WNS (Holdings) Ltd (WNS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 WNS Holdings Earnings Conference Call. My name is Clarissa, and I will be your coordinator for today. (Operator Instructions.) I would now like to turn the presentation over to your host for today's conference, Mr. Jay Venkateswaran. Please proceed, sir.

Thank you, Clarissa. Good morning, ladies and gentlemen, and good evening to those of you joining us from Asia. Welcome to today's WNS Fiscal 2008 First Quarter Conference Call. I am Jay Venkateswaran, Senior Vice President of Investor Relations at WNS. With me I have Neeraj Bhargava, our CEO, and Zubin Dubash, our CFO. Today's remarks will focus on our recently announced results for the fiscal first quarter ended December 30, 2007. Neeraj will begin by providing an overview of the business and financial developments. He will then review key strategic issues, as well as recent organizational developments. Zubin will follow with specific details on our financial results for the quarter and review 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 6-K to be filed with the SEC today. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. You can find reconciliations of these non-GAAP measures to GAAP measures in our press release issued yesterday, August 15. I will now turn the call over to Neeraj.

Thank you, Jay, and thank you all for joining today's call. I am pleased to announce that WNS had a very strong first quarter. The BPO market continues to be very attractive, the revenue and profits have been better than expected, and our people retention initiatives have started to show some positive results.

Also we have left our guidance unchanged, despite the strong [reputation] of the Indian Rupee, our assumption that the Rupee would finish this year--this fiscal year at an average of 40.7 to $1.00, and also the fact that we are including in our guidance the potential loss of revenue from the Aviva BOP contract. [Indiscernible - accented] information, the Rupee ended today at 41.33 to $1.00.

In my remarks today I will touch upon three key topics. First, I will talk about our results for the fourth quarter of fiscal 2008 and our expectation for the rest of the year. Secondly, I will discuss the BPO business environment and review the performance of our three business units. Finally, I will discuss some recent organizational developments.

Starting with our first quarter results, we finished the first quarter with revenue less repair payments of $69.8 million, representing growth of 53.3% from the corresponding quarter in fiscal 2007, and 9% from the previous quarter. Our strong industry-focused value proposition and the efforts of our sales and delivery teams have resulted in 11 new client wins and six expansions from existing clients during the quarter. These wins give us greater confidence in our revenue guidance for the fiscal year.

Looking at margins, we finished the first quarter with net income before amortization and share based compensation of $10.8 million, a 104.2% increase from the corresponding quarter in fiscal 2007. Our gross margins were lower than the corresponding quarter in fiscal 2007 due to the 9% appreciation of the Indian Rupee against the U.S. dollar. However, we exceeded operating margin, including amortization and share-based compensation, from the first quarter of 2007 due to tight cost control and the significant SG&A leverage we've [added] in our business model.

Our net margins further benefits from a foreign exchange gain of approximately $1.3 million. We are particularly pleased with the improvement in operating margin from 12.5% in Q1 of fiscal 2007 to 30.0% in this quarter. This metric would exclude foreign exchange gains [that were received] despite the [current] percent rate inflation and 9% Rupee appreciation. The growth in our business and our ability to manage costs while continuing to invest in new opportunities positions well to conquer the negative impact of the Rupee appreciation for the rest of the fiscal year. Thus, we have left our guidance unchanged despite assuming that the Indian rupee finished this fiscal year at an average exchange rate of 40.7 against the U.S. dollar. Further reduction of approximately 1 million in estimated share-based compensation expense for the year will improve our GAAP net income for the year.

Zubin will cover our financial results and guidance for fiscal 2008 in greater detail shortly.

Moving on to the second topic, the performance of our business units. Building industry focused BPO businesses has been a key aspect of our growth strategy. Now, let's review our progress against the strategy. In BFSI, we continue to build and deepen our client base. During the first quarter, we won three new insurance clients and four new financial services clients. We also [account] for the assets and people involved with the Aviva Sri Lanka operation back to the client on July 2, 2007, as per our BOP contract.

I would like to simply share my thoughts on the current mortgage environment and potential impact to our business. With the reported difficulties in the mortgage--while the reported difficulties in the mortgage market cause concern, we do not currently serve any subprime focused lenders. We do serve clients across the mortgage value chain, including conventional mortgage originators. Our predictions for the year are based on client wide visibility. At this point we do not expect a material impact from mortgage focused revenue. We believe that approximately 1 to 2 million of revenues less repair payments could be affected if the current situation of the mortgage market persists. If this scenario were to unfold, we are confident of replacing such revenues with new businesses since our pipeline continues to be quite strong.

In travel, we've seen a further expansion from existing clients during the first quarter. We won five key expansions in this period and have started a pilot with a U.K.-based airline focused on revenue recovery.

