WNS (Holdings) Ltd (WNS) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the the Q2 2007 WNS Holdings Ltd earnings conference call. My name is Lisa and I'll be your coordinator for today. At this time all participants are in a listen only mode. We will be conducting a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

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

Thank you. Good morning, ladies and gentlemen, and good evening to those of you joining us from Asia. Welcome to WNS's fiscal second quarter conference call. I am Jay Venkateswaran, Senior Vice President of Investor Relations at WNS. With me are Neeraj Bhargava, our CEO, and Zubin Dubash, our outgoing CFO. We also present Anup Gupta, our Chief Operating Officer, and [Rebecca Dotter] Executive Vice President and Controller. Today's remarks will focus on our recently announced results for the fiscal second quarter ended September 30, 2007.

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 those factors set forth in our Form 6-K 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 on November 14th.

I will now turn the call over to Neeraj.

Thank you, Jay and thank you all for joining today's call.

In today's discussion, I would like to cover four key topics. First I will discuss the highlights of our second quarter performance, and reiterate our most recent guidance for the year. Second, I will focus on our remarkable improvement on employee attrition and our ongoing focus on this issue. Third, I will touch upon key factors in our business environment including the impact of the Financial Services market turmoil, the robustness of our revenue stream and the impact of currency inflation. Lastly, I will touch upon organizational issues and other strategic initiatives. Zubin will then take you through the financial highlights and discuss key issues around our guidance for the year.

Starting with our financial an operating performance for the second quarter, and our outlook for fiscal 2008, our growth and operating performance has been impressive despite significantly strong odds we faced in this quarter. I will highlight three key objectives of our operating performance. First, we have delivered over 35% quarter on quarter growth in revenue less repair payments despite the loss of First Magnus as a client from July, the general slowdown in the mortgage space and the loss of the Sri Lanka VOT revenues which we transferred back to our client, Aviva on June 30, 2007. Without these events we would have grown it over 40%.

Second, we also had a one-time write-off of $1.4 million in bad debt related to First Magnus. Despite this, our net income of $1.8 million excluding share based compensation, related fringe benefit taxes, amortization and impairment of goodwill and intangible assets was significantly better than what we had in August, due to several tactical moves being implemented in response to the First Magnus loss. Zubin will cover this in detail shortly. Third, our focus on operating efficiencies had to mitigate the impact of the First Magnus loss. We achieved this through rationalization of capacity, growing other revenues faster, increases in pricing and lower attrition. Our pricing trend particular is very positive since all new book business is at higher dollar prices. We're selling our industry focus as a differentiator even more aggressively. We feel optimistic of our achievement of our guidance for the fiscal year which was revised upwards on October 3, 2007, however we have cautiously decided not to raise guidance further at this point given the realities in the financial services market.

Moving on to the second topic, we have seen attrition drop from 43% in the first quarter to 36% in the second quarter. It is heartening to see this 7% decline in attrition in an otherwise challenging quarter. Our focus on this issue has helped us achieve this remarkable improvement ahead of our expectations. However, these are early days in our attrition management at first which continue to be a top organizational priority, all of the attrition management initiatives highlighted in the previous quarter continue to be rolled out and defined as we work towards a long term goal of keeping attrition below the 40% level consistently.

Moving on to my third topic, I will now focus on our business environment. The secular trend towards offshore BP being a key driver of operating performance for global companies remains very strong and is gathering momentum in industries that were late movers. Undoubtedly, there are some significant uncertainties in the mortgage industry and some ripples of that spreading into other banking and financial services segments, but currently that is being offset by strong interest from manufacturing, CPG, pharma, high-tech and utility companies and we are clearly a beneficiary of that trend. Our pipeline is very strong and as our clients and prospects approach 2008 their budgets with concern about the economic client, the offshore BPO even more seriously.

As a result, we are very excited about our prospects next year. During the the last quarter, we had two new client wins, three new pilot programs, and 11 expansions from existing clients. This has been a heavy quarter for new business despite the June to September period being seasonally slow. We do expect the next two quarters to be busy given the state of our pipeline and historic seasonal trends.

