped significantly, and now it is going to be based on client to client, the comfort levels, because we are confident that we can actually transition 90% of any work easily remotely.

Yes. I think Gautam's last comment is the key one to focus on here, Maggie, that at the end of the day, the clients are going to drive whether those transitions are done remotely or in person based on what their comfort level is doing that. And if it means we have to get on planes and go to the client sites to do transition, that's what we're going to do. But certainly, the model has been validated. We've proven it can be done successfully. And hopefully, clients will understand and appreciate that and increasingly, like all of us, get adapted to the new model.

All right. And congrats on the nice guidance.

Thanks, Maggie.

Thank you, Maggie.

Your next question comes from the line of Ashwin Shirvaikar of Citi.

Good quarter. My -- so it's a 2-part question. One is I wanted to kind of see if you can give examples of how digital transformation is possibly increasing your TAM. And in regards to that, 2 things I wanted to ask. One is velocity or pace of ramp and the impact on that. And then strength of pipeline and whether you can give any color on whether sequentially or year-over-year, it keeps growing because of digital transformation.

Yes. From -- Ashwin, Gautam here. Good 0questions. So the first one, from our perspective, what we are seeing is customers are getting a lot more comfortable with virtual transitions. And a large part of these transitions, as we predicated, involve end-to-end processing capabilities.

So what started off as a piecemeal approach with clients as they started getting a lot more comfortable, what we are starting to see now is in terms of the size of transitions is starting to increase significantly. It's almost similar to the in-person transition levels that we are starting to see. So that's actually helping us quite significantly.

And also from a pipeline perspective, what we have seen, as Dave mentioned earlier, whilst the overall pipeline is broad-based and extremely healthy, the biggest differential between medium-sized deals and the large-sized deals was the planning around transitions and transformation. And what we are seeing now is a number of large-sized deals flowing through the pipeline quite healthily.

Got it. Got it. And then on the supply side, and this is a clear feedback we seem to get across the board is that there are building supply challenges in terms of either talent availability or attrition. So with that as a backdrop, any thoughts on specific things you're doing to control attrition? Any commentary on specific hiring plans? Does work from home actually help in this whole process? Any thoughts there.

Sure, Ashwin, I'll take that and have others follow up. But you're very right. I mean the very fact that you're asking this question, and where -- everyone is experiencing this, the space is hot again. I think that's the key message out there.

The fact that demand is coming back, and for the smarter companies like WNS, there is a strong pipeline, there is a need for the transformational agenda to be delivered, there is a need for the right kind of people, shows that demand is back.

Now from our point of view, I think the core is, first and foremost, ensuring that our employees and the market generally sees us as the best brand to work for. Nothing beats that model, first and foremost.

Second thing is rather than go out and keep hiring, and we spoke about numbers and the number of hires we made in the last quarter. But the reality is our focus has been to train and upskill people within the company as a result of which they are continuously seeing job enrichment, and therefore, want to build a long-term career for us.

Third thing I will say is the models that we are focused on in terms of getting our people comfortable with work-from-office or work-from-home models. Now clearly, everyone has been talking about work from home, but one of the key things that we've also been doing inside WNS is also focusing on work-from-residence models, which is you have to understand that in many of the delivery geographies, people working from home are not working from their actual homes because some of them actually have come from Tier 2 or Tier 3 cities into a Tier 1 city to work. And those are rented accommodations. Those are not really their homes.

But with the changes that, from an industry point of view and from a company point of view, we were able to influence with governments in India and other places, we're now able to actually move the model into people's actual residences as well. And again, that creates stickiness and also will impact the attrition rate positively.

So overall, I'd say that these are some of the steps that we are doing, most importantly, ensuring that this is a safe place to work in. This is an exciting place to work in. And WNS is seen as a company where they can build long-term careers with. That is the secret sauce.

And I think, Ashwin, as Keshav just mentioned, it's just reflective of what's going on overall, right? The industry is healthy again, growth has resumed. And as a result, what you've seen is attrition picks up, compensation increases starts to flow, promotions start again. So this is just the normalization of our business. Is there going to be added pressure for specialized roles and niche types of skills? Absolutely. But as always is the case in these industries, the best way to create those capabilities are from within as opposed to going out and having to pay 2 or 3x to find those skills externally.

And maybe Ashwin, I'll just add over there that during this whole pandemic, we have been carrying those resources. We have been employing them, and that has gone really well, and that also helps really to attract the talent because our employees do want to work for such an organization who have really taken care of them in -- during such hard times.