I would also like to mention that we just added two senior sales and client management people in the travel business unit, [Steve Riddles] in the U.S., and [Peter Grover] in the U.K. Steve and Peter come to WNS with 15 years of experience in the travel industry with leading companies like TRX, [ECS], American Express, and [indiscernible - accented], and have a tremendous track record in building travel technology and travel focused BPO businesses.

In [emerging] business, we continue to build on the successes of last year. We have won four new clients, two of which were driven by the efforts of the recently integrated [Marketics] [indiscernible - accented].

Moving on to our recent acquisitions, as announced earlier, we completed the Marketics acquisition in early May. Since then, we have integrated the sales teams and have been focused on cross selling between the two businesses. We continue to get [better] [indiscernible - accented] acquisition than the initial reaction from existing and potential clients to their services as we increase our confidence and our ability to create value through this team.

During the quarter, we also announced a smaller acquisition, FLOvate Technologies, a technology platform provider in the auto claims business. This acquisition allows us to sell our claims related technology platform, along with our existing BPO services, to fleet owners and auto insurers.

Now turning to the third topic, organizational development, our headcount continues further to increase for the fourth quarter with an additional 1,625 employees. This takes our overall headcount to 16,709, or a sequential increase of 10.8% from Q4 fiscal 2007.

Further, we found improvement in attrition during the quarter, which was down from 48% to 43%. While we are encouraged by the improvements in this quarter, people retention will remain the top priority for me and our entire management team. As we've discussed in the past, our employee sourcing process forms the underpinning of our attrition related initiative. Our focus on employee referral programs is starting to lower [improvement] costs. In addition, we continue to [indiscernible - accented] our plans to extend our sourcing network in new cities where we do not have an operational presence. These and other efforts highlighted during our recent Analyst Day are critical in reducing attrition over the long term.

Our global delivery target remains on track and Eastern Europe is a very key element of that strategy. In Romania, we've leased the facility and the development of a new site is underway. We expect to launch this delivery center in the fourth fiscal quarter of this year. Discussions with the existing clients and one new client are in various stages of negotiation, and we are hopeful to get started with these clients toward the end of this fiscal year.

Our Board of Directors saw the addition of Anthony Greener as an independent member. So Anthony joins us from--after retiring from British Telecom in September 2006, where he served as Deputy Chairman of the Board. We are excited to have someone of [indiscernible - accented] join us--join our Board.

In addition, we further strengthen our client management team through the additions of Deborah Kops who joined us as Chief Marketing Officer, and [indiscernible - accented] who joined us as Chief Administrative Officer. I will now turn the call over to Zubin to 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 the 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 Auto Claims BPO segment we provide accident management services in which we arrange for automobile repairs through a network of third-party repair centers. The amounts invoiced to WNS clients for payments made by WNS' third-party repair centers are reported as revenue. Since the company fully subcontracts the repairs to repair centers, 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 details of our results, I would like to highlight a few key aspects of our strong financial performance in the first quarter of fiscal 2008. First, 53.3% growth in revenue less repair payments, of which 49.6% is organic. Second, operating margins before amortization and share-based compensation of 13% exceeded our performance in quarter one of last fiscal by 50 basis points, despite wage inflation and a 9% Rupee appreciation. Third, we are reiterating our guidance for net income before amortization and share-based compensation, despite changing our assumption for the Indian Rupee U.S. Dollar exchange rate from 42 to Rupee 40.7 for the year.

Now let's look at our results in greater detail. Revenue less repair payments for the quarter were 69.8 million, up 53.3% from 45.5 million a year earlier, and up 9% from 64 million in the previous quarter. After the acquisition [of] Marketics and FLOvate collectively contributed approximately 2% of revenue less repair payments, therefore, our growth was predominantly organic. Gross margin for the quarter, excluding share-based compensation was 32.7% of revenue less repair payments, compared with 34.3% in the quarter earlier. The drop in gross margin was primarily due to the appreciation of the Indian Rupee against the U.S. Dollar between Q1 of fiscal 2007 and Q1 of fiscal 2008.

SG&A expenses, excluding share-based compensation, for the quarter was 13.7 million, or 19.7% of revenue less repair payments, compared with 9.9 million, or 21.8% of revenue less repair payments a year earlier. Operating income, excluding amortization of intangible assets and share-based compensation expenses for the quarter was 9.1 million, or 13% of revenue less repair payments, compared with 5.7 million or 12.5% of revenue less repair payments a year earlier. Our tax rate for the quarter was 10.7%. Capital expenditure for the quarter was about 5.4 million. Now, let's go on to a review of our guidance for fiscal 2008. For the purposes of our guidance, we have estimated our revenues and cost of average exchange rates of 40.7 Indian Rupees to $1 and $2.03 to [one pound sterling] for the year.

Now, let's look at our guidance for the fiscal 2008, based on these exchange rate assumptions. We reiterate our guidance for revenue less repair payments of between $302 million to $307 million. This represents a growth of between 37.5% and 39.7%, despite the potential loss of revenue from the Aviva BOP during the course of the year.

