WNS (Holdings) Ltd (WNS) 2021 Q1 法說會逐字稿

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

Now I would 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 first quarter 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 first quarter ended June 30, 2020. 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 company's Form 20-F. This document is also available on the company website.

During the 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 hope you and your families are safe and well. As our financial results show, COVID-19 had a material impact on our business in the fiscal first quarter of 2021.

Net revenue for Q1 came in at $201.4 million, which represents a year-over-year decrease of 5% on a reported basis and a 2% reduction constant currency. Sequentially, net revenue was down $34 million or 15% on a reported basis and 13% constant currency.

Q1 revenue included a full quarter of COVID-related supplies and demand impacts versus just 2 weeks of headwind in the previous quarter. We currently estimate that the pandemic has adversely impacted client demand by approximately 7% from our pre-COVID run rate with the majority of the remaining revenue pressure coming from supply constraints. Despite the challenging environment, WNS was able to deliver adjusted operating margins of 17.5% in Q1 and generate positive free cash flow.

Working with clients, WNS has transformed our delivery model with agility to a work-from-home approach. Our delivery capability steadily improved throughout the quarter and on average the company was able to supply 92% of demand during the first quarter. At present, WNS is now servicing 95% of our clients' requirements, which represent the current maximum delivery capability in a work-from-home model.

Further, improving supply beyond this level will require relaxed lockdown restrictions as clients have not authorized WNS to perform the remaining process work remotely due to its sensitive nature. We are safely, slowly and cautiously moving employees back into our facilities as and when local authorities allow and within prescribed social distancing and safety practices. However, at this time, we are not planning to move large numbers of employees back to the offices until the pandemic is behind us.

This conservative approach will help mitigate risk associated with potential virus surges and associated disruptions to our operations. In addition to increasing our delivery capacity over the past quarter, we have also further enhanced our work-from-home cybersecurity in the areas of remote access, endpoint security and threat intelligence and monitor.

We have co-created over 200 unique solutions approved by our clients that today deliver information and cybersecurity that is similar to our in-office capabilities. WNS is also in the process of implementing a new future-state hybrid model that will allow us to seamlessly move delivery between office and home. We continue to place the health and safety of our global workforce along with ensuring the ability to securely service our clients as our top priorities.

The client feedback we have received regarding WNS' approach to the pandemic has been extremely positive, including our partnership approach, executive level communication and commitment to support and maintain service. We've been working closely with clients to manage their near-term challenges, including lower volumes and business uncertainty, while also beginning to help them prepare for the post-COVID environment. For some clients, we have extended concessions on minimum volume commitments as well as payment cuts.

At the same time, many clients have seen their businesses stabilize in June and July and are increasingly willing to discuss and move forward with relationship expansion plans. These conversations have largely focused on 3 areas: driving improved competitive positioning and reducing cost; two, accelerating digital transformation; and three, improving operational flexibility by adjusting engagement models.

Perhaps even more encouraging, we are also seeing new clients willing to move forward with RFIs, RFPs, contract negotiations and deal signings. In the fiscal first quarter, we closed 7 new logos despite the difficult environment, adding a new relationship -- rather adding new relationships in the insurance, health care, consumer products, banking and professional services verticals. The clients include a firm outsourcing for the first time and a takeaway deal from a competitor who was unable to provide adequate service during the COVID lockdowns.

In addition, one of the new wins is a strategic relationship in the U.S. property and casualty insurance space, which has the potential to be highly impactful in the claims management marketplace and a large account for WNS. We are also happy to report that both existing clients and new prospects are increasingly willing to forgo traditional in-person transition plans for virtual or remote transitions in order to help expedite business benefits. While it may take some time for new deals to convert into meaningful revenue, these are clearly positive signs.

Overall, our pipeline remains very strong, and although some opportunities have been delayed to date, we have not seen project cancellations. While it does appear that new business momentum is starting to pick up, the company will remain cautious regarding the potential for additional COVID-19 waves, further economic impacts and overall business volatility.

In the fiscal first quarter, WNS actively managed discretionary spending but did not make significant changes to global head count levels. In the second quarter, the company will be proactive about addressing not only discretionary expenses but also adjusting our compensation costs and the mix of resources across skills and geographies. These actions are necessary to bring our costs more in line with today's revenue, position our business for growth opportunities and fund ongoing investments.

WNS does not plan to change our commitment to enable co-creation and will continue to invest in domain expertise, technology and automation, advanced analytics, business transformation and the reskilling of our global workforce.

In summary, despite the current environment, WNS remains confident in our financial stability, differentiated capabilities, solid underlying business momentum, and proven ability to execute. The company is properly positioned to help clients navigate through COVID challenges and transform their businesses for post-COVID success. We have seen nothing in the past few months that changes our belief that this pandemic has the potential to serve as a catalyst for accelerating the adoption of BPM and a shift towards higher end digital solutions and agile engagement models. In the meantime, we must remain vigilant to ensure our employees remain safe and the rapidly changing needs of our clients are met.

