WNS (Holdings) Ltd (WNS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth-quarter 2008 WNS Holdings Limited earnings conference call. My name is Lacy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Jay Venkateswaran, Senior Vice President of Investor Relations. Please proceed.

Thank you, Lacey. Good morning, ladies and gentlemen a good afternoon and good evening to those of you joining us from Europe and Asia. Welcome to WNS' fiscal 2008 fourth-quarter conference call. I am Jay Venkateswaran, Senior Vice President, Investor Relations at WNS. With me, I have Neeraj Bhargava, our Group CEO and Alok Misra, our Group CFO.

Today's remarks will focus on our recently announced results for the fiscal fourth quarter and year ended March 31, 2008. Some of the matters we will discuss on this call are forward-looking and you should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those factors set forth in our Form 20-F to be filed with the SEC within the next 60 days.

During this call, 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 May 15. With this, let me turn the call over to our Group CEO, Neeraj Bhargava.

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 (inaudible) for our industry and the business environment in which we are currently operating. Second, I will highlight our key achievements in fiscal 2008 and the state of our company. Third, I will touch upon our outlook for fiscal 2009. And last, I will talk about our key operational accomplishments.

I am also delighted to have Alok Misra, our new CFO, joining me on this call. Alok will discuss highlights of our financial performance in fiscal 2008 and outline our key financial priorities for fiscal 2009. He will conclude by detailing our guidance for the next fiscal year. After our prepared remarks, Alok and I will respond to your questions.

Let me start by focusing on the state of our industry. Our business is all about winning and executing long-term annuity or [sticky] contracts. Therefore, signing new business is fundamental to creating sustainable revenue. As estimated recently by [Nasscom & Everett], offshore BPO penetration is well below 10% and is expected to grow fivefold over the next five years. Our own experience in the last quarter continues to suggest a very positive business environment for the BPO industry in general and for WNS in particular. In fact, the last quarter has been one of our most successful in terms of new business generation.

Let me go a bit deeper and talk about key trends in each of our lines of business. The sectors that we have previously grouped together as emerging industries have a very high growth potential and we have significant momentum penetrating them as we enter fiscal 2009. These emerging industries for our BPO business include manufacturing, logistics, utilities, consumer products, among others.

Last year, the share of our emerging industry segment increased significantly from 25% to 32% of our revenue less repair payments. Given this growth, we have carved out a new business unit called industrial and infrastructure services that specifically focuses on building scale in the manufacturing, logistics, utilities and telecom sectors. This part of our business showed strong activity as we start fiscal 2009.

The insurance segment of our BFSI business has one of the most active pipelines among our target industry sectors. As this industry continues to rationalize its operating model, we are seeing a significant number of deals enter our pipeline. This trend also extends to our UK-based auto insurance claims business.

Business in the banking and financial services segment of BFSI continues to be slow as this industry deals with its own business challenges. But we see some early signs of pickup in activity. Our exposure to this segment remains relatively low and we are not dependent on it for growth. Overall, our BFSI revenue less repair payments declined last year from 39% to 33% of our revenue less repair payments due to reductions in our mortgage business, but we are deeply encouraged by the momentum in our insurance business.

Our travel business continues to contribute about 36% of our revenue less repair payments. In the last quarter, this business exceeded its internal target and continues to perform very well. This industry has an imperative to cut costs to counteract the rising cost of fuel. In the last few weeks alone, we have seen a high level of interest among new prospects in this sector. This business is healthy and we see all the signs of another growth year.

To summarize the current market [presence], it's a great opportunity for WNS. Our pipeline is in better shape than it was at this time last year and we are winning against the leading global brands in our industry and see ourselves as well-positioned to continue to gain marketshare.

Let me move on to my second topic and recap some of our achievements in fiscal 2008. We delivered over 32% growth for the year despite the loss of First Magnus and other mortgage business. Further, we achieved a 12.7% net income margin, excluding share-based compensation, related fringe benefit taxes, amortization of intangible assets and impairment of goodwill. This was achieved despite the challenges posed by the depreciating Indian rupee and our mortgage client loss.

Unlike other players in our industry, our client concentration is significantly lower and our quality of revenue is improving. The concentration in our top five clients declined from 46% to 42% last year, while the concentration from our top 10 clients declined from 62% to 56% during the same period.

We also saw significant growth in our higher value services such as finance accounting, end-to-end auto claims management, proprietary technology-enabled BPO and analytics. Our UK-based auto claims business has been a stellar performer this year. The recent Call 24/7 acquisition consolidates our top position in the UK auto claims market. We expect significant synergies when this operation is fully integrated with the rest of our auto claims business.

Our analytics or KPO business continues to grow very rapidly with the [market] acquisition having performed particularly well. This business [now again rates] about 15% of revenue less repair payments with higher revenue per employee and a faster growth rate than our overall business.

The other key achievement last year is the expansion of our global operation footprint. We launched our Romania facility and we established a joint venture in the Philippines with Paxys ACS. We are pleased with the structure of our Philippines operation as it minimizes the impact of our P&L, reduces our time to market and allows us to access skills and local knowledge through our partners.

Moving on to my third topic, our outlook for fiscal 2009. Our guidance suggests a revenue growth of between 28% and 30% despite the loss of First Magnus and assuming AVIVA exercises its transfer option in June. In other words, we expect to deliver a growth of over 38% after backing out these revenue reductions. This is significantly higher than the offshore BPO industry growth as we continue to capture marketshare.