Key client wins for the quart ever include US B&C insurer and the UK business of a global retail company. Key expansions from existing clients include the travel technology platform provider, two European airlines, a leading market research provider and a UK retail chain. Another key force affecting our results is foreign exchange rates. Given the current environment, it is prudent to plan for fiscal 2009 based on foreign exchange levels. There are two key operating levers that will help us weather the impact of currency inflation, pricing and cost management and let me discuss them both.

As far as pricing is concerned as I mentioned before, we have been aggressively pricing new contracts at higher levels. We have also selectively increased pricing on existing contracts, and in other cases we have gone back to existing clients to push initiatives such as increasing system up time, increasing fee sharing, et cetera that allows us to spread fixed costs across a larger revenue base. On cost management we have actively controlled discretionary spending without compromising growth related investment. Looking ahead at next year we believe that rate inflation will be more reasonable particularly as smaller and mid sized BPO companies face more uncertainties in the new exchange rate environment.

Moving on to the last topic of my prepared remarks, organizational issues and other strategic initiatives. Total headcount was 70,090 as of September 30. This represents an increase of 381 people during the second quarter. This net increase was significantly lower than historic trends due to the loss of about 545 people associated with the First Magnus account. With a majority of these 545 people being absorbed internally, our headcount declined during this quarter. Management growth changes announced earlier this quarter have come into effect with Anup Gupta taking over the Chief Operating Officer and Anish Nanavaty taking over as Head of Our European operations. As you know, Anup was previously the CEO of our travel business, this position will be now be filled by [Amrish Marjun]. Amrish has been with WNS for over five years and has played an instrumental role in building the travel business, along with Anup and the rest of the team.

Other strategic initiatives such as the buildout of our Eastern European facility and expansion to other global delivery networks are on track. We are on track to open our operations by January 2008 and continue to be in discussions with various lines about this new capability. We are also actively exploring various strategic options to establish a delivery capability in the Philippines, however we do not expect this initiative to have a material short-term earnings impact. In India, our focus has been to create new capacity in special economic zones to create a tax efficient infrastructure beyond April 1, 2009. In line with this objective, we have recently signed deals to these new facilities in two of our major operating locations, Mumbai and Delhi.

Lastly as you all know, Zubin is scheduled to leave the Company on December 1. The search for a new CFO has made significant progress and we hope to have someone on Board shortly. In the meantime, Rebecca Dotter our EVP Finance and Controller and an old hand with sales and an old hand with six years of experience at WNS will play the role of interim CFO. This will be Zubin's last earnings call as CFO. I would like to thank him on behalf of the entire Management team for playing a pivotal role in taking the Company public and building a strong financial accounting team for the last three years. I'll now turn the call over to Zubin and for providing more color on the financial results and guidance for the rest of 2008.

Thank you Neeraj, and again, welcome to all of you joining us on this call. As Neeraj mentioned, this is my last earnings call as CFO of WNS. It's been a pleasure working with all of you and I thank you for your support and interest in our story.

Let me highlight key aspects of our financial results for the second quarter. As Neeraj mentioned, the strength of our non-mortgage related business has helped us grow revenue less repair payments. Our teams have done well in redeploying the human and physical resources that were freed up by First Magnus and other mortgage clients. As a result of these efforts, we have delivered gross margin, excluding share-based compensation of 33.6% for the quarter which is higher than the 32.7% recorded in the first quarter. Other factors that helped us achieve this gross margin is the deferral of planned infrastructure expansion and reduction in discretionary costs.