As a result of changes in our [actual] assumptions, our estimate of share-based compensation expense of 7.8 million for fiscal 2008 is $1 million lower than the previously estimated 8.8 million. The [indiscernible - accented] assumptions are based on both the historical trading performance of our shares and the historical pattern of exercise of employee stock options.

Amortization of intangible assets is expected to be 4.4 million in fiscal 2008. The modest increase from our earlier estimate of 4.2 million is due to the acquisition of FLOvate Technologies. We expect our tax rate for fiscal 2008 to be between 14 and 15%. Our net income for fiscal 2008 before amortization of intangibles and share-based compensation expenses is expected to be between 41 million and 43 million as stated during our previous quarters. Our net income before amortization, but after share-based compensation expenses, is expected to be approximately 1 million higher, between 33.2 and 35.2 million.

We believe that our business and the hedging that we have in place can absorb the additional costs arising out of the appreciation of the Indian Rupee, and we will be able to deliver the same level of net income before amortization and share-based compensation. Our guidance for capital expenditure remains at approximately 36 million for the year.

In conclusion, I would like to reiterate that we are pleased about achieving the targets for fiscal 2008, despite significant challenges already discussed. We continue to invest in growth opportunities and believe we are well positioned to capitalize on them. With this, we have concluded our prepared remarks. Neeraj and I will now take any questions you may have. Operator?

(Operator Instructions.) And your first question will come from the line of Christine Pezino of J.P. Morgan. Please proceed.

Good morning. Just a couple of things. Your tax rate this quarter came in a little bit below our expectations. Can you explain what happened there?

Yes. Well, first of all, our tax guidance for the year has reduced from what we had said earlier. Earlier we had given a tax rate of 16%. We have lowered that to between 14 and 15. That's one of the reasons. But a significant reason was actually we had a deferred tax credit in our P&L for this particular quarter, which is not likely to repeat in the future. It is very difficult to forecast deferred tax credits on a quarter-by-quarter basis. It just happened to have come in this particular quarter.

Okay, great. Thanks. And then, on the SG&A line, it looks like you did a nice job. The SG&A costs in absolute dollars actually declined, which I was a little bit surprised. Can you talk about what areas specifically that you've been able to reduce costs in some of the areas? It sounds like you are still spending in sales and marketing and hiring new people, as well as investing in the Romania facility. But what enabled you to lower your SG&A costs this quarter?

Christine, this is Neeraj. We--as you rightly said, we continue to expand in terms of hiring our sales team and investing behind growth oriented opportunities because in general we are very excited about our growth prospects. I think there were a few benefits that we've had in this quarter. One was that, if you recall, before we talked about the NIC or insurance-related expenses that we had to incur in Europe, there was a reduction in those expenses, compared to what we incurred in the previous quarter. And I think the other big ticket item was in general we are leveraging more [indiscernible - accented] benefits. In the first calendar quarter of this year, we went on looking at significant renegotiations of many of our [projects and] contracts. We've been very tight with discretionary expenditure. And all the benefits of some of the smart things we did in the January to March quarter have yielded additional benefits for us.

Zubin, you want to add something else?

No, I think you pretty much covered it. It's essentially a combination of [scale] benefits and the fact that we don't have [indiscernible - accented], which we had in the January through March quarter.

Okay, great. And then, just the last topic I wanted to talk about is last quarter you talked about being in negotiations to obtain some capacity in special economic zones. Have you made any progress on that front?

Yes, absolutely. We're at the next stage of completing some [plans] there. But what I can guide to you and others on this call is that in Gurgaon, our location near Delhi, we have managed to convert an earlier expansion which we had planned on a non-special economic zone facility to now an SEZ facility with the same builder and that's clearly something that all goes well for the future. We expect this to be operational sometime around the fourth quarter of this calendar year.

Secondly, we are in active negotiation [indiscernible - accented] in other locations as well. And I think once we do that there will be very little new capacity additions we will have in terms of signing of new leases outside special economic zones. There are a few which we have signed in the past, which will--on [[indiscernible - accented] and Pune, for example, in the early part of next year. But they are pretty much limiting our new sign-ups now going forward to doing it only in SEZs.

Okay, great. And then, just to follow up on that, in terms of capacity, what are your plans this year? I understand Romania will be coming on in the fourth fiscal quarter. What other plans do you have to add capacity throughout the year?

Christine, we don't particularly give the precise number of people we're going to add, but it is pretty much in line with our overall people expansion plan and [indiscernible - accented] utilization. And I think the other implied part of your question could be are we looking at any other non-Indian locations. We're certainly exploring options, but there is nothing that we can talk about right now in terms of something that is concrete.

All right. Thanks, guys.

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

Good morning. Thank you. When we look at the gross profit margin this quarter, I know the Rupee has certainly impacted that. But sequentially, it's down about 800 basis points. And I'm wondering if you can disaggregate kind of that sequential move. How much of that's related to the Rupee? And then, maybe you can discuss what else might be driving that and how seasonally you expect kind of the margin to trend.

