WNS (Holdings) Ltd (WNS) 2020 Q4 法說會逐字稿

Good morning, and welcome to the WNS (Holdings) Fiscal 2020 Fourth Quarter and Full Year 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 2020 Fourth Quarter and Full Year Earnings Call. With me today on the call, I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and 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, 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. From all of us at WNS, we hope you and your families are safe and well. Today, I would like to spend a few minutes reviewing our fiscal fourth quarter as well as the full year 2020 performance before discussing the current business environment and the impact of the COVID-19 pandemic.

In the fiscal fourth quarter, WNS delivered solid financial results, despite impact from the coronavirus in the second half of March. Net revenue for the quarter came in at $235.8 million, which represents a year-over-year increase of 14% on a reported basis and 15% constant currency. COVID-19 adversely impacted our fourth quarter revenue by $5.5 million as client volume reductions and mandated regional lockdowns phased in over the last 2 weeks of the quarter.

In Q4, our adjusted operating margin came in at 22% and adjusted diluted EPS came in at $0.82 per share. COVID-19 reduced our Q4 adjusted operating margin by 220 basis points and adjusted EPS by $0.10 per share.

With respect to fiscal 2020, we are pleased with the financial and operational progress our company has made during this past year. Full year revenue less repair payments grew by 13% on a reported basis or 14% constant currency, marking the fourth consecutive year we have now delivered double-digit organic constant currency top line growth. This is despite the reported impact from COVID-19. Growth continues to be broad-based across key verticals, service offerings and geographies and by both new logos and existing client expansions. This was a reflection of WNS' differentiated market position, solid execution and a healthy BPM demand environment through mid-March.

In addition to solid revenue growth, WNS also delivered strong margins, EPS expansion and cash flow in fiscal 2020. For the full year, the company posted adjusted operating margin of 22.7% and adjusted net income of 18%. Adjusted diluted earnings per share grew 16% year-over-year, coming in at $3.10 per share. WNS generated $201 million in free cash and repurchased 1.1 million shares of stock. The company ended the year with a net cash balance of $269 million or $5.20 per share.

From an operational perspective, in fiscal 2020, WNS continued to invest in our business, deploying differentiated capabilities and enable co-creation. Key areas of investment, which are expected to continue into fiscal 2021, included domain expertise, technology and automation, advanced analytics, business transformation and R&A training and reskilling of our global workforce.

While fiscal 2020 was another solid year for WNS, as we are all aware, we enter fiscal 2021 in a challenging, uncertain and rapidly changing environment. The COVID pandemic is impacting daily lives across the globe and in this difficult time, WNS is focused on ensuring the health and safety of our more than 44,000 global employees and are servicing the needs of our clients.

While we understand that our financial performance in fiscal 2021 will be impacted by the pandemic, our goal is to manage what is within our control, continue to invest and not lose sight of the longer-term BPM opportunity. I am amazed, grateful and proud of the WNS team's response to this generational challenge and their commitment to both our clients and our company. Our employees across functions and geographies have come together to rapidly innovate solutions, which address a global business continuity scenario, never previously experienced.

Our organizational resiliency and culture of co-creation or collaborating with our clients to develop unique and differentiated solutions is now more than ever a key to success. The strong relationships and trust we have built with our clients are being validated as we work closely with them to understand their changing workload requirements, shift our delivery models, ensure data security, prioritize critical processes and adjust service levels. These compositions are taking place on a daily basis and across all levels of both WNS and the client organizations.

We are taking this opportunity to demonstrate our capability and commitment to our clients and cement our position as a trusted value-added business partner. I would personally like to thank them for their phone calls, e-mails and video messages of appreciation and support. We realize that many of their businesses will emerge from this pandemic needing our help more than ever, and that WNS will be required to help them address their digital transformation, technology and analytic needs, while delivering a cost reduction and operational efficiencies necessary in a weakened macroeconomic environment.

From a delivery perspective, WNS is actively working with national, state as well as local authorities and complying with their directives. Over the past month, our delivery has largely transitioned to a global work-from-home model with skeletal staff remaining in some of our facilities to perform essential services, compliance with all governmental guidelines. As I am sure, you're all aware, the work-from-home model is something completely new for the global services industry. Challenges in implementing this approach have been different across geographies based on client requirements, local government rules, size and scale of operations and technology issues, including hardware access, software compatibility and connectivity. Today, I'm pleased to report that WNS is now able to deliver more than 80% of our clients' current requirements, as we expect this number to continue improving over the next few months.