As you review our revenue guidance, it is worth noting that our expected fiscal 2009 growth continues to be largely organic with acquisitions contributing less than 7%. In other words, the acquisition of Call 24/7 is expected to bridge the revenue gap that results if AVIVA exercises its transfer option. We are confident about our organic growth prospects because of the surge of new wins and expansions last quarter. We won 12 new clients and expanded the scope of nine existing relationships. Of these, the addition of our healthcare product manufacturer, our diversified financial services company and a chemical manufacturer are expected to contribute significantly to revenue growth. Expansions at our healthcare provider, our global consumer product company and our manufacturing company are also expected to contribute substantially.

Moving on to operational and organizational accomplishments. I would like to highlight a few key aspects of our performance last year. We increased our [width] of customer score while ramping up our operations significantly. We also received a key data security certification. We are among the first offshore BPO companies to achieve the Payment Card Industry certification. We were also the first company in our industry to launch a quality improvement program to develop environmentally-sensitive operational practices. We believe this is a key differentiator in the marketplace. And we made significant investments in building our brand and a lot of credit for the recent growth of our pipeline goes to our marketing initiative.

Our attrition stayed flat in the fourth quarter at 38%. Attrition for the entire year also finished at 38%, a modest improvement over the corresponding number of 40% in fiscal 2007. Reducing attrition further remains a top organizational priority for me and my management team. As far as building out a management team is concerned, we continue to attract the best talent to scale the company.

Alok has hit the ground running as our new Group CFO and Anup Gupta, who took over as the Group COO last November, has taken on full responsibility for managing our business unit and enabling functions. Our new business unit leaders in travel, industrial and infrastructure services and finance and accounting are achieving strong business momentum. Eric Selvadurai, an accomplished WNS veteran, is now aggressively building our pipeline in Europe and has recently added his talent in continental Europe.

Lastly, our operations are up and running in one special economic zone or SEZ in Gurgaon and a second one will go live in Mumbai later this year. Because the future development of our delivery network in India is largely planned in SEZ, we can grow in a tax-efficient manner.

Overall, we ended fiscal 2008 on a very strong note. Our profitability is back on track, our sales engine is humming, we now have a global delivery footprint, we have reduced our client concentration even further and most importantly, delivered exceptional business value to our clients. Our strong industry-focused business model and revenue diversity have been key to this accomplishment. Our prospects in fiscal 2009 are excellent and we are well-prepared to take advantage of the tremendous opportunities we see in the global BPO market space. With this, let me hand the call over to Alok who will take us through our financial performance in detail.

Thank you, Neeraj. Good morning and welcome again to our fourth-quarter earnings call. I am very excited to be a part of the WNS leadership team. I have interacted with some of you in the past and look forward to working with you again.

Let me begin by focusing on fiscal 2008 key financial metrics. As you are aware, we revised and updated our guidance for the year on three occasions after the First Magnus loss. I'm pleased to report that we met our revised revenue guidance and beat our revised net income guidance for the year. Revenue less repair payments grew by 32.3% in fiscal 2008, while gross margins, excluding share-based compensation, finished at 34%. This was a significant achievement resulting from operational improvements that mitigated a large portion of the negative impact from the appreciation of the Indian rupee.

SG&A costs, excluding share-based compensation and related fringe benefit taxes, for fiscal 2008 finished at 22.7% of revenue less repair payments, which is exactly the same level as fiscal 2007. However, our SG&A spend in fiscal 2008 included $1.4 million in bad debt write-offs related to First Magnus. Excluding this write-off, we achieved a 50 basis point improvement in SG&A cash spending despite the appreciating rupee.

Fiscal 2008 operating margins, excluding share-based compensation, related fringe benefit taxes and amortization of intangible assets and goodwill, finished at 11.3% against 14.7% in the prior year. The negative impact on the rupee appreciation and First Magnus were partially mitigated by better cost management and operational improvement. We believe that we can continue to improve these margins by 50 to 100 basis points per year assuming a stable FX environment.

Our fiscal 2008 net income, excluding share-based compensation, related fringe benefit taxes and amortization of intangible assets and goodwill, finished on a strong note. The $37 million we reported is higher than our last guidance range of $34 million to $36 million. Lastly, our cash generated from operating activities was $41.1 million or 14.1% of revenue less repair payments despite the impact of First Magnus.

Let me now move on to my team's priorities for this fiscal year. As WNS becomes larger and more complex as a result of our global expansion and acquisitions, it is our priority to enhance our existing capabilities from a financial management perspective. Our focus during the year is on taking our financial processes to the next level, better use of technology with the aim of making the organization even more scalable. Providing investors more insight into our financial and operating performance will also be a priority. Lastly, I plan to increase focus on balance sheet metrics such as improving our DSOs, tightening our working capital management and enhancing the efficiency of our capital expenditure.

Moving on now to our guidance for fiscal 2009. As Neeraj mentioned, our revenue momentum is excellent, particularly with the new client wins and expansions from existing clients booked in the previous quarter. Given this momentum, we expect revenue less repair payments to be in the range of $373 million and $378 million. This represents a growth rate of 28% to 30%, assuming that the AVIVA contract goes away in June.

We expect to grow our revenue stream, excluding AVIVA and First Magnus, by over 38% to achieve our target. Of this growth, we only expect about 7% to come from our recent Call 24/7 acquisition. There will be a potential risk to fiscal 2009 revenue less repair payments, driven by the depreciation of the pound sterling against the US dollar. However, our hedging strategy protects our net income from this risk.

We expect gross margins to remain stable, assuming a stable exchange rate environment. Wage inflation has moderated to below 10%, putting less pressure on our gross margins. At the same time, our Romania and Philippines delivery centers will continue to be an investment [more] for most of the year.

We will continue to leverage our SG&A spend, excluding share-based compensation, as we grow in scale. The leverage for fiscal 2009 will come largely from G&A expenses as we continue to invest in sales and marketing. As a result, our fiscal 2009 net income, excluding share-based compensation, related fringe benefit taxes and amortization of intangible assets, is expected to range between $44 million and $46 million.