Sure. Here's the breakout of that 800 basis points. The exchange rate resulted in about a 300-basis point hit. Salary [indiscernible - accented] resulted in about a 300 basis point hit. In the fourth quarter of last year, we had some cost reversals because what you have for instance is compensated absences, which will [level over] the year and get reversed at the end of the year. That contributed about 140 basis points. And we had some one-time revenues in the fourth quarter of last year, which was another 170 basis points. So if you actually add those all up, it comes to 990 basis points. Against that we actually achieved productivity benefits, which resulted in the net effect of 790 basis points. So about--we got about 200 basis points in terms of productivity benefits.

Great. That's--well, that's very helpful. And then, I guess how would you expect the--that GM line to trend? I guess the FX. Sequentially going forward you wouldn't expect a big hit now that it's back at about 41. But maybe what are some impacts that you see kind of seasonally throughout the rest of the year?

Sure. Let me first clarify. We said we expect the Rupee dollar to be at 40.7 for the year as a whole. Given that we ended the first quarter a little higher, it actually assumes 40.5 for the balance nine months. Based on that exchange rate, we expect gross margins to be moderately higher than what we've seen in the first quarter. Just like last year, the gross margin should build up gradually, perhaps less for the second quarter, more for the third and fourth quarter.

Great. And then, just finally, building off the last question, with SG&A coming down so rapidly, a little under 20% of revs now, do you expect that to be sustainable or are you going to continue to invest more heavily in the sales teams and have that actually ramp up a little bit as a percentage of revenue?

There is no change in our hiring plans, whether it's in the sales teams or the HR or the IT and all these kind of key functions. Actually, all the savings that we are making are a combination of the normal leverage that we would get, plus cutting out any discretionary expenditures. Giving guidance going forward, that 19% should increase marginally for the next three quarter, but we are confident of actually bettering what we've always said, which was we would get 50 to 100 basis point savings on SG&A per annum. We hope to better that in this particular year.

Great. Thanks very much.

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

Thanks. Hi, it's Brandt Sakakeeny. Good morning. A couple of questions for you. First, on the attrition, congratulations on starting to bring that down. But could you just give us a little more color on maybe some of the specifics on why that fell? And then, number two is I guess if you could just discuss in a little more detail where the Romanian facility is from an operational standpoint. Thanks.

Sure. Let me take the second question first. As far as Romania certainly is concerned, we originally had mentioned that that's something we intend to launch in the latter part of 2007 calendar year. We are pretty much on target. The lease has been taken. We expect to hire one set of team members to work on processes there around the October/November timeframe. We will formally go live on billable client work in the--possibly around January. And we are pretty much on target in terms of where we need to be in terms of trying to get to at least a base [load] of business that allows us to then sell this more aggressively in the year to come. So that's as far as Romania is concerned.

As far as attrition is concerned, I think there is a--there's more favorability as a combination of things that we have. We have, as we described in our Investors Day, a number of programs running from first of all ensuring that we recruit more effectively, which in turn then translates into improved attrition. And secondly, in terms of just from a people development, career development, leadership development, investing significantly behind in those activities.

One very successful program that we've brought is we redesigned our supervisory training program to make it much more sharply focused around people development and retention of front line people. This program was relaunched in the last quarter and is now a mandatory requirement for anyone in a supervisory situation. We are training very aggressively. This is pretty much mandated by very senior people who are ensuring that everyone participates in this and is actually following up on some of the learnings we have from that. And that's one example of an initiative that is working extremely well for us.

So while the trend is good, we are certainly not resting and declaring victory yet. I mentioned earlier that me and some of my senior colleagues have put our own bonuses on the line this year by saying that we'll make a significant difference to attrition in the second half of this fiscal year. And we are very committed and optimistic about making that happen.

Great. And in terms of goals, should we expect something perhaps in the 30s by next quarter? Is that a fair goal do you think?

Yes. I think at this point we are not making quarter-by-quarter projections. Right from our--the guidance we gave earlier, we said that in many ways these programs take times. So it is the quarter--October quarter onward that one should expect some sizeable changes. So we are taking it one quarter at a time, but my sense is that you should expect some remarkably different numbers hopefully from the October quarter onward.

Great. Thank you very much.

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

Hey, guys. Real quickly, what is the amount of FX gains that is included in the guidance for the rest of fiscal '08, if any?

Yes. It's between 700,000 to 800,000 right now. This is based on assuming that the forward--that the Rupee dollar is at 40.5 and the pound dollar is at 2.03.

So it's 700,000 to 800,000 per quarter?

No. Just for the rest of the nine months.

For the rest of the nine months. Okay. And looking at the--I think the tax rate assumptions for this quarter--I think you just mentioned this. But can you just repeat that? I think you said that is related to a deferred tax credit.