Through April, we have continued to see deterioration in many of our clients' businesses and the outlook going forward remains highly uncertain and volatile. Additionally, travel restrictions and business disruptions have reduced deal flow, new transitions and project ramps. The magnitude of these impacts will be a function of how long the COVID pandemic actually lasts on a global basis and how long it takes our clients' businesses to stabilize and eventually recover. Given the current lack of visibility, WNS has decided to suspend annual guidance at this point in time. This is not a decision we take lightly, and we do expect to resume guidance when visibility has improved.

That being said, we enter this crisis in a strong financial position. WNS currently has $269 million of net cash, a capital-light business model and operating cost flexibility that enhances our ability to generate profit and free cash even in difficult environment. WNS also has an experienced leadership team with a track record of solid execution and a client-centric culture of innovation and co-creation. We remain confident in the long-term BPM opportunity and in WNS' differentiated position, underlying business momentum and the ability to execute. In fiscal 2021, we will not make short-term decisions regarding employees or investments, which could impact our long-term success. In fact, we believe that longer term, the COVID pandemic has the potential to serve as a catalyst for accelerating both the adoption of BPM and a shift towards higher-end solutions and engagement models.

Post-COVID, clients will need cost reductions more than ever. Additionally, these clients will likely be more willing to embed technology-enabled automated process solutions, which are less reliant on labor and leverage variable pricing models, including transactions and outcome prices. In the meantime, we must remain vigilant in ensuring our employees remain safe and are meeting rapidly changing needs of our clients. 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 fourth quarter, WNS net revenue came in at $235.8 million, up 14.1% from $206.6 million posted in the same quarter of last year and up 14.8% on a constant currency basis. Sequentially, net revenue increased by 3.3% on a reported basis and 3.8% on constant currency basis. The net impact of COVID-19 on quarter 4 revenue was $5.5 million, which reduced our top line growth rate by 2.7% year-over-year and 2.4% sequentially. Quarter 4 revenue strength was broad-based across verticals, horizontals and geographies, with the exception of the COVID-19 impact in the second half of March, which pressured the travel, customer interaction services and North America sectors.

Revenue, both quarter-over-quarter and sequentially, was also adversely impacted by currency movement, net of hedging. In the fourth quarter, WNS recorded $9.9 million of short-term nonrecurring revenue, which was booked at margins close to company average. This includes $6.5 million of project work discussed last quarter and $2 million for volume spikes related to COVID-19.

Adjusted operating margin in quarter 4 was 22% as compared to 20.8% reported in the same quarter of fiscal 2019 and 22.8% last quarter. Year-over-year, adjusted operating margin increased as a result of operating leverage on higher volumes, hedging gains, net of currency movements, favorability from the IFRS 16 lease accounting change and improved seat utilization. These benefits more than offset the impacts of COVID-19, our annual wage increases and lower productivity. Sequentially, adjusted operating margin decreased as a result of COVID-19, which more than offset favorable currency movements, net of hedging, and improved operating leverage on higher volumes.

The company's net other income expense was less than $100,000 net expense in the fourth quarter as compared to $3.9 million of net income reported in quarter 4 of fiscal 2019 and $0.8 million of net expense last quarter. Year-over-year, the variance is attributable to a $3.6 million increase in interest expense resulting from the IFRS 16 lease accounting change and lower interest expense resulting from scheduled debt repayments. Sequentially, the reduction in net expense is due to increased interest income, driven by higher average cash balances and lower interest expense.

WNS' effective tax rate for quarter 4 came in at 18.3%, down from 19.3% last year and from 20% last quarter. Changes in the quarterly tax rate are primarily due to the mix of work delivered from tax incentive facilities and the mix of profits between geographies.

The company's adjusted net income for quarter 4 was $42.4 million compared with $37.8 million in the same quarter of fiscal 2019 and $40.9 million last quarter. Adjusted diluted earnings were $0.82 per share in quarter 4 versus $0.73 in the fourth quarter of last year and $0.80 last quarter.

In the fourth quarter, the company recorded a nonrecurring impairment charge to GAAP profit of $4.1 million relating to the remaining goodwill balance of the WNS AutoClaims business. The company believes this impairment charge was necessary, given changes in the demand environment, for AutoClaims services. This impairment charge has been excluded from our calculation of adjusted operating margin and adjusted net income as it is nonrecurring in nature.

As of March 31, 2020, WNS balances in cash and investments totaled $302.7 million and the company had $33.4 million of debt. WNS generated $68.6 million of cash from operating activities this quarter, made scheduled debt payment of $14.2 million and incurred $4.6 million in capital expenditures, of which $1.7 million were for purchases of desktops and laptops related to COVID-19 work-from-home delivery.