SG&A costs, excluding share based compensation have in greased from $13.7 million in the first quarter to $17.6 million in the second quarter. This represents an increase from 19.7% to 24.4% of revenue less repair payments for the respective quarters. The increase in SG&A cost is driven by a $1.4 million provision for bad debt associated with First Magnus, and the $0.9 million provision for fringe benefit taxes on employee stock options. SG&A costs as a percentage of revenue less repair payments would have been only 21.3% excluding these two cost drivers. The figure is 1.6% higher than the first quarter as we continue to invest in sales and marketing, despite the reduction in revenue caused by First Magnus. As projected earlier, we took a one-time writedown of $15.5 million related to goodwill and intangible assets associated with First Magnus upon its bankruptcy. Finally, other income of $2.2 million for the quarter includes about $1.2 million of interest income and about $1 million in gains from our currency hedging contracts.

Now, let's move on to our review of guidance for fiscal 2008. We reiterate our guidance for revenue less repair payments of between $290 million and $295 million. This represents a growth of between 32% and 34%, despite the losses of revenue from First Magnus and other mortgage clients. Amortization of intangible assets is expected to come down to about $0.5 million per quarter as a result of the one-time write-offs related to First Magnus. Our net income for fiscal 2008 excluding share based compensation, related fringe benefit taxes, amortization and impairment of goodwill and intangible assets is expected to be between $33 million and $35 million. To continue, I would like to reiterate that we are optimistic about our guidance for the year and at the same time we continue to invest in growth initiatives to capture long term opportunities.

Before I finish let me take a minute to discuss fringe benefit tax on employee stock options. As many of you know, the Government of India qua has impose a new fringe benefit tax on ESOPs. There is uncertainty as to whether FBT is applicable to non-Indian companies and we are currently seeking legal opinion on the same. If applicable, we will recover most of the tax through employees and to the extent and to that extent, the impact on the Company will be cash neutral. The accounting treatment requires a charge to be in the income statement and the recovery credited to shareholders equity in the balance sheet. We are conservatively assume that FBT will be applicable for this quarter. With this, we have concluded our prepared remarks and we will now take any questions you may have.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Bryan Keane from Credit Suisse. Please proceed.

Hi, I just wondered if I could get an update on the overall mortgage exposure, what's left and how much you guys have in the current guidance going forward?

Sure. In the current guidance that we have, we have about 4% in terms -- 2 to 3% in terms of revenue less repair payments in respect of the mortgage exposure.

Okay, and can you just talk about just the financial services vertical overall outside of mortgage? Have you guys seen any other weaknesses that you're kind of watching going forward?

Well, our total revenue in Financial Services including mortgage that we had for the next six months is about 4 to 5% of revenue. We haven't observed any weaknesses outside of mortgage as yet.

Okay, and then getting the attrition down to I think it was 36% for the quarter, can you just talk about if that level is sustainable and if there's kind of a goal kind of going forward?

Well, the internal goals are first of all to consistently keep it below 40% and then claw our way down further to getting it closer to 30%. What we are happy about is the strong correlation between the actions that we are taking and the measurement of the impact that we see. For example, we're recruiting more and more people through our internal channels and referrals and there's a clear correlation between people we recruit internally and the fact that we are able to retain them better, so from our perspective, we are setting the stage for some of these strengths to endure long term but you may have blips in quarters but other than that, we expect the strength to be quite positive going forward.

Okay, and then just finally on the pipeline, you guys mentioned that it remains robust. Have you guys seen any impact with the whole First Magnus situation that it's delayed kind of closing deals or any impact on the sales cycle?

No, we haven't seen any impact on the sales cycle. As we mentioned in our remarks, typically, the June to September period tends to be a bit slower in terms of new closures, the bulk of growth usually comes from increases in things that you had signed up earlier and you ran them up and that's exactly where we've been very successful, but the market in terms of closure starts to pick up post-October and I think the intensity with which we see discussions going on with our existing clients on new engagements as well as prospects continues to be extremely strong.

Okay, thanks for the color.

Our next question comes from Ashwin Shirvaikar from Citigroup. Please proceed.

Hi. First of all let me say, Zubin, it has been very good working with you and I hope our paths cross again.

Thanks.

Sure. The question I have is with regards to the cost actions you have taken and obviously it's a pretty good and relatively quick recovery from First Magnus, how much of the cost actions are sustainable going forward versus sort of one-time to keep the new guidance?