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

Thank you, Keshav. In the fiscal first quarter, WNS' net revenue came in at $201.4 million, down 4.8% from $211.6 million posted in the same quarter of last year and down 1.9% on a constant currency basis. Sequentially, net revenue decreased by 14.6% on a reported basis and 12.5% on a constant currency basis.

WNS estimates that in quarter 1, COVID-related demand reductions impacted revenue by approximately 7% and supply constraints reduced revenue by approximately 8% from our pre-COVID run rate. COVID-related demand reductions were largest in the travel, insurance, utilities and retail verticals, while supply challenges pressured all verticals.

Revenue, both year-over-year and sequentially, was also adversely impacted by currency movements, net of hedging. In the first quarter, WNS recorded $6.5 million of short-term nonrecurring revenue, which was booked at margins above company average. This onetime amount were driven by business continuity pass-through charges, the timing of client sign-offs on work performed, fees associated with client ramp-downs and some short-term project work.

Adjusted operating margin in quarter 1 was 17.5% as compared to 22.8% reported in the same quarter of fiscal 2020 and 22% last quarter. Both year-over-year and quarter-over-quarter, the adjusted operating margin reduction is the result of COVID-related revenue impacts including lower demand and supply constraints, the cost of carrying excess head count and additional expenses associated with business continuity. These headwinds were partially offset by favorable currency movements, net of hedging, proactive management of discretionary spending and lower travel and facility-related costs.

Margins for the quarter were significantly above prior expectations as the incremental revenue generated in quarter 1 came with very little additional cost. The company's net other income expense was $0.5 million of net expense in the first quarter as compared to $0.8 million of net expense reported in quarter 1 of fiscal 2020 and less than $100,000 net expense last quarter.

Year-over-year, the favorable variance is attributable to lower interest expense resulting from scheduled debt repayment and reduced IFRS lease interest costs which more than offset reduced interest income, resulting from lower rates. Sequentially, the increase in net expense is due to reduced interest income, driven by lower interest rates which more than offset lower interest expenses from debt repayment and reduced IFRS lease interest costs.

WNS' effective tax rate for quarter 1 came in at 25.1%, up from 20.7% last year and from 18.3% 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 1 was $26.1 million compared with $37.6 million in the same quarter of fiscal 2020 and $42.4 million last quarter. Adjusted diluted earnings were $0.50 per share in quarter 1 versus $0.72 in the first quarter of last year and $0.82 last quarter.

As of June 30, 2020, WNS' balances in cash and investments totaled $321.1 million, and the company had $33.5 million of debt. WNS generated $25.1 million of cash from operating activities this quarter and incurred $6.4 million in capital expenditures, of which $2 million were for purchases of desktops and laptops related to COVID-19 work-from-home delivery.

DSO in the first quarter came in at 39 days as compared to 30 days last year and 31 days last quarter. The increase in DSO is a result of temporary payment term concessions provided to several clients and some connection delays. From a cash flow perspective, this impact was largely offset by improved management of accounts payable.

With respect to other key operating metrics, total head count at the end of the quarter was 43,422, and our attrition rate in the first quarter was 11%, down from 34% reported in quarter 1 of last year and from 30% in the previous quarter. The lower attrition rate reflects the impact of COVID-19 on global labor markets during the quarter.

Built seat capacity at the end of the first quarter remained steady at 34,779. 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.

In our press release issued earlier today, WNS provided guidance for the fiscal second quarter and continued the temporary suspension of annual guidance. For quarter 2, based on the company's current visibility levels, we expect net revenues to be in the range of $198 million to $208 million, assuming an average British pound to U.S. dollar exchange rate of 1.25 for the quarter. We currently have over 98% visibility to the midpoint of the range and guidance does not include any short-term nonrecurring revenue.

Second quarter adjusted net income is expected to be in the range of $24 million to $30 million based on a INR 75 to a U.S. dollar exchange rate. This implies quarter 2 adjusted EPS of $0.46 to $0.58, assuming a diluted share count of approximately 51.7 million shares.

For the full year, current global volatility and lack of visibility makes it difficult for us to provide a reasonable guidance range or set of assumptions. We expect ongoing business volatility over the next few quarters, which could impact client volumes, contract concessions, supply challenges and new project ramps. WNS will continue to monitor the COVID-19 situation and plans to resume annual guidance once visibility improves. The company remains in a strong financial position with a solid balance sheet, unused lines of credit, low CapEx requirements and the ability to adjust operating costs to manage profitability and cash flow.

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

(Operator Instructions) Our first question comes from the line of Maggie Nolan with William Blair.