DSO in the fourth quarter came in at 31 days as compared to 30 days last year and 30 days last quarter. With respect to other key operating metrics, total headcount at the end of the quarter was 44,292, and our attrition rate in the fourth quarter was 28%, down from 34% reported in quarter 4 of last year and up from 26% in the previous quarter. Global built seat capacity at the end of the fourth quarter was 34,779 and average built seat utilization increased to 1.28.

I would now like to provide you with a brief financial summary for fiscal 2020 before discussing our outlook for the coming year.

Net revenue for the year came in at $896.2 million, growing 12.9% on a reported basis and 13.8% on an organic constant currency basis. The net impact of COVID-19 on the company's full year growth rate was 0.7%. In fiscal 2020, revenue growth was led by the travel, healthcare, insurance, shipping and logistics and consulting professional services verticals, which all grew over 12%. The company's fiscal 2020 adjusted operating margin came in at 22.7%, up from 20.9% reported in fiscal 2019. Margin improvement was driven by the IFRS 16 lease accounting change, operating leverage on higher volumes, improved productivity and seat utilization and hedging gains net of currency movement. These benefits more than offset the impact of our annual wage increases and the COVID pandemic.

Our effective tax rate was 19.8%, down from 20.8% last year, primarily due to the mix of work delivered from the tax incentive facilities and the mix of profits between geographies.

Full year adjusted net income increased 15% and adjusted diluted earnings per share rose 16% in fiscal 2020, reaching $161.4 million and $3.10, respectively. This improvement is despite negative impact of $0.10 per share from COVID-19 and $0.05 per share from the IFRS 16 lease accounting change. In fiscal 2020, WNS generated $228.6 million in cash from operations and $200.8 million in free cash.

During the year, the company repurchased 1.1 million shares of stock at a cost of $63.7 million or $58.01 per share, spent $27.9 million on capital expenditures and made scheduled debt payment of $28.2 million.

In our press release issued earlier today, WNS announced that the company has temporarily suspended our annual guidance. As Keshav mentioned, this is due to current global volatility and lack of visibility, which makes it difficult for us to provide a reasonable guidance range or a set of assumptions.

While our delivery capacity continues to improve, in April, we have seen our clients' businesses continue to deteriorate. In response, clients are increasingly requesting business relief, including lower volumes, reduced pricing and extended payment terms. We expect this volatility will be ongoing for the foreseeable future. And as a result, our fiscal 2021 performance will be heavily dependent upon the duration of the pandemic and its impact on our client businesses, facility lockdowns and travel restrictions. Based on today's delivery capacity and client volumes, WNS estimates that quarter 1 revenue will decline approximately 15% year-over-year. At this revenue level, the company would expect low- to mid-single-digit adjusted net income margin for the quarter. This number could significantly change over the next few months as delivery capacity, client volumes and pricing discussions evolve.

WNS will continue to monitor the COVID-19 situation and plans to resume guidance once visibility improves. Despite the current lack of visibility, WNS enters fiscal 2021 with a strong balance sheet and financial flexibility. As of March 31, the company had $303 million in cash and investments, $64 million of unused lines of credit and only $17 million in scheduled debt payment in fiscal 2021. We also have low CapEx requirements and the ability to adjust operating cost to help manage profitability and cash flow.

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

(Operator Instructions) Our first question comes from the line of Korey Marcello with Deutsche Bank.

And I hope everyone is safe and well. I guess I just wanted to start out, you mentioned a little bit about some of the COVID-19 headwinds on the pipeline, maybe you could just elaborate there? Maybe are you seeing some of these deals may be put on hold versus how many might be lost for good? And any kind of color you could give on sort of the pipeline.

Sure, Korey. I think when you look at the pipeline, what we are encouraged by is the fact that we don't see business falling out of the pipeline either in terms of the new initiatives that we were working on or the expansion opportunities with existing clients. What we're seeing are some delays. And I think the easy way to look at it is to say that the more transformational a deal, the more complex a deal, the newer the client is to outsourcing, the less likely it is that something's going to get them in -- suddenly in this environment.

So we are encouraged by the fact that we're not seeing deals drop out. They are getting pushed. We also have seen deals close in this environment. We have seen some expansions with existing clients. We have seen some additional business come to us from providers who were unable to service some of our clients as well. So there are some good encouraging signs. But overall, the pipeline is getting pushed, but not dropped entirely.

Got it. And I guess, as a quick follow-up, the next natural question, probably just on the pricing front, if there's any color you can give us there in terms of the strategy to kind of retain business while maintaining price and margin?

And then how do you guys view yourself coming out of this crisis? Do you think that we could get some increased demand? And what type of areas are you looking at?

So currently from a...