Well, I think some of these actions are very sustainable because if you divide them up into a couple of areas, actually three areas. First of all, we had exposure on the people costs that were there. These people have been very aggressively deployed. As a consequence what we found is that the some of the exposure you had in people continuing or if we chose to terminate people, the severances that you had to pay, we managed to minimize that extremely quickly so these are clearly sustainable advantages that we have for that cost base is concerned.

Second was that you were exposed on how effectively your infrastructure was being utilized and clearly, some of the actions that we took on insuring that we build out infrastructure and get it on board a bit later, while continuing to have high utilization of existing infrastructure, that's a continuation of the trend of the Company as we generally are efficient about first utilization and so we expect that to continue, and I think the other important aspect of what we've done is more qualitative in nature and I want to emphasize that as the most significant accomplishment of our team in this quarter is that we took the view that for the purpose of maintaining our reputation in a difficult talent market, we would not terminate people but we would move very aggressively to redeploy these people, and that was a tough financial decision but at the same time it was a very important long term decision too in terms of how we position the Company as someone that looks after people when we run into challenging times, and as a consequence, the amount of goodwill we won both internally and the benefits we see in the talent market externally has a major long term positive effect on how we deliver value to our customers as well as our shareholders.

Okay, and pricing you have qualitative comments but could you quantify, is it 2%, 3%? Is that a band for the purpose of currency offset? Is there a band, plus or minus 2% around the current pricing? How are you actually structuring the new contract?

To my knowledge, there is no business that we booked in recent times that is not at least 5% higher than comparable business we booked last year. So we've been able to get at least 5% increases on comparable business we booked last year.

Okay, but in terms of these realized overall impact on the Company, that would be much less than 5, so what is it?

Well, I think it has to maintain profitability because if you look at some of the impact of some of the other issues you have, typically, if you look at the impact of exchange rates in terms of how it flows through your cost base. I think it does help you maintain profitability and if you look at our results and strip out some of the one-time things you'll find that we've been remarkable in the operating profit numbers.

Okay, and my last question is sort of related to the pricing. Where do you stand on the push toward unit pricing? Because that obviously is another driver of profitability.

Well, our UTP pricing we continue to be leaders in the industry. Our UTP pricing is about 40% of our revenue. It is often challenging in new customer bookings to get that UTP because you don't have sufficient information to price it in that manner, but we are aggressively pushing in situations where we can as well as finding ways to convert existing customers to UTP.

Okay, thank you, Neeraj.

Our next question comes from Mark Marostica from Piper Jaffrey.

Hi, it's actually Mark Zgutowicz for Mark Marostica. Could you just remind me of the mortgage exposure you mentioned of roughly 2 to 3% in your current guidance, the concentration among customers or number of customers in that 2 to 3%?

Okay, it's largely only about two of them would comprise the majority of this business.

Okay. And just unrelated to that, headcount growth, could you just comment on what you're looking at over the next few quarters?

I think we typically do not give forward guidance on headcount growth. It's a function of many things that's not just the addition of new business that goes in. There are also situations where you improve productivity in an existing profit, and you actually could reduce headcount, so we typically do not forecast headcount growth.

Okay, just directionally from the roughly 400 that you added this quarter?

Well, I think if you look at the current quarter, the trend that we demonstrated was that we grew the headcount, the 381 people, in spite of significant amount of redeployment we had to do in the mortgage business, so the overall headcount growth in the last quarter was quite impressive and we expect the trend to continue over the next couple of quarters.

Okay.

And just so it should be in line with our revenue.

And just one final question. You mention delivery capabilities in the Philippines. Could you just expand on that, what you're doing there, if it's organically how you're entering the Philippines and sort of how you see that progressing?

Well, these are early days where we're looking to have conclusions on our efforts in terms of how we want to do it over the next one or two months but as we indicated in our remarks here, we're trying to be very tactful here and do it in a manner that has little or no material impact on our earnings profile for the rest of this year.

