WNS (Holdings) Ltd (WNS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter fiscal 2007 WNS Holdings earnings conference call. My name is Towanda and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Jay Venkateswaran, Senior Vice President of Investor Relations. Please proceed, sir.

Thank you, Towanda. Good morning, ladies and gentlemen, and good afternoon and good evening to those of you joining us from Europe and Asia. Welcome to today's conference call.

My name is Jay Venkateswaran, Senior Vice President of Investor Relations at WNS.

With me on this call, I have Neeraj Bhargava, our Chief Executive Officer, and Zubin Dubash, our Chief Financial Officer.

Today's remarks will focus on our recently-announced results for the fiscal fourth quarter and fiscal year ended March 31, 2007.

Neeraj will begin by providing an overview of the business and its financial developments for fiscal 2007 and the fourth quarter and briefly discuss our outlook for fiscal 2008.

He will then review how we stacked up against our growth strategy and also cover our recent organizational developments.

Zubin will follow with specific details on our financial results and guidance for fiscal 2008. We will then open the call to questions.

Some of the matters we will discuss on this call are forward looking and you should 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 our Form 20-S to be filed with the SEC.

During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors.

You can find reconciliation to these non-GAAP measures to GAAP measures in our press release issued on May 14. Neeraj will now take you to this quarter's highlights. Neeraj?

Thank you, Jay, and thank you all for joining today's call. I'm pleased to announce that WNS had a very strong fourth quarter and fiscal year.

Since this is our first year end after our IPO, I would like to thank and applaud my team for rising to the occasion and ending this year wonderfully.

Our revenue growth was stronger than expected and our net income was at the higher end of our guidance range.

We achieved these very strong results despite higher taxes resulting from the recently concluded transfer pricing study.

In my remarks today, I will touch upon these three topics. First, I will talk about our results for fiscal 2007 and our outlook for 2008.

Next, I will review how we stack up against our growth strategy. And, finally, I will discuss our recent organizational development.

Starting with our fiscal 2007 results and our fiscal 2008 outlook, we finished the fiscal year with revenue less repair payments of $219.7 million, a growth of 48.5% from fiscal 2006.

As a comparison, during the entire period, during the same period, the Indian Offshore BPO industry as a whole grew at 32% according to Nasscom.

Revenue growth in the fourth quarter, in particular, was higher than expected as the year's two largest ramp-ups, a utility company and an insurer, were completed with an expanded scope.

I also want to emphasize that our high growth in an industry with sticky revenue is a very healthy sign for the prospects of our company.

We finished the year with net income before amortization and share-based compensation of $32.2 million.

This is at the higher end of our guidance of $30.5 million to $32.5 million despite additional costs and taxes and growth investments we incurred during the year. I will cover these items in detail shortly.

Looking at the fourth quarter, we saw strong sequential growth in revenue less repair payments of 12% from the third quarter.

Further, gross margin excluding share-based compensation reached 40.6%. This pushed our gross margin, excluding share-based compensation for the fiscal year to 37.4%.

Our revenue less repair payments for fiscal 2007 had been substantially higher than our original guidance of $205 million to $208 million.

We believe that this is a result of our strong industry-focused value proposition and the remarkable efforts of our sales and delivery teams that sold aggressively and ramped up operations on schedule.

Overall, we are pleased with the growth through the year and remain excited about our prospects for the forthcoming year.

Looking beyond the numbers, the quality and diversity of our revenue continues to improve considerably.

In fiscal 2007, we lowered our concentration of our top five clients from 52.8% in fiscal 2006 to 45.7%.

We added a total of 25 clients in fiscal 2007, many of whom will continue to ramp up in fiscal 2008.

We also expanded 24 existing client relationships as our sales teams continued to farm accounts successfully.

During this period, we ramped down only one material client, which was in accordance with a predetermined plan to move work to a client's captive center.

From a business unit perspective, travel has grown steadily while banking financial services and insurance, or BFSI, and our emerging businesses have grown significantly faster. It is worth noting that our largest business unit is now BFSI.

As announced yesterday, we concluded the acquisition of Marketics Technologies on May 9, 2007.

As we previously discussed, this is an important strategic acquisition for us and we believe that it will be accretive to net income excluding amortization of intangible assets and share-based compensation expense in fiscal 2008.