Sorry, Sanjay let me start. I just want to mention once again that at this point in time, we believe we are really supply constraint, and we believe that based on where the world has gone through, once we are beyond all of this, we probably would be demand constraint again. I must again mention, I once again underline the point that David mentioned, which is that during the first quarter already, we did close some deals. We are seeing some delays, but we're also seeing the pipeline continue to be strong and healthy. We do not believe that the current experience will result in clients changing their views on outsourcing. We also believe that this pandemic is impacting everyone, whether they are the outsourcers, the insourcers, the offshore, whoever else. And at the end of all this, there will be a significant need for clients and prospects to want to save more money and probably go after their digital agenda even faster. And therefore, we are confident that once all of this is over, it should result in a healthy demand, even acceleration for us.

And maybe just to add what Keshav mentioned, specifically on the pricing, as you asked, right now, we are receiving requests from the client regarding the discounts. And -- but those are temporary in nature, specifically for quarter 1.

So what we believe is once the situation goes back to normalcy, we'll have all those rates back what is already contracted for.

And just to add one piece of color to that, Korey, I think in addition to what Sanjay said about clients asking for relief, for us, what that means in most cases is reductions in volume or reductions in volume out of scope with what's included in the contract. So we aren't seeing lots of requests for just cuts in rates or cuts in absolute pricing, what we are seeing more is cuts in the amount of volume or the number of people we have working on clients' processes.

Our next question comes from the line of Bryan Bergin with Cowen.

I wanted to just ask on this 1Q framework. Can you help us with the moving parts on supply versus demand in that outlook? Obviously, it seems like supply constraint is a primary headwind. But I'm curious, if you were able to deliver at 100% capacity, where would that projection fall? I'm not sure if it seems to imply you would still grow mid-single digits absent that capacity headwind or if there's more to it?

Yes. There's definitely more to it, Korey. As we've kind of -- I'm sorry, Bryan. As we've talked about, we've got kind of several moving parts in the quarter; one is our ability to deliver and execute on what clients need today; the second is the fact that what clients need today is less than it was a quarter ago and a year ago; and then the third is the component on pricing and volume that we've just discussed. So we have these 3 moving parts that are all impacting the top line. Today, as Keshav mentioned, we are very clearly supply constrained. So we've gone from being 100% in-office to essentially having 0% delivery capacity towards the end of March to now where we're able to deliver more than 80% of what our clients want us to do.

And what that means today is that we really don't even have a feel for where the demand is because we haven't been able to service what some of these demands are. So as we get to 85%, potentially 90%, 95%, we're going to find out where the demand and the supply curves start to cross each other. But as of today, we are clearly supply constrained. The expectation, however, is that over the next 2 months, we will be demand constrained and not supply constrained.

Okay. That's helpful. Then a follow-up on margin. So absent the COVID-19 impact in Q4, you would have been over 24% on OP margin. Can you help us pull out what drove some of the factors in that strong performance? I did hear the higher nonrecurring piece. But any other onetime items there? And then as we think about kind of a post-pandemic view, what may change in your operating model that could hamper the ability to operate at such high levels?

Yes. So let me take the margin. And are you looking -- when you're looking at reconciling it, are you looking sequentially quarter-over-quarter, Bryan, or on a year-over-year basis?

Year-over-year.

Okay. So year-over-year, if you look at what's happened on the operating margin line, we're up about 120 basis points. The biggest upside to year-over-year would be volume and currency. So both of those are roughly 150 basis points of tailwind to margins. On top of that, we had the favorability from IFRS. So those are really the big 3 drivers for margin improvement. The offsets are COVID and our annual wage increases. So some of that is operational, obviously, some of it is nonoperational in nature, but overall pretty good margin performance in the quarter.

Okay. And then going forward, what may change?

Yes. So I think going forward, obviously, if you look at the implied margins that we've kind of indicated for Q1, the expectation is that we've got a pretty significant mismatch between revenue and costs. Essentially, what we've done is we've taken the lower revenue factors into consideration based on our current supply constraints and based on how we see that progressing because that number is based on where we are today, okay? But we've also made the assumption for Q1 at this point in time that we're not going to make significant impacts to the cost. And as Keshav mentioned, what that means at this point in time is that we're not planning to throttle back on our investments and we're not planning to let go of people or to adjust compensation for the first quarter.

So essentially, what we've done is we made an investment in our people, we've made an investment in our business. That's something that, obviously, as we go forward throughout the year, depending on where demand is, we're going to have to revisit. But at this point in time, the assumption is that we're not going to meaningfully impact the cost structure in fiscal Q1.

And maybe you know to just add over there, as Dave mentioned, from a compensation or the employee carrying cost perspective, but just to -- beyond that, we'll continue to have our business continuity plan cost, which is going to be there around WiFi connections and the laptops and desktops, rentals, or transportation and allowances. And some of that definitely will get also offset by subcost, which will not be there, like a facility running cost around the power or the travel cost or discretionary spend, so all those actions is also going to be there. But one more additional point is from a productivity loss perspective, that also impacts the margin along with the revenue because when you work from home due to the Internet connectivity, there are some losses around that.