Okay, maybe just a clarification area. In terms of number of seats that you anticipate in the Philippines or capacity, however you want to define it, over the next 12 to 24 months, any sense of or could you maybe provide a little bit more clarity on that?

Well, a couple of comments on that. First of all, as we describe our efforts for Eastern Europe, the pattern in the Philippines is going to be similar. We will partner with existing clients to help them put some of the work that they feel is suitable for that market think, so it's going to be driven by existing clients first and then we add new clients there. Second thing really is that at this point of time, there are two reasons for us to do Philippines. First of all, many of our clients are seeking that opportunity and prospects are seeking that opportunity and as a second thing, it is a tax hedge against potentially the tax benefit going away, and because the benefits that we've been promised in the Philippines were stretched beyond 2009, so depending on which way things move in 2009, we could be moving more in response to the market or perhaps push our customers even harder to migrate more of the existing work to Philippines , and they can create greater tax

Okay, excellent. Thanks very much.

Our next question comes from Tim Fox from Deutsche Bank. Please proceed.

Hi, thank you for taking my question. First, I think you made some comments about expectations for wage inflation to moderate a bit in the next year. Could you expand a little bit there on why you think that may happen and maybe bracket where that inflation may be?

First of all, this is not conjecture. It is also based on observations in the last quarter or two. Clearly, other than VoIP, we've been finding that we're able to hire talent more easily and at more reasonable prices so it's something we're observing in the market today. It is both a result of the fact that we've invested a lot in expanding our recruiting network and improving our recruiting practices that is allowing us to get talent more. Our brand name is clearly get clearly getting better known, and that's allowing us to attract more easily and secondly, our sense right now in the market is that the smaller and mid size BPO companies are hurting a lot more with the currency changes and that is throwing the label market a lot more open for us to capture market share, particularly in some of the larger cities so we're seeing a very positive trend in terms of being able to attract talent, and that gives us cause for optimism that the salary hikes that we have to give next year will be a lot more reasonable and arguably a lot more lower than what we have given in the past.

I suppose too on the same front it could help attrition if in fact the demand for labor is dropping a little bit.

Sorry, I didn't get the question?

I said I would imagine in too think may be some benefit for attrition given the fact there may be less competition for the talent in the market in the near term.

Absolutely. Absolutely, you're observing that too as well and in times of some stress, people tend to gravitate towards more stable and larger companies and that is a trend we have already been observing.

Great. That's helpful and just secondly you mentioned also that there was -- you're seeing some nice acceleration, some of the non-financial verticals. I was wondering if you could comment on which of those verticals specifically were you seeing increased adoption and what might be driving their increased need for offshore BPO?

Well, if you go back into the history, the key segments that drove the BPO markets were essentially Financial Services, Telecom, the IT Companies starting with moving a lot of costs into work and adding more transaction processing and analytics work later. Some of the other large industries like manufacturing consumer products, pharmaceutical, utilities, logistics, they were not moving work into the same quantity, even within a single Company and on all those fronts as we see the greater acceptability for offshore BPO of becoming important tool for performance improvement, we're seeing a large action on those industries and the number of RFPs coming out as well as direct customer relationships we're able to establish in areas like finance and accounting, some industry specific processing as well as analytics, the new activity that we see in the market is centered around these industries and we had success in closing clients and logistics and utilities through the market acquisition. We've bought a lot of relationships in consumer products and retail in pharma and both our existing client base as well as some of the new prospects we see in the market are really providing some very exciting opportunities and so therefore, this is a significant hedge just in case the Financial Services industry is distracted and is not thinking about larger move like offshore BPO.

Great. Thank you.

Our next question comes from Mitali Ghosh from Merrill Lynch. Please proceed.

Hi, good evening. Just in continuation of the last question, trends you are seeing in the travel vertical?

Travel vertical has been stronger than expected in the first six months of this year and has delivered performance above the original budget so at this point in time, things tend to be going very well and even from the perspective of volume increase from existing customers. It's been very healthy and the outlook for the next six months appears to be very very positive.