Marketics had revenues of approximately $6.7 million and net income of approximately $1.7 million as per Indian GAAP based management estimates in fiscal 2007.

These results are subject to U.S. GAAP audit and do not include the impact of amortization of intangible assets, share-based compensation expense, or changes to accounting policies.

Now let me touch briefly upon the strategic rationale behind this acquisition.

Marketics has grown at a compounded annual growth rate of approximately 100% over the last three years with a focus on analytics, a rapidly growing area in offshore BPO.

The company provides complex sales and marketing data analytics using propriety technology platforms.

Their services include modeling to predict customer behavior. Consumer centric companies in industries like pharmaceuticals, retail, packaged consumer goods, consumer financial services, etc. are becoming heavy users of these advanced services and we see a very high growth opportunity.

Such services also command a higher revenue per employee. Through the Marketics acquisition, WNS gained nine blue chip clients, including several Fortune 200 companies, in consumer-centric industries that provide a growth platform for us in the future.

In addition, this business is highly profitable and fits in with our strategy of acquiring profitable companies that bring new capabilities to WNS.

Looking at fiscal 2007 net income, we achieved a profit of $32.2 million excluding amortization and share-based compensation, or 52.4% growth over fiscal 2006.

As disclosed in our press release, fiscal 2007 net income includes growth investments, additional costs, and higher client reimbursement.

To describe this, approximately $1.5 million in growth investment on diligence of our Eastern European operation, upgrading JADE, our passenger revenue accounting platform, and the incremental SG&A costs from the PRG acquisition we incurred this year.

We also incurred costs toward National Insurance and Social Security, or Medicare charges, on UK and U.S. employees exercising stock option grants under the 2002 stock option scheme.

This charge was incurred in the fourth fiscal quarter as employees exercised stock options after the expiry of the post IPO lock-in period. Zubin will also discuss this item in great detail shortly.

An additional tax charge on account of, additional tax resulting from the transfer pricing study was also incurred by us and is included in the numbers we provided for the last fiscal.

The above two items resulted in additional charges of approximately $1.2 million. And finally, there were higher reimbursements from clients on account of a higher-than-expected level of transition and revenue generation actively through the year.

Such reimbursements typically involve out-of-pocket expenses which are billed to the client and these reimbursements are booked as revenue but typically do not have margins built in.

To sum it up, we have delivered at the higher end of our guidance of $30.5 million to $32.5 million despite absorbing these growth investments, additional costs and taxes, and higher client reimbursements.

These items collectively represent the throughput from the incremental revenue over the previous guidance that we gave.

For fiscal 2007, I would also like to draw your attention to a few other highlights.

Our gross margins excluding the impact of share-based compensation expense were over 37% despite higher client reimbursements.

Our SG&A excluding share-based compensation expense were 22.7% of revenues less repair payments. This represents a decline of 60 basis points from fiscal 2006 even after absorbing the incremental growth investments and additional costs that I just described.

As we look forward in fiscal 2008, we expect revenue less repair payments for WNS to grow to between $302 million and $307 million, or growth of between 37.5% and 39.8% over fiscal 2007 (Company corrected following the call).

This revenue estimate assumes the loss of revenues from the Aviva BOT contract in two places, in July 2007 and January 2008.

At this point, we estimate that we have approximately 87% visibility for the forecasted revenue less repair payments for fiscal 2008.

Further, we expect the Marketics acquisition to contribute around 4% of the overall revenue estimate.

We expect net income excluding amortization and share-based compensation to grow to between $41 million and $43 million, or 27.5% or 33.7% over fiscal 2007.

This estimate includes a loss of approximately $1.7 million expected from our new Eastern European facility, which I will discuss in detail shortly.

Our net income estimates for fiscal 2008 are based on an exchange rate of INR42 to US$1.00, and US$2 to GBP1.

This Rupee exchange rate assumption significantly impacts our net income estimates for the year.

For instance, our net income guidance excluding amortization and share-based compensation would have been about $4 million to $5 million higher at last year's average exchange rates of INR45.2 to US$1 and GBP1.89 to US$1.

Zubin will discuss this factor in greater detail shortly, but I do want to emphasize that we are also cutting costs in response to the exchange rate cut without constraining key requirements for future growth.

Now I would like to move to the second topic of my prepared remarks, let us see how we stacked up against our growth strategy.

Offshore BPO continues to be the suite spot of the global services industry with an addressable market of $120 billion to $150 billion according to Nasscom.