Our next question comes from the line of Mayank Tandon with Needham.

Just staying on the margin theme, Dave, could you comment on just how we should think about the gross margin impact from lower utilization and other factors that you called out and Sanjay called out as well? And then the impact on the SG&A line, just to sort of square away the margin impact on both those items?

Well, I think the easy way to look at this, Mayank, is to essentially look at kind of the cost run rates that we've had and assume that they're not going to change. I mean, realistically, if you look at what it would take for us to get to that low- to mid-single-digit operating margin, net income margin, what it essentially means is that we're taking the hit on the top line, as we described, but there's not a meaningful impact to any of our costs. So at this point in time, essentially, that's what's driving the margin dip. But what you're looking at are relatively flat costs on both the direct cost and the SG&A line.

Got it. That makes sense. And then if I could just ask more on the revenue breakdown, could you talk about as you exited March and then into early April, maybe talk a little bit about the demand trends that you're seeing or the lack of it across the various verticals and service lines? Maybe break it down between Travel, which I would assume is the most exposed, and other verticals as well, where you might have seen more of an impact versus less?

Yes. I mean, clearly, the biggest impact in the quarter was in the Travel vertical, and we would expect that to continue into fiscal Q1. But we have started to see impacts in all of our businesses. I mean the reality is that this pandemic is affecting every line of business and whether it's just putting financial pressure on them or whether it's actual declines in volumes for things that we manage, we are seeing that. So the expectation is that you may have different views today, but you're going to have secondary and derivative impacts across all these sectors throughout the year.

So the good news is, I think, given where the Travel vertical is today, hopefully, we've kind of hit a bottom on that. But we're certainly leery as we look forward here about kind of what could be next and how long this lasts. So those are things that we don't have a lot of certainty or a lot of visibility into, and that's part of the reason why we haven't provided our normal annual guidance at this point in time.

But certainly, coming into the second half of March, our business was essentially clicking on all cylinders. I mean we were extremely healthy. We put up 15% constant currency growth in the fourth quarter. Had we not had a COVID impact, we would have been north of 17%. So clearly, the business was performing extremely well before this hit.

Our next question comes from the line of Ashwin Shirvaikar with Citi.

Hope you're all staying safe in the midst of this pandemic and lockdown. Also appreciate you guys being able to close your book and conduct this earnings call in time. Many companies are pushing out by a week or 2. And I also appreciate your full-fledged comments. So I guess, my first question is about the management approach to the planning process for the year. I understand this is difficult. But since we don't know how long the current situation might last, we don't know necessarily the pace of recovery, how are you thinking about costs, including headcount, both sales and delivery? How do you balance getting ready beyond the quarter, which you talked about, getting ready for eventual recovery so you can hit the ground running whenever that happens? Is there a bogey that you have for profitability, such as you will remain at least positive for the year in terms of profitability?

Yes, Ashwin, I think that's a great question. And let me just mention that coming off the back of a fantastic fourth quarter and a second half of last year, clearly, from our point of view, we continue to believe that the demand for our business in a normal market will continue to be very, very strong. And while we see at this point in time, some constraints from our own ability to supply because of the current pandemic, we also believe that at this point in time our focus has to be just on ensuring employee safety, making sure that we are very partner like to our clients and doing all the right things to get the best outcomes for all our stakeholders.

So at this point in time, we will wait to see how things actually shape up in terms of the control of the disease, the flattening of the curve, whatever else, and then we will make specific calls. You have to have comfort that as a team, this is a team that will do what is right for employees and clients. And also in the medium to long term, we will be very focused on high performance and doing whatever is wise for every shareholder.

So at this point in time, I would say that we'll have to wait and see this first quarter through and then we will look at what has to be done for the second quarter and beyond.

And then I would just to add to that, Ashwin, I think, one of the things we do have some comfort with is the fact that when you look at our cost structure, over 50% of our costs in the short term are highly variable, which means that if we need to make short-term decisions, if we need to impact the cost structure in a meaningful way in a short amount of time, we have some ability to do that.

Got it, got it. Understood. Can you also speak to whether or how you're working with various governments, particularly in your delivery geographies? I mean you are important, especially locally to local economies. Any chance of a financial relief in terms of -- in return for -- say, for example, keeping employment?

So again, Ashwin, as you probably know that in my role, still April is fixed as Chairman of NASSCOM, I have been very involved with interacting with governments, not just in India, but also beyond India, and WNS has been at the front-end of interacting all across. I think a number of representations have been made by all the industry bodies to governments. And all of them are being seriously considered at this point in time. And if any kind of relief is available, obviously, at some stage, if it affects the individual companies, including others, we've made cutting to our books.