We expect amortization of intangible assets to be around $3.6 million for the year based on current estimates. The increase in amortization from the fourth quarter of fiscal 2008 run rate is due to the acquisition of Call 24/7. I would also like to reiterate that the entire amortization charge on our income statement is expected to come from intangible assets associated with our acquisitions.

Share-based compensation is expected to increase to approximately $12.5 million for the year. This increase from the $6.8 million expense in fiscal 2008 is due to the issuance of about one million restricted stock units in the first quarter of fiscal 2009.

Let me spend a few minutes talking about this increase in our share-based compensation. As you know, it is our policy to issue stock options and to value restricted stock units at the market price on the date of their [grant]. This new award was issued from the pool of three million shares set up prior to our IPO and is in line with our compensation policy. We have issued a net of 2.5 million shares to the employees as stock compensation over the three years since our IPO, including the most recent grants.

To conclude, we had a successful fiscal 2008 despite the challenges posed by our environment. We ended the year on a very positive note, driven by the strength of our sales engine. In summary, we are confident about achieving our growth targets for fiscal 2009. With this, we have concluded our prepared remarks. We will now take any questions that you may have. Over to the operator.

(OPERATOR INSTRUCTIONS). Ashwin Shirvaikar, Citigroup.

Hi. Neeraj, thank you for your broad comments. They were quite helpful and Alok, welcome. The first question I have is, as I look at GAAP net income, taking out the fairly large increase in equity comp and the much smaller increase, but also increase in amortization and so on, I just would like to sort of better understand, from a management perspective, are you not driving an increase in GAAP net income? What exactly are the management metrics that you use to drive growth?

We are largely focused on adjusted net income. That is mostly driven off -- reflects the cash generation of the company. Clearly, in terms of amortization, it comes largely from acquisitions. Our acquisitions have been accretive and historically have been extremely successful and in those situations, it is difficult to avoid that sort of a charge and we continue to look for more opportunities to make accretive acquisitions. And in that context, if those charges were to come, that is just part and parcel of what happens with accounting.

I think as far as share-based compensation is concerned, this is, first of all, a part of the plan we had at the time of the IPO. Our compensation model is driven largely on guidance we got from Mercer Consulting, which looks at a picture of total compensation that includes base compensation bonus, as well as stock-based compensation. The stock-based compensation, while it gets defined as a part of the overall compensation, the charge is sometimes influenced by the price on the date at which the options are issued.

So there is some variability you get on account of that, but that aside, I think, Ashwin, if you really look at it practically, you have a choice about paying I would say a fraction of that in cash versus giving RSUs or options and our management philosophy at this point in time is that we want to incentivize people, we are a growth company, we want to incentivize the people based on stock and at least our point of view is that rather than giving cash that is valuable to fund future expansion, continuing to leverage our issues and options in a growth company is a better way to compensate people. So we are largely looking at our metrics based on adjusted net income, which totally reflects the performance of the company.

Okay. And in terms of the share-based compensation again, is that also a reserve to existing management sales people and so on or is part of it because you mentioned the fairly large opportunity that you would like to go after and so are you going to go hire a lot of salespeople for that?

We are adding to salespeople, but I think that question -- the stock compensation issue is not linked to the hiring of new people. I think we would like to be competitive for the existing people, as well as new people, but also it is very important to note that the increase from $6.8 million to $12.5 million very largely also comes from continuing of the past RSUs and options that were granted in previous years. So the $6.8 million is sales growth and then in addition to that, you have new as well. So I think the compensation is for both existing and new people.

Clearly, we are expanding and in many ways, the recruiting that we are doing of very strong talent that we are getting from meeting global players, the fact that we are a growth company and the fact that they can get restricted stock units and options in our company is very attractive for them as well.

Okay. And in terms of just the demand you are looking at in the pipeline, other companies in this space have mentioned that perhaps the shorter cycle, the higher-end analytical work and so on is what is playing very well right now and selling very well and they will use that as an antipoint. Are you seeing something similar? Are you seeing broad demand across bigger BPO contracts as well?

No, I think we have, last quarter, demonstrated that we are seeing very broad demand. Our analytics business is doing very well too. In critical areas like the consumer products industry, we are seeing a lot of entry points coming from analytics, but that aside, I think if you look at our history of wins in the last quarter, there are 12 new wins. I would say a majority of them were big BPO contracts, some of them very substantial and for us, it has been more business as usual. We have had a lot of success in winning deals against even global brand names.

Okay. And last question, I don't want to hog too much time, but given the -- is there any intend to pursue more acquisitions, specifically like Call 24/7, especially as I look at your segment revenues with auto claims being such a large proportion of your operating income, even though it is relatively small on a net revenue basis? Is there more opportunity there in the UK?

Well, I think, in general, as we grow and become a bigger company and globalize, having a portion of our business onshore -- our own personal metric is that it should be less than 20% because we are still largely offshore-driven, but having good onshore businesses, adding color to your industry practices is very important and from that perspective, we have been widely successful with auto claims and very, very profitable. We have restructured the business really well and that management team is stellar and we felt that the opportunity we got from Call 24/7 and betting more behind that team was a good thing to do.

So we are very driven by marketshare in specific segments that we are in. So our acquisition strategy is largely driven by expanding our customer mindshare and marketshare in the segments that we are in. So I think from that perspective, we are looking at other deals too, but they will be largely in sectors that we are already in and they will be good additions to our capability. We also like to acquire profitable companies that can grow. So from that perspective, I think what you should be looking at is that if there is an acquisition to fall in the future, it will be accretive, it will be profitable and we are not looking to turn around things.

Okay, great. Thank you.

Joseph Foresi, Janney Montgomery Scott.