Current penetration levels remain well below 10%, creating a very attractive environment for us. While there has been talk of a slowdown, we do not see signs of one.

We continue to see strong growth as reflected by our revenue growth in fiscal 2007 and our guidance for fiscal 2008.

Given this market environment, we aim for high growth with modest margin expansion targets each year coming through more efficient use of SG&A.

Building an industry-focused business has been a key aspect of our growth strategy. Now let's review how our track record stands against this strategy.

In BFSI and travel, our objective for the year was to strengthen our positions substantially in each of these industry segments.

I'm particularly encouraged by the strength of WNS' position in BFSI.

This business unit contributed 39.3% of fiscal 2007 revenue less repair payments. Our BFSI unit was ranked number six globally by the Black Book of Outsourcing in 2006.

These achievements were driven by a very high level of client activity in this area through the year, resulting in the addition of nine new clients and four expansions from existing clients.

In the fourth quarter, we won a new client in the U.S. banking sector focused on banking mortgage and lending operations.

We also extended our relationship with two of our leading mortgage clients and won two new clients in the mortgage servicing and lending services sectors, respectively.

While there has been some turmoil in the U.S. mortgage sector due to the hikes in interest rates, we have seen this lead to a stronger desire to cut costs, leading to a greater sales momentum in this market.

We also continue to see momentum among insurance companies, particularly the U.S. market.

In the travel sector, we continue to build on our leadership position. It contributed to 33.4% of our fiscal 2007 revenue less repair payments.

Our continued success in travel has been recognized by the Black Book of Outsourcing, who has recently ranked WNS number two globally for BPO services provided to the travel industry.

This business unit evidenced our continued competitive success with the addition of five new clients and six expansions from existing clients.

In the fourth quarter, we won two new airline clients, a small Asian carrier and the regional U.S. carrier. In addition, we extended our relationship with a leading U.S. airline, announced earlier in the year.

Notably, we also extended our capability in this space by auditioning a new range of services to go after the corporate travel agencies market.

The year also saw major focus on platform-based BPO with the acquisition of the Verifare revenue recovery platform from the PRG Airline Services and the ongoing upgrade of our new accounting platform called JADE.

Moving on, we also said that our emerging businesses are driven largely by our functional expertise. In our Enterprise Services division, this includes finance and accounting, human resources, and supply chain management services.

In Knowledge Services, it includes a variety of research and analytics-based services. These businesses collectively contributed to 27.3% of our fiscal 2007 revenues less repair payments.

In terms of client activity, these areas witnessed continued competitive success with the additional 13 new clients and 14 expansions from existing clients.

Enterprise services has been a real success story in fiscal 2007. In 2006, WNS was ranked the sixth largest FBO provider globally by (inaudible - highly accented language) Institute standing for finance and accounting outsource.

While these services grew horizontally, enterprise services also created the background for potential verticals in manufacturing utilities and logistics.

In the fourth quarter, we saw expansions with existing clients, including a major utility and also a leading global publishing house. Audit services also exhibited a significant growth phase.

This business is market by high revenue for employees and high client impact. We now have over 900 people with audit services excluding the Marketics acquisition.

We believe that WNS is among the top three offshore audit services providers. Today, our knowledge services generate revenues from the professional services and consumer centric industries in particular.

Similar to enterprise services, our knowledge services capability has created the platform for our potential expansion in consumer industry, (inaudible - highly accented language), and retail.

In the fourth quarter, we won a new client, an asset management subsidiary of a large insurance company and continue to ramp up services for two existing investment banking and a key market research client.

Moving on, establishing a global footprint is a relatively new effort of our growth strategy.

As we continue to grow, we are increasingly being asked by potential customers and some existing ones to think of larger scale and multi-country global contracts and global expansion to complete our high quality, to compliment our high quality operations if the company is a necessary collaboration for us to maintain and enhance our growth rate.

During another look at team conference calls, we have announced our intention to open a location in Eastern Europe.

I'm pleased to report that we've appointed (inaudible - highly accented language) as Director of Operations, Central and Eastern Europe.

[Akov] joins us from [Genpack], very well heading their operation in Romania. The recruitment of Akov caps some significant progress for us in our expansion into Eastern Europe.

We have identified Bucharest, Romania as the location for the facility we expect to start operations with a capacity of 125 feet by the second half of fiscal 2008.