This is Ted actually on for Maggie. So wanted to ask, what does the guidance assume in terms of the improving demand trends over the course of Q2?

Sure. So let me take that. When you look at the Q2 assumption from a demand perspective, there's really 2 pieces to what's embedded in the guidance, at least in terms of at the midpoint. We do expect some mild erosion in demand from Q1 to Q2. And this is predominantly because there was some work that was done in Q1 that was backlog or catch-up related. So we do expect to see some of our clients, especially in the travel verticals, have a little bit of erosion from Q1 to Q2. But we also expect some of the deals that we signed in Q1 to be ramping throughout the quarter. So we've got a little bit of a mixed bag there from a demand perspective. Obviously, the offset to that is we do expect supply to improve as Keshav mentioned in his prepared remarks. With the current supply at 95%, we should be doing better quarter-over-quarter than the 92% that we averaged in Q1.

Okay. That's helpful. And on that point, would you characterize the business still as supply constraint? I know you're talking about 95% of demand, Is that still, in your mind, a supply constraint? Or is demand falling to the point where that's the primary factor going forward?

Yes. I think the only thing that remains is a supply constraint for WNS as of today, and it's that 5% that we're not delivering, right? Obviously, if we're at 95%, it's 5% that we're unable to do. The reason we're unable to do that is because the clients require us to be in the offices to get that piece of work done. So I would actually tell you that we're at full supply as of today given the current lockdown situation and that our ability to address that additional 5% will be largely predicated on our ability to get back into the offices.

And our next question comes from Bryan Bergin with Cowen.

I just want to follow-up here on the outlook. Can you give us a sense just across the verticals. I heard the comment on travel there, Dave. Are there any other verticals where you think it could be a little bit softer before it picks up again?

Yes. I think, obviously, the other place that we want to watch here in Q2 would be retail. For us, it's our diversified vertical. These are the areas where we've seen our end customers having the biggest challenges. So I think it makes sense that these are areas we have to watch. I would tell you that outside of the retail vertical and the travel vertical, the majority of the issues that we've had have either been customer-specific or supply related. So these would be the 2 places that we would see as potential challenges from a demand perspective in Q2.

Okay. And then just on margin, so the cost action. So 2Q looks to be up a little bit. What cost actions have been taken in 1Q? And then your comments on the 2Q workforce actions you might take, what type of benefit do you expect from that? And can you give us a sense of kind of the cadence there on what's sustainable going forward?

So far, Q2, right now, in quarter 1, like to work-from-home enablement, we had to incur a lot of business continuity expenses, which were either related to laptops or connectivity or accommodation and so on. So we expect that to be a little lower as compared to quarter 1 and quarter 2. Also in quarter 1, we had nonrecurring revenue, which was at a margin which was above company level. So right now, in quarter 2, we have not factored any nonrecurring revenue over there. So that's going to be the impact over there.

As well as -- if you heard from Keshav's remark perspective that we want to accelerate our investments into the digital journey technology. We were doing and we continue to do and how we want to accelerate because client's expectation now in every discussion is around how we are going to have a better solution from a digital perspective. So we want to really embark on that entire journey. At the same time, we'll continue to have our compensation from an excess headcount perspective corresponding to revenue. But as we move forward, we keep on doing our proactive cost management to really manage. Those are some of the factors right now for quarter 2.

Okay.

Yes, the net result of that, Bryan, is the midpoint of guidance. We're essentially assuming that our operating margins are going to be flat. We've got some benefits, as Sanjay mentioned, but we've also got some incremental costs. So I think the good news is we're certainly ahead of where we expected to be a quarter ago on margin. But once you get beyond Q2, the driver for margin improvement really needs to be that reacceleration on the top line.

That -- just to clarify there, that's flat quarter-on-quarter, right? And that obviously assumes no nonrecurring, which would come at a higher perceived margin?

Correct. Again, depending on what the nonrecurring revenue is -- yes, it could drive higher margins. Again, though, we need to kind of watch and see. But at the midpoint of guidance, the expectation is that our adjusted operating margin is relatively flat, Q1 to Q2.

Our next question comes from Mayank Tandon with Needham.

First, a big picture question, maybe for Keshav or Dave. I want to get a sense of the nature of conversations you're having today versus what you were having pre-COVID. Just trying to get a sense of what the market -- the overall market may look like once we do contain this virus. In other words, do we see growth that returns to normalized levels pre-COVID? Or do you think growth will be markedly different given the increased desire to automate, but at the same time, companies will be focused on, obviously, driving operational efficiency? So just sort of a big picture question, how does the market look beyond the pandemic?

Sure. Mayank, that's an excellent question. And let me start by saying that I think over the past 3 or 4 months, all clients have essentially been focused on only managing the pandemic and responding as best as they could to changing volumes on their side, managing their costs and at the same time just making sure that their employees were also safe. And I think that is where WNS partnered them extremely well and ensured that we were seen as a very strong partner to each one of them during very difficult times.