Yes. There are two reasons. One is the fact that we've lowered our guidance on the tax rate from what we had earlier said, which was 16%, to between 14 and 15. In addition to that, there was a one-time deferred tax credit that we had. Well, it's not one-time, but it's hard to predict in which quarters these come. Because what you have is [indiscernible - accented] deferred tax [indiscernible - accented] and therefore they were credited to the P&L. But as you build up assets those get reversed as well. So in this particular quarter, we had about a 350,000 credit on that.

Okay. And then, coming back to the financial services exposure, I think you guys have talked about the mortgage situation pretty clearly from the get-go. But I'm curious if you look at the--kind of the financial services as an industry for you guys, is there any percentage of revenue contribution or meaningful revenue contribution from the brokers in the securities industry?

Yes. We have in our--on what we do in [mortgage] services, we work with the securities industry [indiscernible - accented]. It is not a very large portion of our revenue. It's probably not material and worth talking about, but somewhere in the range of about 2% or so.

Okay. And finally, for me, the percentage of revenues that currently come from SEZs?

We don't have any revenues currently coming from SEZs. But you should expect that in the October quarter of this year. We should have [a lot]--a lot of revenues coming from SEZs. Having said that, we do have a small portion of revenues, very small right now, coming still from Sri Lanka where the tax benefits are expected to go beyond 2009.

So by the time that we hit the tax expiration and the tax file date, we would expect that all of the incremental work that you guys are doing is probably going to be more weighted towards the SEZ?

Not all, because as I mentioned earlier, there is some capacity we have--that now we have committed which is happening right now, which will get operational in the calendar year 2008, the early part. That will come outside of an SEZ because that--we didn't have suitable options when we committed to that. But one should expect that from now on anything new that we are booking should be in an SEZ as well as some of the ones that are coming alive even during the current fiscal year will be in SEZ facilities.

Okay, great. Thanks.

Okay. Your next question comes from the line of Mitali Ghosh of Merrill Lynch. Please proceed.

Yes, thanks. Good evening. Firstly, I just wanted to clarify both the--did you give guidance on the GAAP net income? I sort of missed that in your initial remarks.

No. What--we didn't do that. What we gave was guidance on our adjusted--our non-GAAP net income and then just--and the only reference we made to GAAP net income was the fact that it could be 1 million better because our employee stock options would be approximately 1 million less. So the--and we did--the figure that we said was it would be between the GAAP net--the GAAP net income [including]--of the share based compensation we expect it to be 1 million higher between 33.2 and 35.2. But it is before amortization, so it's not GAAP.

Okay. So this is both stock compensation, but before amortization?

Right.

And that you said is--sorry--33.2 to 35?

.2.

35.2. Okay. Secondly, just wanted to understand that--like we have seen pretty impressive SG&A levels this quarter. On a steady state kind of basis, what sort of margin levels do you think you can target at a gross level or at an EBIT level?

Mitali, are you referring to this particular year or going beyond that?

No, beyond that.

I think that would depend, Mitali, upon the exchange rate. I think at this point in time we have guided for this particular year based on the exchange rate that we have. And if this exchange rate continues, then you could expect that to be a reasonably steady state as well. So like we said, we expect gross margins to improve going forward for the next three quarters moderately, and we expect SG&A leverage to be substantially better than the 50 to 100 basis points that we had given guidance towards earlier. So that's what we are targeting for this particular year is that the SG&A leverage is about 100 basis points.

Also, I'll add that if you look at our margin projections for this year, even at the revised exchange rate, we are talking about 41 to 43 on a base of $300-odd million. So we're talking 30 to 40% roughly. And I think the--if you consider the fact that it is adjusted for exchange rate, then that's a good indicator of where we stand on operating margins.

Right. And just a follow-up to that. Apart from the SG&A leverage, what are you sort of factoring into that in terms of some of the operating metrics like utilization for instance?

I think that as we explained, in our business while utilization is important for some areas like [indiscernible - accented], it is not a huge factor in terms of how much impact it makes on economics or--what we are factoring there is that clearly--that some [indiscernible - accented] attrition levels as well as looking at the ways our business mix is proceeding, there would be some benefit to utilization, but that is not the key driving factor in terms of what drives our operating economics. I think the important aspect in our business, also, is asset utilization. We have been pretty much industry leaders in terms of how we are utilizing our [indiscernible - accented]. For this quarter, we actually improved on asset utilization. And our very strong and relentless focus on that area is certainly something that one should expect to continue.

I think more than that is we are beginning to get even tighter on purchasing. As you can imagine, our relationships with vendors for services that we provide to our employees in areas like transportation continue to be very big. And as we look at increasing our scale, some of the efficiencies we achieve on aspects like that are going to be very vital for us to increase our productivity as well.