As we described before, our Eastern European operation is being designed to act as a catalyst for long-term growth driven by clients with a focus on India but are requiring some European language support.

As we launch our offerings, we are in active discussions in ruling out this multilingual capability to our existing clients as we believe that there's increasing demand in this group of clients that we have today.

The investment in our new Romanian operation is expected to reduce net income for fiscal 2008 by $1.17 million.

However, this investment is expected to be MVP positive and yearly return on capital in part of about 30% once the operation achieves stability which is expected in this third year of operations.

Furthermore, it will help up grow our core business in India and get us back to an entirely new stream of global lead.

Now let me briefly talk about our M&A strategies. As many of you know, we acquired Trinity Partners in December 2005. This acquisition has turned out extremely successful.

Mortgage banking is one of the most active areas of new client activity, and our mortgage business has grown very rapidly since the acquisition.

Also, our banking business has come alive on the back of this acquisition as we applaud three banking clients in areas like payment services and significantly expanded on the relationship.

Our strategy of buying a new cable-ready and selling it very aggressively has paid off and we have now reinforces in the BFSI BPO market.

Moving onto the Marketics acquisition, we are aiming to repeat the Trinity's success in banking, in sales and marketing analytics by targeting consumer centric companies.

This tremendous opportunity to sell these services to our existing client base in travel and BFSI as well.

The focus in Marketics has now shifted from closing the deal to integrating the business with our knowledge services unit under (inaudible - highly accented language), our new head of knowledge services, who I will discuss shortly.

The immediate priority of the Marketics team will be to achieve their target performance for fiscal 2008. Looking ahead to the rest of fiscal 2008, we will continue to pursue other acquisition opportunities.

Operational excellence has always been a key focus area for us. In fiscal 2007, we recorded a 35% increase in capacity, taking our total [sea] count to 8,794.

At the same time, our utilization of sea count remained stable through the year at industry-leading levels of about two shifts a day.

The 35% increase in capacity in fiscal 2007 will spread across three key locations, [Mumbai], [Puni], and (inaudible - highly accented language).

As a part of our plans in future capacity addition, we have started negotiating for capacity in special economic zones, or SEZs, to take advantage of tax breaks.

Moving onto the third topic of my prepared remarks, I would like to provide some color on the key organizational initiatives and management changes we are undertaking in preparing the company for its next growth rate.

We added a net of 1,198 people during the quarter and 4,494 people during the year, bringing our total headcount to 14,927 as of March 31, 2007.

Our attrition for the fiscal year 2006, 2007, stood at 40%. In the last quarter, it was 48%, which clearly is higher than revenue would like it to be.

We believe that this is currently an industry-wide challenge. However, let me put a few things about attrition into perspective.

First and foremost, while we have high attrition, we also successfully executed significant growth and awards of customer (inaudible - highly accented language) scored us an all-time high.

We achieved this because of our vast investment in cutting down training time in many processes and building institutional knowledge.

In addition, we also won 25 new clients and secured 24 expansions from existing clients with only one material client ramping down.

I'm highlighting our customer achievements in spite of high attrition not to brush away the problem, but to emphasize that we also constantly strive to serve our customers better in spite of high attrition and are succeeding

Second, our middle management team, which consists of about 900 people at the level of team managers and above, is very stable.

Attrition among this group remains low, well below 15%. This team is our frontline in terms of managing our entry-level staff and interacting with clients on a day-to-day basis, and they keep our operations stable.

Current our Chief People Officer (inaudible - highly accented language), who joined us late last year. We have launched many talent sourcing and attention initiated which are under execution.

These include sourcing more talent from smaller Indian towns and cities because they tend to be more loyal, increasing the share of referrals in our hiring, again, talent that is referred by existing employees tends to be more loyal.

We recently relaunched a very aggressive referral program, more than doubling our investment in training, learning, and development, which are included in our fiscal 2008 budget and guidance. These are only based on some of the initiatives are beginning to bare fruit.

Finally, our senior team and I are making retention a top priority in the coming year and are even tying a significant part of our bonus view with a problem.

We are in a tough talent market but we are confident that our growing brand equity and commitment to (inaudible - highly accented language) talent management issues was beginning to show positive impacts in the second half of the next fiscal year.

Moving on to management changes, as we announced in today's press release, Anish Nanavaty will take over the position of CEO WNS Knowledge Services from Amit Bhatia.