Your next question comes from the line of Dave Koning of Baird.

Nice job. I guess, first of all, just a couple of questions, I guess, on verticals. It looks like health care was kind of flattish sequentially. I think the last 5 years, I looked it was up 7% to 19% sequentially. So normally, you've got some pretty big sequential ramp, which didn't happen this year. Maybe just comment, I guess, on that first.

And then you mentioned a little on travel, too, just how -- I know in dollar terms, it was the lowest quarter of the year even as kind of volumes have been ramping just in the U.S., just -- I guess -- so those 2 kind of vertical questions.

Yes. So on the health care vertical, one of the reasons from a sequential perspective, what we've been talking is the early contract renewals and some of the productivity and the digital transformation, what needs to be there. So one of the renewal was in the health care vertical. So that was one of the reason over there.

And from a travel perspective, in quarter 3, there was a nonrecurring revenue, which was the -- which was not there in quarter 4. So that is the reason of a reduction. And having said that, Keshav alluded that the volumes are coming back in the travel vertical. Whatever the client has committed, we have already baked in as part of our guidance, but that's not like a full recovery because as we move forward and as the travel industry recovers, we expect that to come back.

Yes. And just to add a little color to Sanjay's comments, Dave. In the health care, not only did we have our largest client renew their contract with us but we also do have a seasonality issue in the health care vertical with the pharma space. So we do tend to see that sequentially Q3 to Q4 is a little bit of a slow growth quarter for us because of the -- our footprint in the pharmaceutical space. That's why health care, while it was down 1% sequentially, despite the renewals, was actually up 16% year-over-year. So you do see the healthy growth.

And again, as Sanjay kind of alluded to on the travel side, important to understand that sequentially, we did have a lot of short-term revenues in last quarters that created a tough comp for us this quarter. And as Gautam mentioned earlier, as we look forward, while we did see some pickup in new bookings in our fiscal fourth quarter, we also saw a drop in cancellations, refund activity, customer query activity. So a little bit of an up and down while we kind of chew through some of the cancellations, some of the rebookings that were a little bit abnormal. But I think as we move through fiscal '21, the expectation is that our travel cadence will start to look a little bit normal.

Got you. No, that's helpful. And just a quick one. Tax rate for fiscal '22, I was kind of assuming pretty flattish, like 23% or so. Do you have any comments on that?

You're right. It's going to be flattish from the next year perspective. It will be in the range of 23% to 24%.

Next question is from the line of Puneet Jain of JPMorgan.

Can you talk about various margin puts and takes for fiscal '22? I'd imagine lower short-term revenue assumed in initial guidance, that should be a headwind. But you will also likely incur higher facility expenses as you return to office. So can you talk about relative magnitude of various headwinds or tailwinds for margins in the outlook?

Yes, Puneet, so -- Sanjay here. So some of the headwinds from a margin perspective as compared to this year is definitely -- we spoke about the wage comes back to the pre-COVID normal level. So that's going to be there. As you rightly said, the facility utilization as work from office may keep on gradually improving, so that may increase. And if you recall, during this financial year, to support some of the employee carrying costs, we did change our leave policy. And there was a reversal in quarter 2. So that will get reinstated back.

Our continuous program on the acceleration of our digital investments, that's going to be there. And with some of the tailwind is going to be around the productivity improvements, some of the volume growth from the new logos as well as some of the initiatives what we are going to drive, that's going to be there.

So having said that, between the tailwinds and the headwinds, we expect, as Dave mentioned, 2022 to be around 21% to 22% of our operating margin, which is going to be the pre-pandemic level.

Yes. And just to reiterate what Sanjay said on the leave policy and to give you a little bit of color there, if you remember, we took about a $4 million reversal in our leave accruals in the fiscal second quarter of 2020, which helped offset some of the cost of carrying excess resource, as Sanjay mentioned.

So when we move forward to this year, not only do we not have that reversal of $4 million but we actually have to go ahead and now accrue for leave policies for fiscal '21. So it's actually almost a doubling. And as a result, we've got almost 100 basis point headwind just from the leave -- the change in the leave policy on a year-over-year basis. So we're pretty pleased that we can sit here at the beginning of the year with all of these margin headwinds that we've discussed and talk about a situation where we expect margins to be relatively flat and still at the high end of the range for what our outlook is for company margins.

Understood. And I understand higher visibility and more digital transformation nature of work on these renewals, but are these typically initiated by clients over proactive steps taken by WNS? And also does higher digital work represent incremental volume? Or it just changes the nature of delivery for you?