Great, and just if you could update us on what is your CapEx plan for the year?

The original guidance of which $0.02 has not changed.

An that's worth about $35 million?

Yeah. $36 million.

Okay and just one last quick question, on fringe benefit tax, you know, if you were to model this, should one consider it more or less similar rate for the future quarter is what you provided this quarter?

Not necessarily. It's very difficult to model it because it depends on when people exercise their options. The reason why we even have this rate for this particular quarter is it's actually related to the first six months that we had RSU's which actually matured in July. We don't have any RSU's maturing for the rest of this year. Nothing substantial anyway.

Right, so essentially that shouldn't really, there shouldn't be any --

Unless there is a significant amount of exercise of options between now and March. You should expect it to be fairly flat. The only way that would change is very hard to predict is if there is a significant exercise of options.

Understood. Okay, thanks a lot.

Our next question comes from Julio Quinteros from Goldman Sachs. Please proceed.

Hi, this is [Intinman] for Julio. Real quickly, is there any update in terms of foreign exchange expectations or assumptions for the rest of this year?

Sorry, could you just repeat that the?

Yeah. Is there any update in terms of ForEx assumptions for the rest of this year in terms of the Rupee and the British Pound?

Yeah, actually we've assumed it to be at 39.5 for the rest of the year in terms of the rupee dollar exchange rate but like I think I'm not sure if you mentioned it earlier but we've covered our exposure for the rest of the year so we don't expect any significant variations from now to March.

Got it, okay. And then secondly, could you give us the expected expenses from stock comp for the rest of this year?

The charge for this quarter has been $1.9 million and you should expect that to continue in the future quarters.

Got it, great. And then finally, excluding the write-off from First Magnus this quarter what was the effective tax rate?

Yeah, I think it's very difficult to give you an effective tax rate because of what's gone on in terms of the write-off for First Magnus. We are are conservatively not assumed any tax benefits coming out of this write-off though we will be claiming some. In terms -- I'd rather not give you a tax rate. I think it's better to guide you in terms of a tax figure for the rest of the year. We expect that to be somewhere between 4.5 and $4.75 million for the full year.

4.5 to 4.75 for the full year?

For the full year.

Got it, okay. And I'm sorry, if I could squeeze one more, is there any update in terms impact because I know the large effect of First Magnus might have changed or slowed the pace in terms of expected margin improvement over longer term so I'm just wondering, could you give us an update in terms of long term growth margin and perform operating targets that you have in mind right now?

I think we have that in line with our guidance for next year. The only thing that we would like to see for this particular year in terms of gross margin guidance, we've done reasonably well for this quarter. What you should expect in the third quarter will be a quarter of consolidation and you should see an uptick in terms of margins from the fourth quarter to run with.

Okay, great. Thanks.

Our next question comes from Julie Santoriello from Morgan Stanley. Please proceed.

Thanks, good day. First, Zubin, let me add that it's been a pleasure working with you and I wish you the best in your new role.

Thank you, Julie, likewise.

Thanks, on the issue of gross margin that you just touched on it, but in your prepared remarks, you said that one of the benefits there was a deferral of client infrastructure expansion costs. Can you elaborate on what that is exactly?

Sorry, I didn't get the last part.

Could you elaborate on that?

Yeah, we were supposed to take on new premises and that has been deferred and some of that will actually come through in the third quarter and that's why I mentioned earlier when Julio asked me about the gross margins for the rest of the year for the third quarter, think will be a period of some consolidation; however, the premises coming into play in the third quarter will be utilized more in the fourth quarter and so you see an uptick in terms of gross margins from the fourth quarter.

Okay was this related to First Magnus timing kind of issues or was it a customer that was on hold?

No, we already planned to actually take on more additional accommodation. We just deferred it because of the First Magnus issue and because when First Magnus happened, that had come in the second quarter we would have had [surplus fees].