Anish recently completed five years with WNS. He was one of our first two employees in the U.S. and played a key role in building our North American business from scratch.

During the last three and a half years, he focused on building our travel business in North America. He led the sales effort and relationship with our largest client. And under his leadership, we also developed other significant clients, including several large airlines and travel agencies.

Prior to joining us, Anish spent ten years of his strategy consultant with the Monitor Group and Mars & Company in the U.S. and in India.

We believe that the combination of his prior consulting experience and his contribution to building WNS' presence in the North American market positions him very ready to lead the newly expanded Knowledge Services business, including the Marketics acquisition.

Anish steps into a very strong and rich legacy that was built by Amit Bhatia. Amit will now move on to focus on talent management as a part of my office.

I will now turn the call over to Zubin who will provide additional color on our financial results. Zubin?

Thank you, Neeraj. And, again, welcome to all of you joining us on this call. Before I review our results, it is important to note that WNS' revenue is generated primarily from providing BPO services.

The company has two reportable segments for financial statement reporting purposes -- WNS Global BPO and WNS Auto Claims BPO.

In the WNS BPO Auto Claims segment, we provide accident management services in which we arrange for automobile repairs through a network of third-party repair centers.

The amount invoiced to WNS clients for payments made by WNS' third-party repair centers are reported as revenue.

Since the company wholly subcontracts the repairs to the repair center, it evaluates its financial performance based on revenue less repair payments to third-party repair centers. This is a non-GAAP measure.

Before we get into the details of our results, I would like to highlight a few key aspects of our financial performance in fiscal 2007 on the revenue less repair payments basis.

First, our revenue growth at 48.5% was stronger than our guidance.

Second, gross margins excluding amortization and share-based compensation at 37.4% was in line with expectations.

Third, we have delivered 60 basis points reduction in SG&A excluding share-based compensation as a percentage of revenue less repair payments compared to 2006.

Fourth, we have achieved the higher range of our guidance range in terms of net income before amortization and share-based compensation.

Finally, our fourth quarter growth rate positions us well for fiscal 2008.

Now let's look at our results in greater detail on a revenue less repair payments, or non-GAAP basis.

Revenue less repair payments for the quarter was higher than expected, strengthening our ability to reach growth targets for fiscal 2008.

At $64 million, it was up 54.5% from $41.4 million a year earlier and up 12% from $57.2 million in the previous quarter.

Gross margin for the quarter excluding share-based compensation was 40.6% of revenue less repair payments compared with 37.6%, in the year-earlier quarter.

SG&A expenses excluding share-based compensation for the quarter was $15.5 million, or 24.1% of revenue less repair payments, compared with $11.1 million, or 26.9% of revenue less repair payments, a year earlier.

This reduction was achieved despite the National Insurance and Social Security and Medicare charges on employees exercising stock options granted under the 2002 stock option scheme.

This charge represents approximately 2% of revenue less repair payments for the quarter and all of this was incurred in the fourth quarter as a consequence of the expiring of the proposed IPO lock period. Let me discuss this charge in more detail.

When UPN U.S.-based employees exercised the stock option, the difference between the fair market value during the date of exercise and the exercise price attracts the National Insurance contribution or Social Security or Medicaid charge.

Going forward, our National Insurance liability in the U.K. transactions have been capped, thereby restricting the impact of the charges.

Operating income excluding amortization of intangible assets and share-based compensation expenses for the quarter was $10.5 million, or 16.4% of revenue less repair payments, compared with $4.5 million, or 10.8% of revenue less repair payments a year earlier.

We finished the year with operating margins excluding amortization of intangible assets and share-based compensation expenses of 14.7% compared with 15.1% of revenue less repair payments a year earlier.

However, excluding the positive impact of deferred revenue of $2.4 million recognized during fiscal 2006, the operating margins in fiscal 2007 shows an improvement over 2006.

Our tax rate for the quarter was 11.5% compared to 6.6% in the year earlier. Increase in the tax rate is driven by higher taxes as a result of the recently concluded transfer pricing study and increase in profits attributable to our U.S. nuclear (inaudible - highly accented language).

Capital expenditures for fiscal 2007 was $27.3 million. This was slightly higher than our previous estimate of $26 million as we added more capacity than planned on account of better-than-expected growth.