Having said that, I can tell you, I have been having conversations with every one of our clients across the past few weeks. And what is coming out clearly is that while some verticals continue to be challenged from a demand point of view for all the obvious reasons, the reality of CEO speak on the client side is they know that they cannot just be paralyzed and they have to continue making decisions in order to make sure that their companies and their businesses survive and grow at a healthy pace beyond the pandemic.

So from our point of view, we're already seeing really good conversations around the need to reduce more costs from their point of view, the need to accelerate digital models and have lesser physical kind of handoffs. And the third, their hunger and their excitement to look at new operating models that help create variability in terms of their overall costs. Personally, as I've said in my prepared remarks as well, I actually think that, assuming this is an extended pandemic, post pandemic, the potential for this business is significantly better than what it could -- what it was pre-pandemic.

Great. That's very helpful, Keshav. And if I can just follow up with a question on guidance. Obviously, you gave specific guidance for 2Q, which is encouraging. What will it really take to be able to provide full year guidance? It sounded like you've seen some nice pickup in terms of deal activity. I know we're not back to pre-COVID levels. But I want to get a better sense of what it would take from a visibility standpoint to be able to provide a full year outlook once again?

Sure. I'll take that, Mayank. I think for us to provide full year guidance, what we really need to do is see some more stability, particularly in terms of the new client behaviors and the new wins. Like Keshav mentioned in his prepared remarks, we're very happy that we've been able to see deals moving through the pipeline that clients are willing to entertain conversations, that we've added new logos and we've been successful in signing new pieces of business. But we also know as a company, because we've seen this before, there can be gaps between when a deal is signed and when that deal actually starts to generate revenue. We know the client has to do some things to be prepared for transitions and to prepare for WNS to come and help them. And if the clients aren't ready to do that, then the actual revenue generation for us can get delayed.

So I think one of the things we need to see over the next couple of months is that the deal signings and the new work that we've been able to move through the pipeline is actually translating into clients making the kind of behavioral changes required for us to generate that revenue. And if that happens, I think we've largely figured out the supply side of this business at this point. We certainly could see some more volatility in demand and we have to watch out for that based on waves and what happens with the virus, but I think the biggest wildcard for us right now is seeing the new business ramps converting into revenue.

And our next question comes from Moshe Katri of Wedbush Securities.

I have 2 here. Assuming travel continues to be weak and, obviously, this is probably -- probably will continue for the next 6 to 12 months, where do you feel the most confidence? Or where do you get the most confidence in terms of the verticals that can, down the road, kind of fill in that gap that was created by the weakness in volumes there? Does it take 6, 12 months to kind of get that gap filled? And then what's your appetite on the M&A side of the business? What sort of conversations are you having? In which areas are you currently focusing on?

Yes. I'll take the first part of the question. In terms of the verticals where we see a strengthening of demand, we saw health care and life sciences vertical where we have been seeing a steady demand increase. The second vertical is our shipping and logistics. Our -- second vertical is our shipping and logistics vertical where we are starting to see a steady to an increase in demand. And thirdly, our consulting and professional services vertical where some of our larger clients are going to start increasing their volumes with us.

I'll ask Gautam to just mention in terms of the M&A question.

Yes. I'll take the M&A part. From our perspective, at this point in time, what we're doing is we're taking a very conservative view of the M&A side. We continue to revisit and we will keep reevaluating opportunities. Our approach to M&A remains unchanged. I wanted to clarify that. At the same time, we are also looking at captive carve-out opportunities post COVID. So there are opportunities on the sale. We are being proactive in terms of looking at all of them. But in terms of priority, I think we are, right now, comparing investments in some of the other areas from an operating point of view where we can see results quickly and at the same time, reserving the time frame to do some of the M&A-related activities for the longer term.

And just to add a little bit of color to Gautam's comments because I know the response got a little bit garbled there with the technology issue. I think when we look forward to where demand can go and fill in the hole, I think the thing that's really important for people to understand is we're not waiting as a company for the volumes that we've lost to come back for us to drive revenue growth, right? We've kind of taken a step back, especially in the travel verticals and to a lesser extent, retail because of COVID. But the driver for us to grow the business going forward isn't waiting for those volumes to return, which we know could be prolonged in some cases. The way we're going to drive that growth is the same way we've driven our growth historically, which is by adding new logos and adding the number of processes that we manage for those clients.