Yes, Puneet. A number of these discussions were initiated by WNS. And actually, to be honest is that it centers around the theme of co-creation, at the end of the day, in terms of building the right digital transformation and solution at the end of the day. And what that is actually enabling is, as we mentioned earlier, the confidence with which we are implementing these digital transformation is permitting the clients to open a number of other doors for us, so increasing our wallet share with each one of these clients.

I mean this is the classic example, Puneet.

Puneet, I think I must mention -- sorry, Dave, I'll just finish off first. Puneet, I must just mention that when a client is able to move quickly on these kind of decisions based on something that has been started from our end, it clearly shows confidence in the partnership, the resiliency of the relationship, and more importantly, how we have grown each of these relationships even in the last 1 year. I think I want to point that out.

This whole co-creation theme that Gautam spoke about is something that is impacting every one of our key clients in a positive manner. And I think the confidence comes now from the fact that not only do they want us to help with these themes across existing books of account but some of the areas that they were trying to handle by themselves in the past are now opened up for WNS to play in, right? And I think, therefore, that is where the exciting opportunity is for the long term. And I think from our point of view, I think all of that is really positive for 2022.

Yes. And I think just to reiterate what both Keshav and Gautam have said, the reality is, Puneet, that if you're trying to drive digital transformation in an organization, what you want to do is include the most processes possible to make sure that they're all working in harmony with each other. And if you try and transform one part of the organization and leave the other part out, you're not going to get that benefit that you're really looking for.

So the best way to drive benefits to a client is to have a digital transformation initiative that goes end-to-end across the organization and from front office to back office. And the reality is, when you sit down and have these conversations, by definition, what's going to happen is increasing pieces of the business will come into scope. And that's what we're seeing.

Your next question comes from the line of Sam England of Berenberg.

The first one was just a follow-up on the health care vertical. I was just wondering what impact you think the pandemic is going to have on the pace of BPO expansion in the health care vertical longer term. And also linked to that, how are you thinking about the environment for health care growth as we head into first -- the fiscal 2022?

Yes. We continue to be bullish with regard to the health care vertical, Sam. In fact, what we are starting to see is, whilst there is definitely an increase to spend in terms of the BPM activities with the life sciences companies, we are equally seeing growth from the payer side of the business, and to some degree, also the provider space. And we do expect to continue to see -- have this momentum in at least the next couple of years is what our anticipation is as more and more of these companies look to innovate and digitize whilst reducing the cost of care provided to the customers.

Yes. I think it's always important to remember, Sam, that despite the healthy growth that we've seen and the activity levels that have picked up through the pandemic, this is still a very immature, underpenetrated vertical. And as a result, the opportunities are pretty significant across the 4 key elements of the health care space: the payer, the provider, the pharma and the devices side. So we really are, as Gautam mentioned, bullish and see huge opportunity here for us to really create value for our clients.

Great. And then the follow-up. I was just wondering if you've seen any renewed disruption to service delivery over in India given the rising cases that are being reported over there? Or do you think now you're in a better place to deal with it than you were at the start of the pandemic because of some of the planning you've done over the last year?

Absolutely, Sam. In terms of -- we see minimal disruption despite the rising cases of COVID across some of the delivery locations. It's also because the learnings from the earlier phases has helped us be better prepared to manage the eventualities now. So we see, again, to reiterate, minimal disruption.

Yes. I think you are going to see as waves of the pandemic hit, we've seen this over the last 3, 4 months, some meaningful swings in terms of the number of people that we have in office, but very small swings in terms of our ability to service and deliver for clients.

So to give you a great example, Sam, we averaged a little bit over 99% of delivery in the fourth quarter. We're still, today, delivering a little over 99%. So it's been consistent. But the work from office peaked at about 23% in the fourth quarter. And today, we're at 17%. So as the case counts in India and the Philippines have picked up, what we have had to do is move more people to a work-from-home model, but we have not seen that impact our ability to deliver for our clients.

Your next question comes from the line of Vincent Colicchio of Barrington Research.

Nice quarter, guys. Could you provide an update on the pace of large new deal ramps?

Sure. I'll take that, Vince. No real change, I think, for the very large transformational kinds of deals. Clients still are moving slowly, although I think there's been a little bit of a sign here that things may be picking up. But certainly, the approach that clients are taking for things that are so disruptive to their organizations and so transformational to their organizations, they want to plan well. They want to understand exactly how this is going to impact them. And they want to move slowly. We are seeing good healthy acceleration in terms of the expansion opportunities with existing clients and the smaller new logos, but no real change in terms of the pace on the very large transformational deals.