Okay, got it. And you had mentioned in the beginning that you're optimistic about achieving the guidance for this year but you didn't want to raise guidance just given the turmoil in the Financial Services sector. Can you share with us sort of what your thinking is there and the mortgage stuff obviously is still an issue. Is there more to it though or more that you're just concerned about generally?

I think that there's given the fact that we were bitten once, we were just just being of being optimistic here. The reality is that we have about roughly 2% of revenues coming from mortgage. There's nothing that we've learned from our clients that suggests that things are slowing down there and over and above what we've got now. I think the second thing is that is also another 2-3% that is there in the broader banking and Financial Services area, and again, we have taken all the care to check with our clients very recently and see what changes they would have, they want to make in our programs and think for, at this point of time, if everything were to go well, we are very optimistic of even doing better than we are projecting but in the spirit of being conservative we want to leave our projections as they are.

Okay, that's helpful. On the Aviva Pune operations that BOT contract, I know that has been now postponed until April, can you just give us an update on how things are going there? I know they had a change in Management and were reevaluating really the whole positioning of that transfer piece. Can you give us an update?

Well, I think what you said is exactly right. What we've been communicated by them is that they're evaluating their position and they're clearly in a think mode. It gives us some cause for optimism but at the same time, from our investor standpoint, we're guiding them to assuming that. We won't have that next year.

Okay, so no update on timing or decisions or further discussions with them?

Not at this time.

Okay. Last thing I wanted to ask you about, generally it's been I guess a frustration of investors that the liquidity in the shares, the flow is quite low. Can you share with us sort of your thinking on that and maybe what the Board is thinking potentially on helping to improve the flow, helping more people be able to own more of your stock?

Well, I think right now, there's no update on the Board on thinking about it. Clearly, with the stock taking a beating that it has, our expectation is that if we as the Board has an event like that it's more likely to be when the stock price is better but there's nothing that we have discussed at the Board level at this stage that suggests that there is any change in our view in terms of what the flow is in the market right now.

Okay, thank you.

Yeah, I think we are trying to evaluate different tactical alternatives but not in a position to talk about them at this point in time.

Our next question comes from Joseph Vafi from Jefferies & Company. Please proceed.

Hi, gentlemen, good evening. Most of my questions have been answered but maybe one quick question here. In your prepared remarks you talked about I think maybe 11 expansions with clients in the quarter. Was there anything there to discuss in terms of expansions going on with Financial Services clients in the quarter or was it really mostly other industries other than Financial Services?

Well, we have expansions going on with insurance clients and as we emphasized in our last call as well, the bulk of our BFSI revenues comes from insurance and those client expansions have been under way and we also announced a new client win in that area as well, so the insurance market base has been quite healthy. In terms of banking and mortgage situations, there are a couple of retail banking clients we have that with whom we have expansion plans that are over long term programs that could run over other 18 or 24 months of expansion and we're clearly on track to continue with that.

Okay, would it be, if we didn't have the kind of issues we're having right now in the financial services market, would it have been surprising to you see 11 expansions going on with none really at least in this quarter that were within non-insurance part of the BFSI vertical?

Well, I think there has been some expansion with the non-insurance part as well but the point I'm making really is that at this point off time we are not as reliant them for insuring that our growth continues in the future so the good news is that decline base has spread. There are expansions that have happened in many areas that are, if there's a slowdown in some of our Financial Services expansions or new client booking, the overall client base is fairly robust and if you look at even our year on year growth number, relative to competition we've done exceedingly well in spite of the problem we have.

I'd like to add a little bit to answer your question again, if things have returned to normal in the Financial Services segment, yes, we would have seen expansions from them as we were seeing right up to July in fact.

Okay, that's helpful. And then just maybe one other question on the supply side of the of the equation, in Q&A it's come up to some smaller competitors are facing a tougher time and that's helping you on the human capital side, are you seeing trends emerge within the overall captive side of the market that might be beneficial or harmful in the next few quarters?

well I think with the new spreading about a few captives being on sale and the general buzz about that model being under pressure with their owner and shareholders, I think clearly, there is an interest in people working in captives to seek growth opportunities outside the captive area, and I think clearly, we've been the beneficiary of that trend as well. Thank you.