So you look at the travel vertical, for example, yes, we know it's been structurally impacted. Yes, we know it's going to be a multiyear recovery. But the reality is those businesses need our help now more than ever. So for us to drive growth, it's not waiting for the number of passengers to come back or the number of flights or the number of routes to come back. It's helping them reduce costs, it's helping them automate what they do, it's adding to processes that we manage for them to help them reduce costs. And these are the things that are normal businesses. We don't normally grow our business based on higher volumes with the same client. It's not a same-store business. So I think to the extent that we've taken a step down, and this is the new baseline level for us, hopefully, at this point, now the question really becomes how do we layer growth on top of that.

And our next question comes from Ashwin Shirvaikar with Citi.

Hello, can you hear me now?

Yes, I can hear you now.

Sorry about that. Well, first of all, good to see you're all doing well. My first question was with regards to the contracts that you signed in the quarter. And the clarification there is, were these a closing out of a process that started in prior quarters? Or was it all in quarter? What that's leading to is, if you could talk a little bit about how the sales process has evolved and changed? And do these contracts stand out either in terms of size or the pace at which the clients are asking you to ramp them?

Sure. So let me take that one...

So let me start and I'm sure the others would like to add on beyond that. But Ashwin, I think one of the very interesting changes that WNS is driving in terms of the sales process itself is something that we had started prior to COVID but we have pushed through very aggressively during COVID. So first and foremost, imagine the entire sales process for us is now being done virtually. Obviously, it's a function of how we have created automation, built certain platforms and allowed prospects to go through the entire process of presale, interacting with our sales folks, look at a solution end-to-end and also look at the transition plan, and to some extent, also see how their offices from which work will be delivered ultimately will look from a virtual point of view. All of this has been put together on platform, and I must say that it is resonating extremely well with prospects as a result of which some of the deals that we spoke about would have started prior to the pandemic. Some of them actually started during the pandemic and moved through very quickly and seamlessly, right? And that is very, very exciting from our point of view because it means the clients now appreciate and understand that you don't need to physically actually travel into delivery centers to meet people and things like that to at least make the first decision.

Obviously, in the longer term, you need to do all of that. But the fact that all of this has worked, we have given comfort to them around the risk models, the operational risks, the cybersecurity risk as well as the potential outcomes, is working very well. And I would expect to see faster acceleration of this model and therefore, better sales performance around this as well because, look, from my perspective and my interactions with clients and prospects across the globe, we are seeing this as the whole COVID pandemic as nothing more than a delay or a pause at this point in time. Clients are very clear that they need to keep getting things done. They cannot keep talking about the pandemic to be paralyzed in terms of decision making. And the quality of conversations with clients and prospects for WNS has actually improved even more. We are now talking to them about new areas beyond the traditional areas that we generally service them. And that is exciting for the long term.

That's great to hear. And then with regards to the other part of that question, which was -- these are processes, then I assume, based on your response, that it kind of doesn't matter whether they started before or during the quarter because you are now fully capable of doing things virtually as far as the sales process is concerned. Is that a fair assumption then?

Yes. Let me take that. So yes, we are fully capable, and we're comfortable in our ability to do remote transitions for both existing as well as new clients because we've now seen that it will work. The real question is, from a client perspective, how comfortable are they? And that's the one wild card that we have to watch going forward is while we know we can do it, do clients want to wait if they believe this is a 1-month or a 6-month issue? Do they want to wait 6 months for the kinder, gentler handheld model? Or do they want to have those savings, those business benefits quicker and have them today? So I think you're going to see across the board very, very different behaviors client-by-client based on the pressures, based on the culture and based on their experience with process management.

Understood. And then the clarification I had is your 2Q outlook does leave open the possibility of sequentially lower performance for revenue and profitability metrics. But none of your comments seem to imply that, that's likely. So is this just basically an overabundance of caution leading you there? Can you talk about that?

Sure. So I think if you look at the low end of guidance, Ashwin, for us to end up closer to the 198% range, for example, as opposed to the midpoint, which is 203%, where we have 98% visibility, yes, we would have to have further demand erosion, we would have to provide more clients with concession, we would have to have another wave of potential lockdowns or supply issues, and we would have to have some kind of paralysis in the timing of ramps. These are all certainly possibilities in this environment. But yes, we would have to see certain things go wrong for us to end up at the low end of guidance. And similarly, for us to end up at the high end of guidance, things would have to happen that we don't have visibility to today, but certainly could happen as well.

Our next question comes from Dave Koning with Baird.

Yes. And so I guess I just had a question, I guess, around margins. It's kind of 2-part, I guess. I guess, first of all, what level of revenue would you have to be at to get back to kind of the 22% or so margin that you've been putting up kind of last year? And then the second part is, has anything fundamentally changed in the business, whether it's more work from home, whether it's just less physical infrastructure needs that could actually raise the long-term margin profile relative to what you thought before?