Hi, my first question here is just on the exchange rate, the British pound. I was wondering if you could give us the impact that had on revenues this quarter and what rate you are expecting for fiscal '09.

Let me answer the rate first, and Alok can then talk a little about the impact on last quarter. I think we're looking at a rate of GBP1.95 for the British pound to the dollar and also in the same breath, let me talk about the Indian rupee. We are assuming 40 rupees to a dollar. Clearly, the rupee has moved up a little bit. Sorry, moved down a little bit in recent months, but given the volatility, our assumptions are right now on 40 rupees to a dollar. Alok, do you want to add about the last quarter?

Yes, last quarter, there wasn't much of an impact for the difference on the British pound. So about 55% of our revenues actually is denominated in pounds. Last quarter, we did not see much of an upside from the British pound.

Actually we saw more downside from the British pound on our revenue, but it wasn't that significant.

So maybe -- it looks like the numbers came in a little bit lighter than what people expected.

Let me clarify that. I think, first of all, the numbers were within the range we promised and sometimes revenues tend to be a bit lumpy on contracts. So there are two factors where we would have been -- we ended up slightly lower than what we wanted. One was the British pound that had a minor effect.

The second one was that a couple of the transitions off our existing work that we landed in sometime middle of last year. They began a couple of months late, not a reflection of any trend in the market, but they were mostly because of -- in one case, it was a technology glitch on part of our customer on the platform that we were going to work on. So it got delayed by a few months because of that.

In the other case, there were some staffing issues that our customer had in terms of putting the transition team together. But both those things are up and running and therefore, things are fine on that. I think the third factor really was that our auto claims business is a bit seasonal and if you exclude the impact of that, our revenue growth rate of our global business was actually higher at 3% quarter-on-quarter.

Just looking at the acquisition, I think you guys said it was something like 7%. Could you give me a dollar amount on what you are expecting on the acquisition?

Yes, so what we have reported is that the revenue of the company we acquired last fiscal was about, yes, roughly one time the price of the acquisition. So it was around $17 million or $18 million is the revenue we got. That is the business, which is directly -- which was directly comparative to our auto claims business. So they are being very tightly (inaudible) and the combined businesses, we expect to see growth rates that will match if not exceed our growth rate in the coming year.

$17 million, $18 million on the non-GAAP, is that what we are expecting?

Non-GAAP revenue.

Yes.

Great. And then just two more quick ones. On the headcount and the seatcount, how should we look at that going forward? I know that there has been some talk that the demand for labor is sort of softening. Are you looking to move up utilization? Are you seeing pricing move up? Maybe give us some direction in the model.

Well, I think if you look at it last year, while our revenues grew by about 32%, our headcount grew slightly over 20%. We clearly, from our revenue productivity standpoint, did a lot better. And I think you should expect us if -- the revenue per employee is a tricky question because the UK pound changes. On the negative side then, even though you may have made revenue per employee gains in equal terms on currency, you may not -- that may not reflect on your numbers.

But I think you should expect that revenue per employee assuming stable currency will grow at about 5%. So based on that, the headcount growth should be lower than your revenue growth. As far as peak utilization is concerned, our total peak utilization was for the year ranging between 2.1 and 2.2. Sorry, our [you] seat utilization. Our total seat utilization was ranging between 1.6 and 1.8, and I think given the growth rate that is still the range in which we expect to operate.

Okay, thank you guys.

Bryan Keane, Credit Suisse.

Yes, hi. I just want to clarify that. So then headcount should be about 5 or so points below revenue growth then?

Yes, I think that is a reasonable estimate, but you know depending on the nature of what you get, that may vary a little bit. But that may be a reasonable way to model that.

Okay. And then I just want to clarify the environment. You talked about, you know, new business generation being good and the 12 new clients in the quarter. There has been a lot of talk about pushouts and maybe some cancellations in deals. Can you just talk about have you seen any of those types of things?

No, our experience in the last quarter and it's continuing in this quarter as well has been quite positive. We see very healthy deal flow in the market and we haven't seen any cancellations or push-out. We see a very healthy growth trend and we have had a lot of success in winning new deals as well.

So you are not seeing really any economic impact whatsoever --?

I think what we said in our prepared role marks was the banking sector was slow, but other than that, in every other sector, it's business as usual and in fact, on many dimensions, it is better than where it was last year.

And in the banking sector, you also said there was some pickup in activity though possible?

We have got our -- in our early stage of our pipeline at the inquiry level, we have got a recent pickup in the last four weeks, but it is still very early days, but I think compared to where we were three or four months ago, we are beginning to see some encouraging signs.

Okay. And then I didn't pick up any comments on pricing. Are you able to get any price increases in some of these new deals?

Well, as we reported earlier, four of our key client relationships last year we renewed at a higher price and in terms of all our new contract sign-ups, we are pricing at least 5% higher than what we priced last year.

In the competition out there, are you seeing any aggressive pricing out there to try to sign new business?

No, I think we are seeing fairly rational behavior right now.

Okay, thanks a lot.

Tim Fox, Deutsche Bank.

Hi, thank you. First question was around the travel business. You mentioned that your expectations there were quite positive. I am just wondering if there has been any change in your view on your exposure to sort of the volume side that we have seen some signs of some travel downticks in certain geographies. Just wondering are still confident about your ability to cover any slowdown in volumes with new business?

Well, there are three sources of impact on revenue as far as our travel business or for that matter other businesses as well. One is the volume on existing business, second is business from existing clients that could come outside the scope of what you are doing today. In other words, new business from existing clients and third is the addition of new clients. We haven't seen any perceivable reductions or changes in volume yet. Things are quite stable. We don't see a perk up in volume either, but things are quite stable. In fact, there are events like things that happened at Heathrow Airport recently actually increase volume for us on things like [refunds]. So in some ways, we have had positive benefits as well.