Now let's move on to guidance for fiscal 2008. For the purpose of today's guidance, we have estimated our revenues and costs as an exchange rate of INR42 to US$1 and US$2 to GBP1

Our analysis indicates that for every 1% change in the U.S. dollar against Indian Rupee, our net income margin excluding amortization of intangible assets and share-based compensation will change by approximately 50 basis points for fiscal 2008.

Similarly, for every 1% change in the U.S. dollar againstPound Sterling, our net income margin excluding amortization of intangible assets and share-based compensation will change by approximately 30 basis points for fiscal 2008.

Now let's look at our guidance for fiscal 2008 based upon these exchange rate adoption. We anticipate that revenue less repair payments over year will be between $302 million and $307 million.

This represents a growth of between 37.5% and 39.7% despite the loss of revenue from the Aviva BOP during the course of the year.

Our net income for fiscal 2008 before amortization of intangible assets and share-based compensation expenses is expected to be between $41 million and $43 million.

This amounts to a 1% reduction in our net income margin excluding amortization and shared-based compensation and is the consequence of the foreign exchange impact partially offset by the cost reduction program.

This estimate also includes the loss of approximately $1.7 million from our new growth-oriented Eastern Europe investment.

Amortization of intangible assets will increase from $1.9 million in fiscal 2007 to $4.2 million in fiscal 2008 primarily due to the Marketics acquisition.

Share-based compensation is expected to be $8.8 million for the year.

We expect our tax rate for fiscal 2008 to be around 16%.

The increased tax rate is accountable for transfer pricing study that we just undertook and higher tax from our auto claims business which is taxed at approximately 32%. Our guidance for capital expenditure is at $36 million for the year.

In conclusion, I would like to reiterate that we feel very good about achieving the targets for fiscal 2008 despite challenges in the form of exchange rate, higher taxes, and growth investments, particularly in our new Romanian facility.

With this, we have concluded our prepared remarks. Neeraj and I will now take any questions you may have. Operator?

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Brandt Sakakeeny with Deutsche Bank. Please proceed.

Yes, hi. Good morning. Just a couple of questions for you. Can you give us, actually just one housekeeping item, can you give us the exact transfer pricing impact on the quarterly P&L in the fourth quarter?

Brandt, we'd rather not disclose specific amounts on the transfer pricing. I think if you actually look at our tax rate, we've given you guidance as to where we will be with the new transfer pricing study which is almost completed and in place.

As a policy, we don't disclose specific live items of expenditure.

Okay, fine. And you noted, with respect to attrition, that that can be part of the bonus. Can you just give us an update on sort of the campaign to bring attrition down and also how it performed in the fourth quarter?

Well, as we mentioned earlier, the attrition rate in the fourth quarter was 48% and the average during the course of the entire year was close to 40%. There are two components to our campaign to bring attrition down.

First of all is modifying the nature of candidates that we source because our own analysis of what is happening is that if you're sourcing correctly, that allows you to get the right people in and ensure that you can have the right kinds of things and to have them stay longer.

An element of what we were we will do on sourcing candidates which also leads to the managing of the attrition properly.

And the second thing is that we embarked on this journey of adding people specialize in vertical areas and then making investments on their training learning and development that allows them to basically build their competencies as well as leadership capabilities in a more sustained manner.

This investment was something we began last year, but we are based on some early learning, gathering a lot more momentum behind that and our belief is that the single biggest issue that people face is that they want to ensure that when they are working within our industry and with our company, they're looking for long-term career and most of our investments are geared towards making that happen.

Okay, great. Thanks. And just a final question on the Marketics acquisition. So I think you said, I just want to confirm these numbers -- $6.7 million in March '06. That's about $1.7 million in net income.

So at the growth rate, is it your anticipation that by the FY '08, the business is doing something like $15 million on the top line and maybe, say, $4 million on the bottom line so it translates to a purchase price of about 15 times earnings with year up?

Your first question, Grant, the numbers that we gave you on revenue and net income are given and our management estimates they still need to be audited as to U.S. GAAP. And management estimates are based on Indian GAAP at this point in time.

To answer your second question, Marketics contributed roughly 4% of the guidance of revenues that we've given you and yes, the price that we will have paid will be actually 15 times U.S. GAAP earnings for the year 2008.

Okay, great. Thank you very much.

Your next question comes from the line of Ashwin Shirvaikar with Citigroup. Please proceed.