Sure. Let me take a cut at that, and Sanjay and Keshav can add in as well. I think when you look at the margin profile, what it would take for us to get back to margins at or above 20%, at this point in time, it would probably take us getting back to a similar revenue run rate to where we were in Q3, Q4 of last fiscal year. So I think for us to get back north of 20% on the margin line, you've got to be looking at revenues that are back in the $225 million, $235 million kind of a range. So a lot of that now is predicated on getting that top line moving again. We want to continue to invest. And as a result, we don't want to make short-term decisions here to pull a margin lever in the second quarter that could impact how we interact with our clients, how we interact with our employees and certainly how we continue to drive the business forward. So I think that from a short-term perspective will be the key to getting margins up. Longer term, we have to kind of wait and see what some of these changes to the models mean. We certainly believe that if work from home becomes a structural part of the delivery model, there will be lower cost to deliver. But the reality is we would also expect that in that -- those kinds of cases, clients will understand that they want lower pricing for those types of work. So not sure that that would necessarily drive a higher margin for us. What would potentially provide margin lift for us going forward is if we do have more clients willing to move to transaction and outcome-based models, where we have control over delivery and we have the ability to drive those margins up by having inputs into the levers. That, I think, would be a bigger driver for us going forward than something like work from home.

Okay. Yes, that's really helpful. And then just one other question, just looking through some of the slides you sent over. Is that subscription revenue has actually been up quite a bit. And then there's an other line, too, in your contract type. And I am just wondering, what exactly is that subscription? Why is that growing so well -- I mean I think that might have been up 20% or something like that, even despite the tough environment. Is that something that you're just sharing more work to?

Yes. Do you want to go ahead, Sanjay?

Yes. So the prescription revenue, primarily, if you recall, it's more around acquisition, what we did in the health care space and that has been not impacted. Right now, from a COVID -- in this environment perspective, that has been pretty stably growing. Even if you'll observe from a North America perspective, we know -- from a geography split, North America has not been impacted primarily because of some of the growth what we're seeing in that. So that continues.

Yes. So the subscription base is largely in our health care payer business. And we've seen not only that they're stable in this COVID environment, but we've also seen healthy growth in that vertical -- in that segment of the vertical over the last year, which is part of what you're alluding to. The other thing is when you look at the outcome-based revenues, right, the reality is because they're performance-based, there's less volatility with things like volumes, right? This is more about how we're performing on what we own versus the number of transactions that we're processing. So from that perspective, I think we do have a little bit more control over how we generate revenue in that area than, for example, in a transaction-based model where we're completely at the disposal of what the clients' volumes are doing.

Our next question comes from Vincent Colicchio with Barrington Research.

Yes. Nice quarter, guys. I was curious, you had mentioned that you picked up some business from a competitor. Are there more opportunities like that out there? Is there sort of a pipeline of that?

Sure. I'll take that. Yes. So we -- during the quarter, we did take some business and helped a prospect who we were working with earlier in terms of some business that their -- one of their existing vendors couldn't manage because of the pandemic. And I mean you've got to do that in order to make sure that the industry is healthy, and that the value is being seen. So that's one. At the same time, as I talk to clients across the globe, I think there is a very clear feedback coming to WNS that the way we have managed this pandemic and the way we have kept the lights on for them and the partner-like approach that we have showed them all through in terms of not just keeping the lights on but also in terms of just being very partner-like around contracts, around payment terms, things like that, has been appreciated very, very much by each and every one of them. And that is going to actually result, I believe, in much more traction in the longer term in terms of new opportunities that traditionally, they may have kept in-sourced with themselves or may have handed over to some other partner who didn't respond as well. So that's something that, I think, will benefit us.

And overall, I still am very positive about the fact that there are enough kind of reasons why the model post pandemic is going to be very positive for the industry and for us because the reality of life is, any client I'm speaking to is not expecting volumes to permanently be where they are for -- in terms of their business volumes. They expect it to come back at some stage, and they're looking for temporary help at this point in time. But overall, their need to save cost, their need for digital acceleration, their need to manage volatility through new models, their excitement about being able to blend the work-from-home model into their existing business, as well as the fact that the pre-COVID kind of drivers continue to remain in place, means the potential longer-term for the industry is positive.

And what degree of confidence do you have that financial concessions are largely behind the company?

I think it's something we obviously have to watch. The reality is if you look at the concessions that we've provided, they've been temporary. And to the extent that there are prolonged challenges, we may have to help clients over several months, potentially even several quarters with concessions. But again, part of what we've been doing with these conversations is to look at ways for us to help them further to reduce costs, right? So the clients that are going to be most impacted are also going to be the ones that are most likely to give us additional process work because they need to save more money. And as opposed to getting a 5% discount on what they already do with us, the bigger opportunity is to save 30% to 40% with what they haven't done yet. So that's part of it.

The other thing that we've done that we did not talk a lot about on this call is in exchange for some of the concessions that we provided, we've also added contract years to the term. So one of the things that we've tried to do is say, where we're giving you concessions for an additional quarter, we want to add another year to our contract. So as opposed to it expiring in 2023, it will expire now in 2024.