What is important to note as far as the travel industry is concerned is that even though there might be a downturn in volume for existing work, we see enough expansion happening to counteract that. In fact, if you look at the last quarter, our travel business did spectacularly well and they exceeded the numbers we set for them. So at this point, we are not seeing any trend towards that and we have been fairly conservative in assuming growth for the travel business in the coming year, but we expect it to be a growth business.

Great. And the second question is around your fiscal '09 guidance, particularly around the revenue growth. And in light of your new client wins and some pretty impressive expansions last quarter, I am just trying to frame how you are thinking about that growth number as it relates to new client wins as opposed to expansions. How much of this guidance is coming from existing clients in your view versus new client wins?

Well, the new client wins that you have primarily affect your revenue in the second half of the year. So the bulk of what you are likely to see in the first half of the year is going to come from growth we have had with existing clients, but the new client wins will -- typically we have -- anywhere around 85% to 90% of our business in any given year comes from clients we have had in the previous year.

I think we are pretty much in that [bone] this year as well. I would say close to 90% would come from clients we have had in the previous year. 10% will come from new clients, but the good news about new client wins is some of them are substantial in size, so while the ramp-up period this year may not allow us to get the benefit for the full year, but next year, they will have a very significant impact on our growth.

Great. That's helpful. And if I may, just on the announcement on your Philippine joint venture there, just wondering if you could talk a little bit about what the opportunities are in light of this joint venture and how quickly do you think that this can actually ramp given that it is an existing facility and do you have the customers at this point that can tap into that opportunity?

Well, the good news is that this is a very well-established [winner]. They are up and running. They have capacity. We can ramp up -- we could ramp up right from the day we sign. We have one of our existing clients already in transition there and we are very hopeful. We have got a global sign-off from another client, which is fairly significant in size, but we are very, very hopeful that that contract should get signed shortly and we are going to hit the ground running there.

The reason we chose this was for exactly the same reason that our partner is very experienced. They have done this for a long time. They have done it for US customers, customers in Europe and Australia and we can benefit from their experience, their capacity and ramp up very quickly.

Great. And look, just one quick question on -- do you have a CapEx for fiscal '09 at this point?

Yes, it is about $32 million to $33 million.

$32 million to $33 million. Great. Thank you. Congratulations on the quarter.

Thank you.

Dave Koning, Baird.

Yes, hi, guys and nice quarter. First of all, just on the auto claims business again, over the last four quarters, margins have been in the 40% to 50% range and like Ashwin said, half of them were of revenue over the last couple of quarters. How do expect margins to progress over the next year given the acquisition and given some pretty favorable contracts I think that you have had in place?

Dave, thanks for your question. I clearly read all the reports that you do on us, but I just want to make one very important clarification here. That business is clearly generating profit significantly above our average. The comment you made in the recent past is you expect it to go to 15%, so let me correct that perception. We are not going to go close to 15%. It will still be significantly higher than our average because of the fact that that business is truly a reflection of what people (inaudible) technology platform-based BPO. It is extremely productive. We leverage an offshore capability for that business as well. The new acquisition provides us both cost side and revenue side synergies. So I think the favorable contracts clearly generated some unusual margins for us this year, and those margins will come down a little bit, but it is not going to go anywhere close to 15%. It will be significantly higher than our average.

Okay, that's great color. I really appreciate the clarification. And is kind of the ballpark of 25% plus, is that maybe --?

I think that is a reasonable assumption for this year.

Okay, great. And then secondly, you mentioned share-based comp $12.5 million, amortization $3.6 million. Are those on an apples-to-apples basis with what we should add back from GAAP to non-GAAP or are there some adjustments in those numbers so that it is actually a different number kind of when we do the add-back analysis?

The only thing that is a variable besides those two is the equity on the stock compensation.

Fringe benefits.

The fringe benefit tax. Now that really depends on when people exercise, so it is very, very difficult to predict that number because it is like reading somebody's mind as to how they are going to exercise their options and their stock units.

Let me just add a small point of view on that. If you look at what happened last quarter, we paid that tax, okay, and so therefore that got reduced from our net income, but we claimed that money back from our employees. Unfortunately, the way US GAAP works is that money gets credited on our balance sheet, but not to our income. So in reality, it has no real impact on the company. This is just kooky accounting. So I just want everyone to give us some credit for the fact that a few cents of our net income was -- actually $0.03 actually Jay points out to me -- was actually on this item. It really marks the fact that we really beat our numbers.

Yes, that's a great clarification. It looks too like you beat operationally by $0.03 or so. So I guess just getting back -- so to the other points. There is no tax implications on that $12.5 million or anything else. That $12.5 million is a straight add-back from GAAP to non-GAAP?

That's right.

Okay. And then just finally, the dynamics of how you paid for that little acquisition, was it all cash or was there some stock? And the genesis of the question really is to understand your net income guidance. Does it reflect increased stock comp? Maybe if you could give a sharecount estimate or was that acquisition all done in cash, so there is an interest expense kind of coming out of your net income now. Maybe just a little sharecount --.

The acquisition was all cash. All the acquisitions that we have done in the recent past have all been for cash. In terms of your suggestion of giving the projected diluted sharecount number, we will try and do that, but the only dilution that will come in the coming year as we can see it today will come from exercise of options or [receded] stock units.

Okay, great. So we won't be way off if we kind of assume 43 million, 44 million of diluted shares?

You are in the ballpark.

You are in the ballpark there.

Great. Thanks so much.

Joseph Vafi, Jefferies & Co.

Hi, gentlemen. Good evening to you. I was wondering if we could circle back to your earlier comment on 5% price increasing. Is that -- is WNS seeing pricing power relative to the market or is that what you are seeing across the whole landscape, including competitors and where pricing is going?