Thank you. My question is what was the revenue and earnings contribution from the UK-based auto claims BPO this quarter?

This quarter, the revenue is similar to what we had in the previous quarter. But on the case of UK-based auto claims business, what we do have is we've restructured the Liverpool and Victoria contracts.

And as a consequence of that restructuring, from January 2007 onward, it's going to be a lot more profitable than it had been in the first three quarters of this year.

For this particular quarter, the revenues for the auto claims business is going to be $6.9 million. Like we said, we don't break it down further in terms of going down to the net income for that particular segment.

However, in terms of the segment's operating income, we think there is going to be $2.1 million for the quarter.

Okay. Could you shed some light on the restructuring? What was involved there?

The basic result of the restructuring was that while we had a five-year contract, which had run almost for a year, that contract will be reduced to a two-year contract, but we will save a lot more in the cost.

And as a consequence, we will, the margins that you can expect from this business going forward for the next 24 months starting January 1, 2008 will be substantially more than what you've seen earlier.

For the full year, it contributes roughly $8 million, $9 million in operating income?

Going forward?

Yes.

We do not give guidance on a segment basis. We've given you joined guidance for both.

Okay. On attrition, if I may, what is your attrition target to hit your management compensation line that you had put in? Do you want to get it down to 40%?

We want to get it to the low 30s.

Low 30s.

That's right.

And what's the timeframe?

We expect things to change at least two quarters from now, so we're looking to get the 30 more from October on.

Okay. And what's the specific challenge? I mean, last quarter, you mentioned two reasons why it went up.

I think one of those reasons in terms of the attrition being high in our Punai location as well as for a specific data centric processes (inaudible - highly accented language). I think overall the market tends to be overheated in general.

We were early movers in providing BPO services with a largely focus on transaction processing. Therefore, in many ways, we are most likely pushing target for somebody else to come in and set up business in that area.

We have made substantial investments in ensuring that people are looking, getting substantial training, as well as building careers with us in a more substantial manner, and that is what we're hoping will change things up in the time to come.

Okay, last question is after January next year, you're out of Punai, right? Because you are going away?

No, not really. We have two locations in Punai, rather two types of operations in Punai. One is with Aviva, which is going to go away. And we also have our own operations in Punai, which are quite substantial.

Okay. Thank you.

Your next question comes from the line of Julio Quinteros with Goldman Sachs. Please proceed.

Hi, thanks. This is [Vincent], sitting in for Julio. First of all, could you comment on the margin projectory throughout the year FY '08?

Our guess is that because of the, I'm guessing you'll have to past due and not around a wage hike. And because of the ramp up, the European facility, our sense is that the margin profile will be a little bit more backend loaded. Is that the right way to think about it?

Yes, what you've seen is if you look at net income excluding stock option and amortization, our margins would have dropped by 1% compared to the previous year.

If you actually break it up, you will find a larger impact on the gross margin front and however it's made up by some savings we've made in SG&A and some further cost reductions that we've planned as a result of which having done to counter the impact of the exchange rate that we're now facing April of this year.

Yes, again, in terms of the profile of the margin. You should expect gross margin, in terms of the trend, to be similar to what we had last year, but they should be lower for the first quarter and build up gradually to the fourth quarter.

Okay. And then just related to that, would you remind us again the timing and magnitude of the wage hike for this year?

The average hike was around 13%. The range was between 12% and 14%.

And the timing that's expected in the first quarter?

Right now, from first April onward.

Got it. Okay. And also, I'm just wondering if you can provide more color in terms of utilization and pricing assumptions that are baked into your FY '08 outlook and is there anything different from what you're currently seeing right now?

Roughly about 30% of our business had an attrition baked in, in the contract itself. We also are certainly looking at a few more price revisions as we go upward as well.

But both are market factored so what is in our guidance right now is that the inflation on existing contracts are already negotiated and factored in.

We expect pricing to be, on new contracts, better than what we had before. And we expect to have some (inaudible - highly accented language) as the year goes along on some upward provisions of prices which are not factored in.

In terms of utilization, we've discussed before utilization levels in our business tend to be very high because of, in general, there is sufficient gap you have between the time you actually get a contract and the time you ramp up and start the service and to have the training teams come in. So we expect the utilization levels to be very high.

Got it. Okay. And lastly, if you will, could you share with us the currently number of seats and the current revenue run rate that are expected to go away for the Aviva operations? Thanks.