Yes. Vince, I'd just add one point here. I think by now, you must realize that this is a very disciplined team. So even in these areas, this team is very disciplined. One of the things that we have also focused on during this pandemic is we have also looked at our entire client base very carefully. And clients that didn't have potential for the long term, they have actually also exited. So I wanted to mention that as well.

Our next question comes from Sam England with Berenberg.

Just a couple for me. First one, I suppose around the concessions point. Your DSOs were up quite a bit year-over-year and sequentially. Do you have any concerns around collections going forward? And is there anything you're doing to tighten up collections? And I suppose is that increased DSO number driven by any particular verticals? Is it the ones we might expect them to be like travel, like retail that you mentioned?

So the deals -- it's just not due to any particular vertical. Just more broad-based. And as Dave was talking about some concessions, what we need to do, and those concessions also included from a payment term perspective. And during the quarter 1, there were certain delays from some of the clients due to the challenges what they had. So this concession may continue, but we'll have to just watch how things progress. So that was the only reason for the DSO. But cash is stable, collections are stable. And at this stage, we are not seeing any concern from any client as of today.

Okay. Great. And then next one, you mentioned earlier on the call around the investment you had to put in IT to shift over to a remote working model. I was just wondering, longer term, whether the pandemic has made you realize there's any areas of the IT infrastructure you need to invest more heavily in going forwards?

Yes. From our perspective, whilst there has been increased IT investments predominantly in terms of the laptops and desktops to enable the work-from-home scenarios, we don't anticipate larger continued investments around that particular area. It's just a normal course of business. We're starting to see, and we continue to make the relevant investments on the technology and the transformation side of the business where there is an increase in continued demand.

Yes. The only thing I'd like to add to that, Sam, is in addition to the laptops and the desktops, one of the places where we have invested, and it's more on the software side, is the cybersecurity, which Keshav mentioned. So making sure that we firmed up our remote access, making sure that connectivity is healthy, making sure that we've got threat monitoring and threat intelligence so that we can not only work from home but work from home in a solution model that gives our clients the comfort and confidence that their business is as stable and secure as it is in our facilities.

Our next question comes from Puneet Jain with JPMorgan.

Keshav, would virtual sales and virtual transitions drive higher outsourcing longer term as they reduce cost and time required in those steps?

Yes. So Puneet, great question. So the reality is, I think for most clients and for prospects, it has to be business as usual. We've now finished 4 months of the pandemic. And the expert speak out there is this probably is something we have to assume will last for the next 12 to 18 months till a vaccine is out there. So if you bake that into your thinking, and if you are a client and you are looking to stay in business and continue with your strategic programs, you are quite clear that you don't want to wait till the end of the pandemic to start making those decisions because you want to participate in the old model. I think what we are seeing is clients now getting comfortable with the fact that this is something that is around. We have to now live with it, and we have to take the decisions. And therefore, when we come out with a model of this kind to them, it actually helps them take the decision quickly.

And I can tell you, even post pandemic, as opposed to prospects flying across the pond and meeting 10 potential partners and then choosing 1 or 2, I actually think many of them may actually look at interacting with 5 or 6 potential partners in this format and thereafter, flying across the pond to just meet with one. So the reality is that with technology, with the maturity, with the understanding of the work-from-home model, we have led in terms of creating completely new thinking, new models for prospects and clients to continue their journey with us. And if you ask me, I think the fact that we delivered so well during such difficult times will actually hold us in good stead for the long term. That's what clients and prospects are indicating to me.

And maybe just to add that work from home or virtual transition, it's just not necessarily means just reduction of the cost, but it's all about adding more value.

Right. Right. No, understood. And your travel vertical was down, but nowhere as much as the industry capacity appears to be. So is that because of high level of booking cancellations, which would also generate a transaction for you? And what do you expect for travel in second quarter?

Yes. Absolutely. The last quarter, in terms of the travel vertical, we have seen the demand has been actually centered around the bookings, cancellations, refunds and the changes associated with the hospitality and the airline and the OTA industry. We continue to see some of these changes, cancellations or refunds of bookings and including as in certain countries where the lockdowns have started being eased, the increase in some of the bookings happening. So that's where some of the volumes, even in Q2 and Q3, will continue to be added.

Right. And I think just to add to that, Puneet, it's always important to understand that when you look at, for example, our travel vertical, not everything that we do in that vertical is variable with volume. We have services that we provide to several of our OTA and our airline clients that aren't variable with either customer interaction activity levels or even operations. For example, finance and accounting may not have any kind of a variability to it. So I think the reason that you've seen our travel less impacted than, for example, when you look at the numbers that the OTAs were down 80%, then the airlines were down 90%. You haven't seen a corresponding reduction in our revenues.