I think the way pricing in our market works is that when clients are looking to contract, they typically would short-list two or three companies and once among them, they have made their choice, they define a price range and within that price range, they are not that price-sensitive. Most of the time on our contracts, clients are saving anywhere from 25% to 40% in terms of cost structure. So a variation of about 3% or 5% on pricing usually is not something that is -- that you cannot negotiate if you have -- basically have the client exercise a preference for you.

So if we look at it from our perspective, what is really going well for us is our industry-focused model where we are able to get some premium for our specialization and based on that, we have been fairly strong in terms of our point of view on what we should be charging. We are certainly not out of the range, but in most of our areas, we have been able to get reasonably good pricing.

Also adding to that, we made a lot of improvements in our overall productivity while seat utilization is the highest in the industry. So from a cost structure standpoint also, we are very competitive. So therefore, that allows us to, also from an operating profit standpoint, be in a very good position in this contract.

Okay, that's helpful. And has there been any change or evolution in the industry on pricing structure, how deals are priced moving away from per transaction or some other method to kind of a shared model with clients? Have we seen any kind of evolution in pricing here amongst any customers in the last few quarters?

We have seen a greater shift towards unit transaction pricing. Although slow, but it's certainly happening. We also see more contracts with gain-sharing or (inaudible) that line based on productivity improvements. So things are moving steadily in that direction, a bit away from the [FP] (inaudible) pricing model.

And that gain-sharing model is -- if you could explain a little bit more on how that works and how that might -- what the positives and negatives are to margin there would be helpful.

The way that works is that if you are able to, based on a program preapproved by the client, increase productivity, you agree with the client that the gains on that productivity will be shared 50/50 or some predefined ratio with them. And if you look at the fact that last year if we had not made productivity improvements or increased prices, the effect of currency on our numbers would have been far more dramatic. So the gain-sharing model has a fairly significant bearing on how we maintain and increase our profitability. So even this year's numbers, we have factored in some of the improvements we have with existing clients, but keep in mind that the portion of our business that typically gets subjected to gain-sharing is not much more than 20% or 25% at a time.

Okay. Great. And then maybe just a few housekeeping questions on the model. First, the rupee has come in a bit against the US dollar. I was wondering if we can get an idea of where you see the hedging gain being for fiscal '09. And then secondly, with some of the extensions of the sunset provisions on the tax holidays, what we should be thinking about in terms of tax rates for fiscal '09. Thanks.

From our perspective, for positive, our numbers for next year are at 40 rupees to the dollar and $1.95 to the pound. There is a slight downside on the pound and probably a moderate upside on the rupee/dollar exchange rate, but I think it has been a little volatile over the last few days. Don't really know how it will pan out for the rest of the year.

In terms of our hedging, we are pretty much hedged, almost 98% hedged for the year. Overall, if you look at it, it is about 25% in options. So we have the potential to write the upside and about 75% in forwards and we choose the mix to keep the option premium down while still wanting to write the upside. So that's overall as far as our currency is concerned.

Just to add to that, even into the subsequent year that is 2009/10, we have got about 25% of that hedged already. Given the current scenario, we might even look at upping some of that hedging level.

To answer your other question about the tax, yes, the tax holiday has been extended for one year. What that does is it actually allows us a little more breathing time for our move to SEZ. So as Neeraj mentioned in his prepared remarks, we have already got one SEZ up and running in the north of India near Delhi. We have got a second SEZ in the works on the outskirts of Mumbai. That will be operational probably around September/October timeframe. So we have already got a couple of SEZs in the works. It is anybody's guess whether the entire tax holiday regime under what was called the [SPPI] scheme, whether that will get extended further or not, I mean your guess is as good as mine.

So in terms of any guidance you would like to provide on where the tax rate might come in for fiscal '09 or how would you be looking at it from a modeling perspective?

We have previously guided that it would be -- for fiscal '09, it would be in the 16% to 17% range. I don't think we are going to change that right now. For the subsequent year, we had earlier looked at a tax range of around 22% to 23%. It will probably be lower now that the tax holiday has been extended. So we probably stay in the same range of 16% to 17% for the next couple of years.

All right, thank you very much.

Mark Marostica, Piper Jaffray.

Hi, it's actually [Mark Skitovich] for Marostica. Just a few questions. First, on attrition. I was just hoping you could talk a little bit more about the initiatives that you have in place, just given kind of mixed results in the numbers over the last few quarters, specifically what levels of voluntary versus forced attrition we are seeing right now and also just the impact from moderating inflation, wage inflation environment, sort of what impact that has on the trend and if you can maybe quantify what you are targeting for levels in FY '09?

In terms of attrition, as far as attrition is concerned, we will have some complication off the First Magnus situation, diluting some of the efforts we had on cutting attrition down. So while we are pleased to an expense with the progress we made from getting the average lower, we clearly can do better and as far as the next year is concerned, in spite of the wage inflation being lower, it's important to point out that our employees, based on the operational targets that they accomplished, got a very good bonus in the last fiscal year. And as a consequence at this point in time, the mood and morale is quite high and I think the position we have really taken is that while the salary increases are lower than what they were last year, but we won't really align their incentives with the incentives of the company. If we meet or beat our target, they should expect a very healthy bonus and from that perspective, I think any effect of a lower wage increase for the time being looks very much under control.

We are very long-term focused in terms of what we want to do in terms of operational practices to manage attrition. So a number of initiatives that we began in terms of how we recruit and things we do for retention, they are all now stabilized, they are gathering momentum and we are targeting attrition levels of low to mid-30s this year. In other words, at least 3% if not 7% to 8% improvement in levels of where we are compared to last year and our team is working very hard because it is a very important priority for all of us and we all, in the senior team, like last year, have part of our bonus tied into accomplishing greater levels.