At this point in time, the assumption is, none of that is expected or forthcoming. And we are focused completely on managing all of this ourselves. And that's the reason why Sanjay also mentioned about the kind of effort he and his team were making in terms of having very progressive discussions with vendors across the globe as well in order to get ready to partner us in this journey across as well. But having said that, we have been extremely proactive. All industry and trade bodies have been very proactive across the world. Every government has been extremely supportive. We will wait to see what support is actually forthcoming. I think a lot of it will depend on what view they take about how long this pandemic will last.

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

I wanted to ask about the guidance for the quarter and how it was built? So the 15% year-over-year decline, am I right in understanding that this is built off of the kind of plus 80% delivery that you're currently achieving? Or is there an expectation that, that 80% improved built into that 15% decline?

Yes. Your understanding is exactly right, Maggie. It's based on that 80% delivery assumption, which is where we are today. We do believe that, that number can get better as the quarter progresses, but we're also obviously somewhat concerned that the business environment and our clients' volumes could also get worse as the quarter progresses. So it's just a way to kind of give everybody a stake in the ground in terms of what we see as of today. But as we all know, the situation is highly fluid and changing extremely quickly.

That's helpful. And then in terms of kind of the exposure of the business across verticals, can you give us a little bit more granularity about the weakness? I mean you said obviously, travel and leisure, are there any spots within travel and leisure that may be holding up? And where is kind of that short-term COVID revenue that you saw in the March quarter coming from? Where are some of the spots of kind of resilience in the business model that we may see?

Yes. So obviously, in this environment, there's not too much in the Travel vertical that's holding up well. Our exposure is largely in the OTA space and in the airline space, which have both been hit relatively hard. I think the interesting thing is when you look at the volume spikes that we had in the fourth quarter that helped contribute to that $10 million of short-term revenue and help manage the COVID impact to only $5.5 million on the revenue line, we had roughly $2 million of volume spikes, and that was largely in the Travel vertical. So what we did see kind of on the front end of this is as end customers were looking to cancel, rebook, reschedule their travel plans, that we had significant activity levels with several of our clients that we were required to handle. So we did have a volume spike on the front end from the Travel business, but as expected, it kind of fell off a cliff after there.

Our next question comes from the line of Dave Koning with Baird.

And congrats on really what was a really good fourth quarter. And maybe, first of all, just on the cost side, I know a lot of questions. But when we look at revenue, it's going to be down, give or take, $50 million, $55 million sequentially, and EBIT is going to be down almost as much. So basically, what you said, costs are just staying very stable or close to stable. Is there any downdraft of kind of the normal cost but uplift in kind of some nonrecurring or new types of costs that are coming on? Or is it literally just the existing costs are just staying roughly flat?

So you're right, the additional cost what is coming up is all about the business continuity cost, what I mentioned, around the rental laptops and desktops and the WiFi dongles and some accommodation, so that the employees can walk to the office nearby wherever we have that permission and goes on, right? But those costs got offset by some of the facility running costs, which is not going to be there, like power or the employee transportation as well as some of the travel, which is not happening. So net-net, it's just getting offset each other, and that's what is looking flat right now. And when you looked at even the revenue, the dip, almost $10 million, was coming from the nonrecurring, which was there in quarter 4, which is not going to be there in quarter 1.

Okay. Got you. That's helpful. And then, I guess, secondly, this probably gives you some new insights kind of into how much of the revenue is truly recurring. Is there any way like -- have you looked at the portfolio and said, "Wow, it's kind of amazing, but let's just say 75% of our revenue, no matter how bad this environment is, it's just coming through because people -- the clients needed it." Is there that? And I guess part of the question, too, is, if we get anywhere toward back to a normal economy, should fiscal '22 be higher revenue than fiscal '20, just based on that recurring components of revenue and stuff?

Sure. Let me take that, Dave. I think you're 100% right. I mean I think we kind of stress tested, if you will, the model through this. And what we're seeing is that we do have a healthy base that is recurring in nature that is not subject to any volume impacts. Obviously, one of the challenges that we have now is that this goes beyond kind of a standard recession or a standard business challenged environment where things get moderately worse. I mean you look at the airlines, and they're down 95%. Your -- what is recurring in nature, not recurring in nature, changes dramatically when you start looking at potential bankruptcy situation. So this is kind of a unique environment to kind of stress test and to look at this in. But I do think you're right. We do feel comfortable that there's a lot of the things that we do for our clients that regardless of what happens, we'll still be there. It gives us a nice base of business.