And then, finally, I think the point we made earlier about getting more productive on contracts that have a unit transaction-based pricing basis, and our focus on that continues. So when you are seeing improved numbers that come from productivity that Zubin mentioned of 200 basis points, it is a combination of all these things.

Sure. Thanks. That's [very good]. But in fact, I was referring to that asset utilization number. What was the shift utilization like this quarter?

The shift utilization on a [used peak] basis was 2 and on a [total peak] basis was 1.8.

All right. And just in terms of the sales and marketing, it would be helpful if you could give us an update of how large the team is now and what the [indiscernible - accented - accented].

We have approximately 45 people in North America and about 25 people in the U.K. right now. And these are supported by about 30 [indiscernible - accented] support resources in India. This team has grown compared to having [indiscernible - accented] 85 people around this time last year. So we have added people and part of what we want to communicate here is that revenue growth is still something that is going to drive this company. And we continue to invest in people and it's not just the quantity of people that we've added, it's the fact that we are going for some very experienced resources, like Steve and Peter, who we added this quarter. That's important.

And finally, I think one of the bigger changes, which we started making some time last year, but it's going to get accelerated this year, which is factored in our budget and guidance, is the increased expenditure and focus on marketing. And we've got a very accomplished new CMO in Deborah Kop, and we're building a team around her, which is again, all a part of our budget. So we expect the [indiscernible - accented] aspect of what we're going to do to be enhanced very significantly as well.

Sure. Thank you very much.

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

Thank you. Obviously, very good performance this quarter, plus you did not lower guidance, which has been the view in some quarter--which the guidance did do in some quarters. But the question is, have you pulled out all of the stops to get to this? Is there--what are the operating levels going forward that you can still depend on? If you could drill down sort of one more time into the existing productivity levels that you have.

So let me talk to the revenue side first. First of all, we'll just talk about the pricing aspect. I think clearly on any new business that we are bidding for, we are bidding at higher prices. And [indiscernible - accented] that we continue to win business, suggesting that the fact that we have raised prices on new bids. It is not a deterrent to our continuing to win business. Secondly, if you look at our business today, about 50--more than 50% of our business the revenues are coming from pound or Euro denominations. And that ratio with the Rupee did not suffer to the same extent. In fact, on the pound we did quite well during the quarter.

And that--and also the fact that the remaining portion that we have from the U.S., we have inflation already built--and price inflation already built into the contract, so it's nearly 50% of that business. Our exposure on the pricing front has been small. And in situations that are involving renewals as well as in some cases some proactive negotiations with customers on situations where we're finding our costs are rising, we've been very aggressive on that and we are expecting to continue to see progress around those areas as well. So that's one level.

And the second thing is to be driving your people-related costs down further, that comes from managing attrition thereby influencing the [bench]. Also coming from how you adapt your mix of people that you staff on projects. There are opportunities to have skill mix changes through--in more mature processes as well as increasing more knowledge to the work, so that you actually can train people a lot faster. So there are changes we are making on the operating levels to make sure that we are more productive in terms of how we staff our more mature teams. And that's a very important aspect of how we are increasing productivity.

The third element is working on reducing people in your unit transaction price bid program. We have about roughly 40% of our business that is coming from these programs. And clearly on that, there are very specific targets on how to do the same work with lesser people. And the other aspect is what I referred to earlier, which is smarter purchasing on elements of your business, such as transportation. And we've got a lot of movement in that direction in terms of how we do it. Telephone bandwidth is another area where we've been working on it continuously to reduce the costs there. And there are some other initiatives we've got going this year to cut those costs down further.

And then, finally, if you look at the SG&A, clearly looking for more productivity from the sales team. So in terms of targets that people are bidding on, looking constantly at how you restructure the teams to get more out of them, that's important. And as Zubin mentioned earlier, some of the discretionary expenditures, I think we've been watching them a lot closely. It's Zubin's birthday today, and we have a party, but we are not even serving Indian champagne.

Happy birthday, Zubin.

Sorry about the--sorry for the little joke here. But I think we are just watching things very closely and ensuring that the value is transferred as much to the shareholders as possible.

I guess, happy birthday, Zubin, first of all. And I think--also talk about demand by vertical. There has been a lot of concern, obviously, about the financial services vertical largely, not just related to mortgage brokers. But generally speaking, do your pricing comments and your demand comments apply to the financial services vertical?

Well, the financial services vertical is--has always been very attractive from the perspective of growth opportunities it offers, but the contracts tend to be tighter, very smartly negotiated, and pricing tends to be a lot tougher there. So this has been a target issue about the last [portion] of the offshoring business. So there's a--and the point I'm really making here is that things weren't very rosy in terms of how you negotiated with financial services companies historically as well. So we--that trend of tight negotiations and ensuring that contracts are priced right from their standpoint is in some ways more of the business as usual. We haven't seen an increasing pressure coming enough to reduce prices there because of the recent situation.