Okay, great. And just a couple of follow-ups on travel and BFSI. Can you comment on the travel pipeline in the US versus Europe and then maybe quantify a little better the strength that you are seeing in insurance. I believe that the segment has been around 20% of your revenues. Is that sort of the same level you expect in '09 and are you looking at potentially higher levels there?

Sorry. Can you repeat the last part of your question?

Yes, just in terms of the insurance sector, my belief is that you were tracking around 20% of revenues in that segment. I am just curious sort of what -- if you can maybe quantify the strength you are seeing there and how that relates to '09.

Yes, let me start with insurance first. Insurance is more than 20%, closer to 27% or 28% of our revenue, and this is a sector that is really on fire with a lot of new business situations both in UK for our auto claims business, as well as for our global business in both North America and Europe.

From our perspective, we expect to at least maintain this as a share of our revenues or perhaps even grow it a little bit. As far as travel is concerned, the demand has been strong in both US and Europe. It is very difficult for me to differentiate at this time. We have a very strong client base in both those areas. The existing clients have grown in both places and some of our new inquiry base that we have today is also coming from both. So it is actually quite even in both places.

Okay, great. And just a final question, on deferred rev, can you just remind me what the makeup is of that balance there and sort of the reason for the downward trajectory we have seen there in the last few quarters?

Sorry, again, I didn't hear a part of that.

I'm sorry. Deferred revenues, can you just remind me again what is in there and what accounts for the downward trend in the last few quarters?

Deferred revenue really arises out of the timing difference between what you build and what you are recognizing as revenues. So there is no real pattern that you can predict to it. It tends to go up or down depending on fulfilling milestones sometimes. We have quite a bit of knowledge services work now, which is the -- which is a project base that you would build on milestones. So because of that, because of the increase in that part of the business, you would have a certain amount of deferred revenues and that tends to fluctuate a little bit.

Okay, so would you expect to see an upward trend in '09 or --?

Yes, I would expect it to continue to trend downwards overall and we are trying -- we are trying to align the milestones also to month closure, so that it keeps the cutoff clean.

Okay. Very good. Great quarter. Thanks, guys.

Ed Caso, Wachovia.

Good morning. Thank you. Just a couple clarifying questions. I think you mentioned a sharecount of $43 million to $44 million. Now is that basic or diluted shares?

That is basic shares.

And what would the increment be for diluted?

About another $1 million roughly, assuming that you are only taking dilution for those that are above order.

Okay. And just a clarification on AVIVA. Are you assuming it is through the month of June, so it ends July 1 or are you assuming it ends June 1?

Our assumption based on the last communication we had with them, as well which we shared with our investors as well, is that they could give us one-month notice any time. So last I looked at my e-mail, there wasn't a note, but our assumption is that it could end on June 15. That is we have in our model.

Okay, so you are assuming June 15? So your guidance assumes that AVIVA ends June 15, is that what you are saying or is it kind of soft?

That's right, June 15.

Any update on IndyMac Bank, what percent of revenue, what might be happening there?

IndyMac Bank is slightly over 1% of our revenue. We continue to serve them. We have good contact with them all the time and it is a very good relationship. At this point in time, it appears quite stable.

Just to add to that, they are current on all their invoice payments, so we don't have any overdue outstandings on them either and that is something that we are watching very closely.

Can you talk a little bit about your comp plan, how it is determined, how is the senior management bonus -- is it revenue growth, margins, cash generation, DSOs? What are the factors and maybe some relative weightings?

Yes, our senior management compensation is driven by mostly quantitative elements and one or two qualitative elements as well. The key drivers are ensuring we meet our adjusted net income targets, that is number one. Number two, we look at revenue exit rates in the last quarter, which is usually a good indicator of how much you have done to grow the business in subsequent years.

We look at senior management, senior talent retention. That is clearly a very important bonus item for me personally and correspondingly for some of my other senior colleagues. We look at overall attrition for the company as well and then there are some other qualitative factors in terms of what we have done to build the management team in terms of new hirings. So Ramesh, our chairman, for example, had a target last year to add to the sales talent in the US and restructure the team appropriately. So there are some qualitative elements, which are very important that are there in that mix as well.

So from that perspective, I think we did all right last year because of the fact that First Magnus happened and if you look at that from the perspective of the original guidance we gave at the beginning of the year, we clearly missed those numbers because of First Magnus. Later on, we recovered very well, so our recovery was recognized. However, the fact that we missed our numbers, I would say on overall rating scale, we were given sort of a B+ and largely driven by external circumstances.

But having said that, that is the best way to benchmark ourselves. We clearly hope that there are no external circumstances this year that prevent us from getting an A+ this year.

I guess I am trying to understand -- you've set forth some metrics, your net income before a lot of things, a basic sharecount, numbers before acquisition amortization. So as far as a shareholder's concern, there is an awful lot of impact between your adjusted net income and diluted earnings per share that seem to be just ignored both in the guidance and in your comp plans. And particularly with a rather sizable one million share grant, which is a pretty big number relative to the base, it seems like there is a disconnect between the way the business is being driven and management compensated and the numbers that the shareholders are concerned about. I wonder if you had some thoughts there.

Ed, we are very EPS-conscious. If you look at dilution as well, the guidance we have from our HR advisers is that [total group percent] dilution that comes on account of options or RSU plan is not unusual for our size of the company. Based on that, the number of 3 million shares, which is for a period of three years, which is well within the 2.5% number that was guided, is considered standard for our size of the company and that is the guidance we have got.

If you look at it from our perspective, the items that are excluded are clearly non-cash items and some of them, for example, [VSBT], those are things that are driven by tax on which we have no control over. We are very EPS-conscious and from that perspective, if you look at how the incentive structure is driven, it is pretty much in sync with ensuring that the EPS actually grows.