The real question is, how quickly can we and how quickly do we want to adjust the cost structure to what that is? The hope, certainly, with the way we've provided insight into Q1 is that it represents a bottom for us, the 15% down year-over-year and the low- to mid-single-digit margins are things that we can improve upon throughout the year as the quarters progress. And the hope certainly is, as Keshav mentioned, given the fact that we think we're going to exit this pandemic into an environment that could be ideal for BPM services, the hope is that we'll see a rapid conversion of some of the things that are in the pipeline and some of the things that have been pushed out over the last month now, and I would assume several months going forward. But we start to see rapid conversion on that and the opportunity to accelerate growth in fiscal '22, assuming that the pandemic is largely behind us, is certainly there.

So excited about the long-term opportunity. I do believe that this has the potential to be a catalyst for adoption of BPM. But now we're kind of in a wait-and-see mode to see how long it takes for this to run its course and how long it takes for our clients' volumes to start to stabilize and then return.

Our next question comes from the line of Puneet Jain with JPMorgan.

And hope you, your family, everyone is safe. So Keshav, how should we think about WNS' positioning when this COVID-19 related headwinds are behind us? You talked about higher adoption of automation, transaction outcome-based pricing, what are you doing or plan to do in the near term to position yourself as winners coming out of it?

Yes. Again, Puneet, excellent question. So I think, first and foremost, I must say that we will continue to do more of what we have been doing in the past. And while we are extremely busy at this point in time, delivering from a completely new model, there is another team that is also working at the back end to accelerate some of what other technology enhancement programs that we have started off, maybe sometime last year, because we are now very confident that coming out of this pandemic, many of our clients who were interested in these models, but didn't want to see too much of disturbance in their environments, will now want to accelerate the adoption of some of these models.

So I just want to make it clear that what has worked extremely well for WNS over the past 2 or 3 years is our single-minded focus on appreciating, understanding our clients' domains extremely well, making sure that we are, through technology, introducing them to new models of delivery, embedding analysis behind it and also adding a lot more technology kind of solutions that gives them faster and better decision-making power as well as better outcomes.

And as part of all of this, from our perspective, we will continue to drive innovative thinking around pricing, right? And so that's what we'll continue to do. In terms of what specifically we will be doing, again, as you are aware, we have updated you over the past many quarters, every one of our verticals actually has created and continues to create very interesting technology-enabled kind of solutions. We believe the adoption of those solutions will just get stronger, one. Second thing is we believe that the whole world itself will want to accelerate cost-saving measures based on the current impacts they are seeing at this point in time, that's going to enhance the demand for WNS' service offerings.

We also believe that -- generally, there is going to be absolute comfort around the fact that companies like WNS that has actually delivered so successfully in spite of such uncertainty, there's a level of trust that we are now seeing will only be enhanced even more. So all of this, I think, will result a completely different kind of momentum because of which I continue to be bullish for the long term.

Got it. And can you also talk about relevance of global low-cost delivery model as clients look to -- look for ways to cut cost? I know there is a near-term disruption, but coming out of it, like do you expect increased offshore as a result of it?

Okay. Let me start that answer, I'm sure Gautam will have more color to add. But first of all, I actually think that the need to save costs to build a stronger operating and resilient operating model will continue to be the focus of every client for the long term, and that will ensure that any location that provides all the advantages of great people cares to achieve in order to lower costs and higher impacts will continue to grow. So from that point of view, I think, lower cost models as well as offshore models will continue to only rule the roost.

At the same time, I think what we are also doing is having very mature discussions with clients and prospects in terms of areas that they try to run themselves at this point in time, quite often from an onshore point of view, right? And helping them appreciate and understand that maybe that's not what they should be doing and that should also be something that they should actually be handing over to a trusted partner, who understands the domain, understands their business. And in fact, we are making good progress on some of those discussions. As Dave just mentioned earlier, we've also won some of them.

So I think not just their own captives, but also looking at new high-impact areas that traditionally they would not handle over to somebody else, I believe will now be in play. And I think the trusted partners, like WNS, who have actually seen them through this crisis, will be beneficiaries.

The third thing I want to mention is that during this crisis, not every partner or vendor will operate with the same integrity as well as maturity. And therefore, one should expect that those conversations also need to be had where we need to go and actually help clients who may be working in a multi-vendor environment, and who are not getting the required support at this point in time from each particular partner to actually make sure that their business lights are running, and again WNS has benefited already from some of it.

So I actually think that demand will continue to be strong, once all of this is over. But the huge requirement of lower costs, higher impact analysis will continue to rule the roost. But I think digital enhancement and more innovative models will accelerate and that's where we are focused.

Got it.