I think one of the things that is happening there is that offshoring, particularly in the banking space over the last 12 months, with mid-sized banks we've had quite a few wins there, while getting more and more acceptable - the same with mid-sized insurance companies. So the demand growth has more than offset the usual tightness that you see from that industry. And while some sectors like mortgage are likely to get hit in the future--but the fact that we are a very diversified BFSI business with growth coming from--like insurance, certainly is something that all goes well for us.

I think the other sectors, we--the big news I still think is on the revenue side, because even before this [indiscernible - accented] started, usually you begin to see the pipeline for deals that get particularly close between October and February bubble up around this time frame. And what we have seen is a pattern pretty much similar to previous years where the [build] flow as far as the [indiscernible] are concerned or builds in the travel area, or for that matter, even insurance and banking, is actually looking quite good for the rest of the year. And hopefully, some of the economic turmoil that you see will--actually there's some closure there, too. So overall, we continue to be quite excited about the overall mix of the business, in spite of some pressures you see in BFSI going forward.

That's fabulous. That's exactly what I was hoping to hear. Could you [indiscernible - accented] on your forward hedging strategy?

Yes. As we've mentioned before, our hedging strategy is primarily to cover up to about six months, [then] we have Board approval to cover up to one year. Just given the recent [indiscernible - accented] India [FX] markets, we are reevaluating the strategy to see whether we should be looking at [indiscernible - accented]. I think there is a [fear of] doing [indiscernible - accented] because the cost of [option] can be quite significant [as they go] beyond six months. And so, that's why your effective cost--your effective FX rate can be quite--may not be that good. But having said that, it's [indiscernible - accented]. Most of our hedges--most of our [indiscernible - accented] is covered six months and going forward we may extend that to a year or beyond.

So just to clarify, six months meaning right now you are covered for through the end of December?

Yes. Let's say our--for the next three months, 90% of our exposure would be about 90 to 100% and for right after December, more than 50%.

Got it. Okay. And last question, why were deferred revenues down?

Yes. I'm glad you asked the question actually. I thought I had explained this in the last call as well. What we did was that we restructured one of the contracts in the [indiscernible - accented] business, we got an advance from our customer. Though we continued to perform the work over two years, we actually got that money in advance. So we were not allowed to recognize that revenue in one shot because we had to continue to do the work over two years. So that advance, which you see in the balance sheet, gets debited to--in the balance sheet and gets credited to revenue as we do the work in each of the months.

Thank you. Congratulations.

Thank you.

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

Thanks. Good morning.

Good morning.

Hi. You--at the NASCOM BPO Conference last week there was a lot of focus and discussion around the tax exemptions and potentially through the industry rallying and sending a combined message I guess to the government regarding extending the tax holidays beyond March of 2009. Can you give us some color on this? I mean, how do you think this may proceed over the next month to the next year? And what are some things that perhaps we should look out for to see how it's progressing? It does seem as though there's--the government has certainly heard what industry is saying at this point.

Well, I think the industry--the BPO industry was united on a couple of fronts. One is that we felt that given the maturity of this industry and it's criticality to India in terms of generating more direct and indirect employment, it was very [indiscernible - accented] for Indian government to consider extending the tax exemption that we have for at least five years, if not 10 years. And so, that request has been continuously made by NASCOM and some of us more privately over--to the government over the last few months. And I think certainly we see us as continuing to do that.

We don't have any visibility on whether that is something that the government is going to agree to. So at this point in time, all our business planning is done with the view that it may not happen, as things tend to happen on fronts like this, that we are unlikely to see any decisions getting made until it is perhaps six months before the event. So we're not expecting to have very concrete action--and this is more my private view than anything else--over the next six or 12 months. But there would be continuing efforts from--on the part of NASCOM to do that for the BPO business.

I think the other aspect that is also clear to all of us is that for our shareholders we still need to ensure that both from making SEZ investment as well as considering some investments in other countries, which are willing to give a longer tax holiday for a potential transfer of work, we need to generate more options for our company. So at this point in time, we are very aggressive about moving our new work to SEZs. We are also looking at some other job [indiscernible - accented] other than India, which are in reasonable cost locations where we could potentially move some of our existing work and ensure that on that work we have tax benefits that extend significantly beyond 2009. It's not easy because you've got to commit to your customers also to ship work from India to somewhere else. But that's an imperative that some of my senior colleagues have taken upon themselves to at least generate those options as we move closer to the 2009 date.

So that's where we stand right now, Julie. We don't have much visibility on which way things will go.

Okay. Okay, thanks. Good to hear that there's--it sounds as though the pitch is getting louder there. Just a last question on the contracts. You have a good number of new wins in the quarter. Can you give us a feel for sort of the average contract size of these you may be signing? And then, also, once they--what the potential dollar size could be over time?