Got it. Got it. And ...

One of the things I want to mention, one of the things I want to mention, which is -- which hopefully should give some comfort and confidence is while for the current year, one should expect to see this kind of impact around the travel vertical. What I'm hearing from our clients is that bookings for 2021 are already at pre-COVID levels, which is very interesting. And it speaks a lot about the human spirit, people want to fly, people want to get back to travel, people want to take cruises, visit hotels. So at this point in time, it's very interesting that while we are not seeing that level of commitment in terms of volumes right now, for 2021, in many cases, volumes are already at pre-COVID levels for many of our clients.

And also just to add another point to what Keshav mentioned is, earlier he mentioned

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provided that has also enabled some of the clients to actually consolidate vendors where we have been the recipient of the consolidation across vendors. So that's also shored up our volumes.

And our next question comes from Edward Caso.

I was curious about any market share gains that you believe you're getting, both from competitors, maybe smaller ones that don't -- weren't quite as able to switch to work from home, as well as any potential benefit from clients who have undersized sort of captive operations.

Yes. Let me take that, Ed. I think we've definitely seen examples where competitors have struggled to service our -- either our clients or our relationships in this environment. I don't know that I would see this as a short-term driver for market share. But certainly, I think when you look out over the next 5 years, the fact that clients increasingly want a partner who can provide end-to-end services that -- see end-to-end service is really where the value in digital transformation is driven, that niche providers are going to struggle in this environment. And our customers are looking for somebody to hold accountable for results, not to supply pieces or parts of their business.

So I think it makes logical sense that over time, you're going to see consolidation in this industry and see consolidation to where those providers that can provide end-to-end capabilities, especially in a domain-centric model are going to be the ones that are winning the business and become net acquirers in some cases of these niche tuck-in types of things.

I -- with respect to captive carve-outs, Keshav mentioned a little bit earlier, we see opportunities there. It's been very clear that several large global organizations that have captive units struggled badly with the transition to work from home. And I think as a result of that, they may be reevaluating whether or not they want to have captive units. And as a result, they will either be looking to get rid of them or looking at a partner who can service them. So we certainly see this as an opportunity for an end-to-end domain-centric player like WNS to gain share over the next several years in an industry that hopefully has accelerated growth.

My other question is around that 5% that you're unable to do because of client restrictions. Where did that work go? Did the client pull it back in-house? And then where are you in the process of sort of being able to capture that work, particularly now that my understanding is India is -- at least Bangalore is going into another round of lockdown?

Yes. So I'll take that, Ed and then Gautam can add some color to that. Obviously, when you look at the 5% that we're unable to address, it's because of the sensitivity of the work that clients don't want it done remote. We have been able to address some of our clients' requirements, but the reality is, if you look at what they're doing with that work today, it's a combination of things. Some have decided to bring some of that work back in-house because they've got excess capacity. They've got people sitting around without a lot to do, which has been part of it. Some of it has been backlogged or queued, so that when we get into the offices, we can start to address that backlog, and some of it has just gone, depending on the type of work. So it's really a mix of things. But there's definitely some opportunity when we can get back into the office to address that.

In terms of getting back into the offices, I think it's going to be a combination of fits and starts. We've got to be very careful, as Keshav mentioned, about not moving too quickly and not moving too many people into the offices and constantly running fire drills where we're moving our employees back and forth from office to home. That being said, even when we can get into the offices, we realize there are challenges with transportation. There are challenges with employees' comfort in working from an office in this environment. So there's a number of things that need to happen for us to be able to address that. One of the things we're also working on is trying to get clients more and more comfortable in our work-from-home cybersecurity protocol so that they may enable us to attack that 5% without having to get back into the office. Whether or not they're willing to do that over the next several months is something we're going to have to watch. But it's clearly one of our key focuses over the next quarter or 2 to try and manage what we can control to try and get at that 5%.

Also just to add to what David mentioned, besides the client having an excess capacity, which enables it to process some of the work, also the

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the regulators are appropriately commenced in terms of the security and Infosec measures associated with work from home. And as the clients ensure along and be along with them, that the same kind of security systems are in place, we will start seeing a lot more acceptance with regard to even the 5% of the work being enabled from work from home.

I just want to mention one thing, which is if one steps back and looks at clients' feeling about all of this, my conversations with all of them clearly bring out the fact that look, they are also having the same issues of COVID back at home. So if they've taken something back, they are also operating from home. And frankly, it's not a model that they want to work in for themselves. So not only would they like to see this come back to us, and it's just a matter of time, after which it will come back to us. But they're also reevaluating a number of other processes that were not outsourced earlier which they are forced to operate from home at this point in time themselves, which I think will also be part of our long-term game plan. So I actually think this will be positive, though in the short term, we'll have to wait and see when we get back to the office.

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