And in terms of the 9 new clients added in the quarter, could you provide some more color on that or any of these takeaways? Do you think any of these could become large strategic clients?

I can take that. The good news, again, is kind of similar to what we've seen before. The 9 new clients were spread across multiple geographies, reflecting the broad-based health of the growth and the broad-based nature of the pipeline. We added new logos in insurance and banking and health care and shipping and logistics, in utilities, in retail. So several of our verticals were represented. Of these new logos, I would say there are 1 or 2 that represent pretty sizable potential for us over the next couple of years.

Your next question comes from Korey Marcello of Deutsche Bank.

I was just curious, just given the size of deals are smaller, but the number of deals has kind of accelerated, is there some kind of apples-to-apples kind of comparison you can give us maybe like total ACV signed on a year-over-year basis?

And then you've talked a lot about those deals kind of expanding through the year. Any sense of how large kind of some of those deals could become? Are you starting to see people start to move towards that? Just any kind of sense of that?

Sure. I'll take that, Korey. Look, I think we're pretty pleased, as I said, with what we've seen in terms of the new logo signings. And in terms of ACV, TCV metrics, certainly, because we've signed more of both existing logos and new logos, there's going to be more ACV in there, albeit some of those larger deals, as we've talked about, are a little bit smaller to start with. So I do think there is some upside to both ACV and TCV from historic levels.

But what is really exciting is of these several large transformational opportunities that have been signed this year, when you look at what their intention is over the next 3, 4 years, there's potential for these to be top 10 customers. So if they continue to move down the path and they continue to do what they say they want to do in terms of transforming their organizations and continuing to run them with WNS, we see sizable opportunity for changes in the names in our top 10.

Yes. I'll just add a little bit there. I think the second part of Dave's answer is really exciting for the industry and for the company because when you look at all the traditional verticals that WNS operates in, we may have seen muted activity during the pandemic and during COVID itself. And in fact, if you look at each one of them, the green shoots we are seeing at this point in time is clients now actually starting to place their bets in terms of going back to some kind of normalcy. And therefore, going after new areas of transformation that they may not have attempted last year.

So for example, we spoke a lot about health care earlier. But the reality is, when you look at the news outside and the activity outside, you will see that across the globe, people have been focused a lot on just managing COVID itself and managing vaccine creation, and many people actually have reported ignoring traditional regular illnesses, right?

So I actually think that with confidence coming back about the vaccine starting to work in some of these geographies, the traditional areas are all starting to come back, and clients are, therefore, placing their bets in those areas. Same thing we're seeing with the insurance side, where we're starting to see interesting activity in new areas. Same thing that we are seeing in the retail and CPG side, where for almost a year, people focused completely on essential services, now they're taking their bets. And therefore, a lot of these deals, while they may start small, I think what we'd like to focus on is the logos, the kind of brands they are, the global nature of those companies and the fact that they have huge potential for the long term.

Got it. And then I just wanted to follow up on travel. I know you guys have spoken a lot about that in the quarter. But if I recall, on the way down, some of those forecasts were pretty conservative. Is there like a way that you can help us understand how those forecasts are made and how conservative those might be?

And then just as a quick clarification question. Any kind of color you can give us on sort of the FX expectations with the hedge gains and things like that?

Yes. Sure. So let me start. You want to go ahead, Gautam?

Yes. In terms of the forecast that the travel companies make at the moment is, of course, they are quite conservative, given the number of lockdowns and the changing waves of the COVID scenario is on a country-to-country basis. So the way we have started extrapolating at the moment is basis countries and the domestic travel that they have to undertake. The second area, which actually benefits from a forecasting perspective has also been the consolidation that a number of these vendors have done in terms of -- a number of these clients have done across vendors, that is also lending towards the positivity in terms of the forecasting mechanism with us. So broadly conservative, but yes, we continue to see increased momentum in terms of the forecast.

Yes. And in reality, all we've included in the guidance at this point is what our clients have committed to. So during the pandemic, what we would originally get is a forecast that showed declining volumes over a period of time that they had the ability to kind of ratchet up as they get closer and closer to the actual execution date. What we're seeing now is that those forecasts are much closer to flat or static with the opportunity to ratchet up in the case that volumes exceed what they expect. So we've clearly seen that behavior change. And as a result, that's part of the reason that we have incorporated a little bit of an uptick in travel into our fiscal 2021 guidance -- '22 guidance, sorry.

At this time, we have no further questions in the queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.