Alternative to add from what -- also just to add from what Keshav mentioned, besides these over cost operating model, the depth of domain that we carry and our ability to manage processes end to end for a client and the investments that we have made over the last few years on the technology and transformation side of the business allows us to actually drive rapid automation and digitizations for these clients, which is going to be a big kicker for us in the short term.

Our next question comes from the line of Moshe Katri with Wedbush Securities.

Just a couple here. First, how challenging has it been to get security clearances, especially as the model kind of changes for remote work? That's number one. And has that continued to be a challenge for you to increase productivity?

And then the second question is, going back to the U.K. customer base, has that been acting differently than some of the other clients that you have globally?

Yes. I'll -- this is Gautam. I will take that. So in terms of the clearances for -- from an infosec perspective or technology solutions perspective, hasn't been that difficult across most clients because what we have cautiously done is, we have co-created all solutions with the client IT teams on an individualized basis and at the same time, ensure that the risk teams and the infosec teams have signed up on those solutions. The way we have actually built our solutions is to ensure that there are 4 layers of monitoring and hardening of devices that effectively render and provide as much protection from a work-from-home perspective as possible.

There are, of course, a few clients where due to certain regulatory conditions and needs, where they are not comfortable with work-from-home operations happening, so though -- that's the only area where we have not been able to take the work to work-from-home basis. And in terms of the wider geographical mix, I think the issues and challenges have been the same in this case. Whether it is APAC, Europe or the United States, the impacts are similar and the client behaviors are similar. It is becoming more of an industry-specific issue rather than a geography spread issue.

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

Keshav, are your supply constraints impacting service levels in a way that's causing any large clients to increase work with other providers?

Yes. Let me start the answer, and then we'll have Gautam add color. So Vincent, so first and foremost, no, that's not the case actually. I think we have worked with every client to understand which are the priorities and have made sure that as we have shift desktops and laptops home, we have lift up the required desktops, where the priority kind of processes are getting attended to.

At the same time, even as we see, there are a number of desktops that are being lift up and that's what will add to that capacity over a period of time. I must mention that, actually, our business is a very sticky business. And in fact, our clients are appreciating very, very much the kind of effort we have made. And whichever processes are not critical at this -- at the current movement are actually either being handled directly by themselves or our team handled in an alternate model, as a result of which, as soon as they're are ready, we will continue dealing with them. But none of it is actually going to any other vendors or partners at this point in time. And we are having conversations with many of them on going after new areas that they had not outsourced before. Gautam?

Yes. And also just to add to what Keshav mentioned, over the course since the crisis started, we have not had a single SLA breach. And secondly, we have got agreements with the clients in terms of certain SLA waivers and deferments, given the business scenario. Also, given the fact that this is structured recovery program, we have been able to, for example, for all companies that we manage finance and accounting processes, where we had month end, year-end and quarterly closes, we actually achieved that well within time. In fact, D minus 1 for most clients bespoke volumes of what we have achieved for them.

And as Dave alluded earlier, we have been recipient of certain businesses that some of our clients, who use multi-vendor strategy and their vendors haven't been able to provide the right level of resilience, we have seen an inflow of volumes from there. And also, we are in strong discussions and almost closure stages with a couple of prospects, who have come to us because their existing vendor was absolutely shut.

Our next question comes from the line of Sam England with Berenberg.

The first one, could you just talk about your ability to shift work between geographies or locations if we see a staggered reopening of either different countries or regions that you operate in?

Yes. That's not an issue in terms of the -- given our network infrastructure and our resilience planning, our ability to transfer work from one site to another or one country to another is not difficult at all. It's all -- it is entirely predicated on the clients providing us the requisite permissions for us to shift work from one center to another.

And secondly, in some of the financial services industries, it would also mean a bit of a regulatory approval that will be required. But this is -- these two, there's no problem from our infrastructure to move over quite easily from center to center.

Yes. And just to add to that, Sam, I would say that, that is our standard business continuity approach. So this is how this industry has operated the last 15, 20 years to where when you have specific issues in a city or in a country, you move critical work to other areas. And whether that's based on medical or health issues, like we're seeing today, or natural disasters or political unrest or terrorism, this has been the standard approach to business continuity. And this is probably how we would have handled this crisis, had it not been a truly global crisis.

Okay. Great. And then the next one was just on hiring and capacity additions. I presume everything is pretty much on hold for now. Is there anything you are committed to that you have to go through it? And how quickly would you try and ramp back up the hiring and capacity additions once things get back up and running?

Yes. Just to add -- sorry, go ahead, David.

I was going to say at this point in time, Sam, I don't think we have commitments looking forward to hiring beyond what we have today, and the focus is on trying to make sure that we keep the people that we have today billable for our clients.

Thank you. 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.