Yes, I think the overall impact of Aviva for next year, we should, what you'll find is we would lose roughly around $12 million in revenue as a result of the Aviva operations going away.

Great. Thank you.

Your next question comes from the line of Julie Santoriello with Morgan Stanley. Please proceed.

Hi. This is Matt Spiegelman standing in for Julie. My first question was just with regard to the cost cutting measures that you described to offset the Rupee appreciation. Could you give us a little bit more color on what those measures are and how much you save?

We cannot be specific on the quantum of what we want to save, but I'll give you a sense of the nature of cuts we are taking.

We clearly are investing behind many initiatives that enhance the scalability of the company in areas like IT, in enhancing the measure of our -- the quality team, investing behind the (inaudible - highly accented language), risk management measures, as well as some branding and marketing activities. Many of these are what we believe are very essential for the future.

So the bulk of the nature of the cost cutting is done to do with postponing some of these expenditures and in some places delaying some projects even from this year onto next year. So a lot of these are SG&A related cuts.

In addition to that, over the last three or four months, even before the currency changes came, we were on an internal project of reducing many of our operating expenses which are not necessarily to do with people, so that includes things like travel, communication services, and all those things.

And some of these projects are quite mature and we are actually accelerating our plans to get some volume discounts from our vendors, as well as work out different ways of reducing that.

So all these are changes that have got factored and are mitigating some of the impact because of the currency changes.

Okay. And if the Rupee were to appreciate further, are there specific additional levers that you would pull? Or would most of that appreciation fall through to the bottom line?

Overall, we are very clear that there is a wide open market and we have to invest behind growth.

So out of these investments that we are making, we would like to see them done during the year, but nevertheless, in terms of the profitability, we need to have flow to our increased revenue to the bottom line.

We would expect that the growth in currency would lead to some of that, if not most of that, flowing to the bottom line.

Okay. And I just had one quick question for Zubin. You had mentioned that the National Insurance payment in the UK, I think, were capped going forward.

Is this a cost that we could see still being incurred on the U.S. side? And how much of that cost is U.S. versus UK?

Yes. Just to give you a flavor, in the UK, that National Insurance cost is 12% of the difference that I have talked about in the call, which is the difference between the price at the time of exercise versus the (inaudible - highly accented language) price.

In the U.S., it's closer to 1.5% so the U.S. is relatively small. Going forward, we've capped the UK and we've also factored in the potential cost of these exercises in the year 2007 and 2008, and that's incorporated in our guidance.

Okay. Well, thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Prasad Deshmukh with Merrill Lynch. Please proceed.

Thank you. So what would be our margins if we are one time adopting a (inaudible - highly accented language)? How much of this additional charge, the tax charge, will occur in FY '08 or so?

Yes, I think, as Neeraj explained, the two items that he spoke specifically about, i.e. the tax charge as well as the National Insurance charges together accounted for roughly $2 million during the fourth quarter itself.

If you actually look at that as a percentage of our revenue, that will be almost 3% of our revenue for the fourth quarter. So margins would potentially have improved by that much if these charges were not there.

With regard to going forward, like I said, we've given overall guidance on the tax rate which takes into account not only the transfer pricing study but also changes in the U.S. mix also.

Okay. And one more comment that was made was there was higher business from auto claims or insurance side, which also, then one comment which continued was Q4 percentage that business was similar to Q3. What is incremental change there? Why is the impact higher in Q4?

Yes, let me repeat this actually. Revenue in the auto claims business has not changed substantially between the third quarter and the fourth quarter.

What I did say was that we've restructured one of the major contracts in Liverpool and Victoria.

And as a consequence of the restructuring of that contract, it's become far more profitable from January 1, 2007 onward, and that contract will continue for 24 months from January 1, 2007 onward, hence the profitability of the auto claims business, which was much slower during the first three quarters and improved substantially in the fourth quarter.

Okay, and one small question -- on Aviva, how many people do you have there?

We have approximately 1,100 people across (inaudible - highly accented language).

Okay. Thanks a lot.

At this time, there are no further questions in the queue. I would now like to turn the call over to Mr. Neeraj Bhargava for closing remarks.

Thank you all for taking the time to attend the call and we look forward to communicating with you in the near future.

Ladies and gentlemen, that concludes the presentation. You may now disconnect and have a great day.