So Julie, what we talked about is two things here - new contract wins and [indiscernible - accented] expansion. Let me address the expansion one easily--that's relatively easier. Typically, what happens with our client relationships is we [try to work] one to two processes, and then we have--our work begins to expand in other places. Our typical expansions--there are often multiples of these--multiple such expansions of the same client. So a single expansion is in the range of somewhere between $500,000 and $2 million a year. That's what we typically see.

In terms of new wins, again, there are situations where you have a bigger win, which in our context is, if you have a signed first contract of $3 to $5 million, it's a big win. And in other situations, people want to start with one or two processes and that ends up usually being a $1 to $2 million situation with a very clear promise that that relationship could end up to being over $5 million and perhaps over $10 million. So I think what you've seen in the--these [connections] is a mix of all these things. We've had in our new wins one of the ones which are clearly bigger ones, what stands out clearly is a couple of wins we had with the same insurance company in the U.S. was a relatively bigger one. But the rest of them are reasonable sort of 50 to 100 FTEs or sometimes 150 FTEs, which have the promise of building into a much larger initiative.

Thanks. And just, lastly, an update on other verticals. Obviously, the core verticals continue to do well. But do you think we'll see some [marquee] type contracts in new verticals over the course of this year?

Yes. I think we mentioned some of the consumer-centric industries in our list today. We are seeing some very strong leads coming from consumer products and media, pharma industries that tend to be consumer-centric. We are also excited about what we are seeing in manufacturing, which is different from what things we have done in the past. And there are some new recruits that we've just added--in fact, after the completion of last quarter--to help us sell more aggressively in those areas.

So other than the business as usual activities we have in travel and BFSI, I think I'd like to single those two out because the good news is that the whole offshoring wave is now beginning to spread beyond the early movers, which tend to be particularly from BFSI, into a much more widespread phenomenon. And we're certainly seeing some of that now coming through as--and particularly as economic concerns in the U.S. get more intense, then we'll see then a significant widening of the phenomenon.

Okay. Thank you.

(Operator Instructions.) And your next question comes from the line of Anthony Miller of Arete Research. Please proceed.

Yes. Hello, gentlemen. I'm trying to understand a little better about your competitive positioning in a couple of angles. Firstly, if you were to look at the deals you've bid for over, say, the past couple of quarters, have you detected any changes at all in the makeup of the players you're meeting in competition, either sort of new names appearing or any old names disappearing? Are any of your traditional competitors to your mind getting more aggressive or stronger or any weakening?

Yes. We have three categories of competitors. The first category is some of the large local players like Accenture and IBM. We've been up against them in a few situations. We see competition from them getting a little bit more intense as they build their offshore operations. However, we've had some of our better wins in the last couple of quarters in situations where they were involved as well. So while there is increased aggression, I think it is still a little bit similar to what we've experienced in the past. The second is from the BPO offshore provider services companies. We've had situations where we've gone against them in a few cases as well. They continue to be aggressive and so that's the second one.

I think the third one is from more pure plays like Genpact or EXL. And again, it's not very different from what we saw in the past. We see them in many of the deals we are in. So the competitive landscape continues to be the same as it was--usually the same six or seven companies we see in 90% of the deals. There are a few repeats you will occasionally see in more specialized areas like [revenue comping] in travel or some things we do in the KPO knowledge services area. But usually, it is the same players that you are seeing, and the competitive intensity just as it was earlier remains to be still quite strong.

If you looked then at the deals that you've been competing for and haven't been successful, what would you say--are there common themes there why you miss out on a deal, or does it vary transaction to transaction?

I think the single biggest theme that was a big gap in our portfolio, which we have built over the last 20, 18 months, was that we lacked a global footprint to be able to compete for some large multinational contracts, which involved work in languages other than English. And--which is the reason we started correcting that was given the size of our company in comparison to some of the large global diversified IP and BPO players, there's a natural time at which you can start spreading yourself geographically, both from a financial and operational standpoint.

So we felt that about 12 months ago it was a good time to plan expanding of global footprint. Romania, which we added in Eastern Europe, is an example of what we've done there. We over time do expect expansions in other parts of Asia, as well as Latin America. So I think the expansion of the global footprint, certainly the European expansion, is beginning to get us into a lot more [deal flow] that involves European companies which are looking at both English and European language work.

So to--from out standpoint, that was the single biggest gap. But the way we see that is, first of all, there's enough of a market even without that for us to grow. And secondly, as we grow ourselves and start beginning to add those capabilities, it certainly will make us appear in those deals as a strong contender more often.

Okay. Thanks very much.

And we have no further questions at this time. I'd like to turn the call back over to Management for closing remarks.

Well, thank you all for taking the time this early morning in a market where things are clearly quite interesting. We have had a very good quarter in very difficult conditions and I'm extremely proud of what our team has accomplished. We continue to be cautiously optimistic about the rest of the year. And assuming that the exchange rate starts playing a bit more in our favor, we should do quite well. So this is a very good start to the fiscal year, and I'm very pleased with where we are. So thank you for your time.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.