Thank you.

Tien-Tsin Huang, JPMorgan.

Hi, this is [David Cohen] for Tien-Tsin. I thought I heard you say in the prepared remarks that pound appreciation represented a risk in FY '09, but that net income would be protected. Can you talk a little bit more about the mechanics around hedging regarding the pound?

Actually if the pound depreciates against the dollar, we will have risk. But if it -- so just to go back to your question on the hedging. For the current year, we are pretty much completely hedged on the pound. It is probably around 95% or 96% of our pound revenues that are hedged and most of that is through forward contracts. We do have a few options, but not too much of options. Even into the next year, 2009-10, we are about 20% hedged on our pound exposures.

Okay, great. And I'm sorry if you gave -- I know you talked about CapEx for FY '09. Did you give CapEx for the fourth quarter? And if not, would you?

For this past fourth quarter?

Yes.

I can get back to you with that number, but for the next year, we are forecasting about 32% to 33%.

And I think for full year fiscal '08, we ended up -- Jay, can you correct me if I am wrong -- between $26 million and $27 million.

Okay and how should we be thinking about CapEx sort of over a longer-term horizon, three to five years? As a percentage of revenue or in terms of its growth?

Well, typically what we have guided the Street is that our CapEx should be, depending on the level of growth, between 7% and 10% of revenues and I think that is where we really are.

In the current year, 2009-10, we do have a few leases that are expiring so we need to do some restacking. So that is why it is going to be a little higher this year, but beyond that, like Neeraj said, somewhere around 7% to 10%, at least some 10% of revenues.

And then I think you talked about 12 new wins in the quarter. Can you just give us a little bit more detail for the kinds of work, obviously not for all of them, but just sort of a flavor of the kinds of work that you are doing on some of those?

We have had a reasonable amount of wins related to financial accounting work. So that is category one. The one win we had with our healthcare product manufacturer is largely in the revenue cycle management. We have had a fair number of wins and both in terms of new as well as expansions with existing clients in the analytics area. If I were to take two areas where we are seeing stronger than average momentum in terms of the nature of work, they would be financial accounting and analytics.

Okay. And when you are talking about analytics, can you drill down just sort of another level and help us understand a little bit more about the kinds of work you are doing there?

The fastest growing area which we see in the analytics area is largely on data mining consumer databases to look at trends around market segmentation pricing. It is mostly decision support work for senior management, as well as marketing and sales professionals. So we are pretty much looking at large data warehouses and pulling out data from that and doing (inaudible) supporting these decisions.

And then just lastly in terms of the wins, can you talk a little bit about who you are seeing from a competitive standpoint in some of those deals?

We are seeing the usual suspects. Some of the leading pure -- BPO pure plays, as well as, in some cases, some larger global players as well. And I want to re-emphasize again that this has been one of our best quarters in our history of winning competitively as well. We have gone against much bigger companies and won very successfully not in one or two situations, but in multiple situations.

Great. Thank you.

Julio Quinteros, Goldman Sachs.

Good morning guys. This is actually [Vincent] in for Julio. Just real quickly on the trajectory of the margin trends throughout the year, is there something different this year other than the normal seasonality? In other words, should we expect a downtick in terms of growth in operating margins in the first quarter and then a pickup throughout the year?

Yes, I think that is normal for us because our salary increases are usually given in April. So usually the April to June margins are lower and then they start picking up over the year as business expands, as well as we get more economies of scale. So you should expect that the average margins will be lower in the April to June period as a consequence of salary increase, but it will start picking up later.

Okay, great. And then as far as your net income, adjusted net income guidance is concerned, I was just wondering, out of the $44 million to $46 million, how much foreign exchange gains is actually baked into that number relative to your hedging program?

Well, actually, it is actually difficult to predict that because it depends on how much goes on your revenue line and what all your hedging does to protect it. So if the -- if the currency depreciates, if the rupee depreciates for example, you will get more on your operating margin line, but you lose some of the hedging line. But as it will depreciate, you will get less on the operating margin line and you will gain on the hedging line. So it is very difficult to predict this separately.

But also if you look at our account for the last 12 months as well, our dependence on foreign exchange gains as a contribution to our net income was much smaller compared to the competition and in general, I think you would find that you would find us less volatile compared to some of the other players in the industry on foreign exchange.

Got it. So in terms of relative to the amount of gains that you booked in FY '08, should we expect the amount to be much smaller or even immaterial in FY '09 as far as modeling assumptions is concerned assuming stable exchange rates?

I think you should expect, assuming stable exchange rates and the assumptions we have made of 40 rupees to the dollar at $1.95, you should expect very modest foreign exchange gains there. But as Alok said, clearly, this will move up and down depending on where the currency is and what hedging does as it -- your income statements vary and you have the opposite effect on what the ForEx gains or losses may be.

Got it, okay. And just real quickly, just specific to the fourth quarter, out of the $2.2 million other income, how much of that actually came from foreign exchange gains?

Just under $600,000.

$600,000?

Yes, just under that. It is about $560,000 to $570,000.

Got it. Okay, great. Thanks, guys.

That concludes our question-and-answer session today. I will now turn the call back over to CEO, Neeraj Bhargava, for closing remarks.

Well, thank you all for taking the time to attend this call. We are absolutely delighted to finish this year on a strong note. This has been a challenging year and thank you for all the support we have had this year, but from our perspective, I want to repeat some of the key point I made earlier. We have got our profitability back on track. Our sales engine is really humming now and in terms of doing all the right things to build a bigger and well-diversified company, we have increased our geographical coverage in terms of our operation and expanded our focus across industries, (inaudible) concentration. So we are very excited about our prospects in the coming year and look forward to your continuing support.

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