[OPERATOR INSTRUCTIONS]. Our next question comes from Dave Koning from Robert W. Baird. Please proceed.

Yes, hi, guys, first of all on the auto claims business i think for the second quarter in a row, you've delivered 40% plus margins and in the core BPO business the margins are closer to 5 to 15% in the last several quarters. I guess first of all I'm wondering is that 40% margin sustainable and secondly, why is it so vastly greater than the core business?

A couple of reasons here. If you look at the core business this quarter it was affected by what has happened even in the previous quarter with the exchange rate and wage inflation, but in this quarter in addition, have you the First Magnus effect coming through to some extent. As regards to the Auto Claims business, if you see for instance January, it's gotten into higher margins and that's primarily as the result of restructuring one of the major contracts that we had from the first of January of 2007.

So, is 40% plus margin, is that sustainable going forward?

In the immediate future, yes.

Yeah, in the foreseeable future, absolutely. I think that's a major success story for us in the way that business got restructured from being -- addressing a very fragmented client base to having a few strong clients that allow us to get significant economies of scale and that certainly helped us.

Great, and then secondly just a couple modeling questions. First of all if Aviva does go away in early April, would Q1 09 be more of a flattish type sequential growth situation from Q4 '08 to Q1 '09?

Well it's hard to say at this stage because a lot depends on how aggressively we book business. We typically are not forecasting for the next year yet because in general, October to February or March tends to be an area for booking a lot of business, but as you look at our historical trend, you'll find that the Q1 of Fiscal Year usually from a revenue standpoint ends up being a very strong quarter.

Okay, good, and then the hedge gains you talked about in this quarter being about a million, do those start to ramp down over the next year if the Rupee stays kind of around where it is now or does that stay around a million?

No, it will ramp down very substantially for the rest of the year. A lot of our hedges as you know our hedging policy covers, we cover at least 50 % if not more of our exposure for six months, so a lot of these hedges would have been taken in the beginning of the year when the Rupee was much weaker. Since then, we've been covering but not as attractive so for the next six months you shouldn't expect significant hedging profits.

Great, and then finally, do you have a non-GAAP diluted share count? I know you give the GAAP share count in the 10-Q, but given your loss, the GAAP or the diluted share count and the basic share count are the same and I'm just wondering if you have given your non-GAAP profit, if you have a non-GAAP diluted share account?

No, we do give a non-GAAP EPS but not non-GAAP diluted share count.

Okay, all right thank you.

Our next question comes from Nathan Rogoff from Citigroup. Please proceed.

Hi, thanks for taking my question. First question here is on SG&A. The expense stepped up meaningful it both in dollar terms as well as percent of revenue basis. I was wondering what drove that increase an what we should expect from the SG&a behind going forward?

Yeah, I'll go through the SG&A percentage in a little bit more detail for you. If you compare the SG&A as a percentage from the first quarter of this year, excluding share compensation and SPD, we had SG&A was 19.7%. Now, that has grown to 23.7% and the main reason for that has actually been the bad debt provision which would account for almost 2% of this 4% increase. The balance increase of around 180 basis points is primarily on account of investments that we have made in sales and marketing costs coupled with the fact that the revenues have actually diminished because think were no First Magnus revenues in this particular quarter so you combine those two and that's how you have that 170-180 basis points drop in increase.

Okay.

Going forward, we have committed to the Street that we will reduce our SG&A expenses as a percentage of revenue less repair payments by at least 100 basis points compared to what we did last year and we reiterated that today.

Great. Thank you very much. Second question related to the Aviva BOT push out by quarter, does that create any potential upside to your revenue guidance for FY '08 or is that already baked in?

We already included that in the guidance we gave on October 3rd.

Okay, great. Thanks so much, guys.

I will now turn the call over to Jay Venkateswaran for closing remarks.

Okay, thank you, everyone for joining today's conference call. We will talk to you again next quarter.

Thanks a lot.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day, thank you.