WNS (Holdings) Ltd (WNS) 2009 Q2 法說會逐字稿

Good morning. And welcome to the WNS Holdings second quarter conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, we will conduct a question-and-answer session and instructions for how to ask a question will follow at that time.

Now, I would like to turn the call over to Alan Katz, WNS Vice President of Investor Relations. Please proceed, sir.

Thank you. Good morning, ladies and gentlemen. And good afternoon and good evening to those of you joining us from Europe and Asia. Welcome to WNS's fiscal 2009 second quarter conference call. With me today I have Neeraj Bhargava, WNS's Group CEO, Alok Misra, our Group CFO and Anup Gupta, our Group COO. By now, all of you would have seen our press release detailing our quarterly results. This release is available on the investor relations section of our website, www.WNSGS.com. Following this call, we will post slides on our website summarizing the presentation. If you have any trouble finding this information, please e-mail us at IR@WNSGS.com and we will e-mail it to you.

Today's remarks will focus on our recently announced results for the fiscal second quarter ended September 30th, 2008. Some of the matters that 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 which was filed with the SEC in August and is also available on our website. During this call, we will reference certain non-GAAP financial measures which we believe provide useful information for investors. You can find reconciliation of these non-GAAP measures to GAAP measures in our press release issued this morning.

I will now turn the call over to Neeraj.

Thank you, Alan and thank you all for joining today's call. Before I begin our prepared remarks, I will quickly outline the agenda. First, I will provide a brief update on our financial performance, and key developments during this past quarter. Second, I will comment on our revised guidance, particularly on the impact of currency fluctuations on our predicted numbers for the current fiscal year and finally, I will talk about our revenue pipeline in the context of both our current and targeted and the state of the market. Following my remarks, Anup will describe our key operational achievements in the quarter, including an update on our progress in the integration of Aviva Global Services or AGS, the acquisition we completed earlier this year. After Anup's comments, Alok will provide additional detail on our financial performance, our balance sheet, and our outlook for the remainder of fiscal 2009. We will then take your questions.

To start with, I'm very pleased with our financial and operational performance this quarter. We saw solid execution across the board and we are on track to meet our profit numbers for the year. In terms of revenue and profit performance this quarter, we achieved $109 million in net revenue and $11.9 million in adjusted net income, or net income excluding share based compensation, related fringe benefit taxes and amortization of intangible assets. Compared with quarter 2 of fiscal 2008, our revenues grew over 50% this quarter and adjusted net income or ANI grew to almost 47%. Today's economic environment is a challenge. As we mentioned in our last earnings call, our clients have (inaudible), transition and contract positions. Despite these pressures, WNS had a very strong quarter in terms of organic growth. When adjusted for the recent currency fluctuations, our organic growth was greater than 9.5% quarter-over-quarter.

We announced two large deals this quarter, Biomed and T-Mobile, both of which have already started contributing to our organic growth. Each of these will account for annual revenues of approximately $10 million at maturity and we see additional growth opportunities as well. We believe that we will continue to see organic growth in the back half of the year. However, we expect some pressure on the revenue line due to the present currency fluctuations which I'll explain a bit later. This was also our first quarter with over $100 million in revenue, an important milestone for our Company. As we discussed in the past, this level of scale positions us more strongly to bid for larger and more complex outsourcing deals. Our larger revenue base and secure cash flow make us a stable and reliable long-term partner for both our current and prospective clients.

Moving on to our guidance, with this strong quarter behind us, I am pleased to reaffirm our profit guidance, range of adjusted net income of 46 to $49 million for the current fiscal year. However, we're reducing our revenue guidance to between 385 and $400 million, a change that is driven primarily by the recent sharp decline of the British pound against the US dollar. Let me explain the new guidance and the seeming contradiction between our revenue and profit outlook in more detail. As you know, we report our financial results in US dollars. Any revenues secured in another currency are recorded in that currency and then converted on a monthly basis at an average exchange rate for the month into US dollars. Since the beginning of the current fiscal year and especially since the last time we discussed our guidance at our Investor Relations day on September 15th, the British pound has declined sharply against the dollar, thereby resulting in fewer US dollar for pound denominated revenues and leading us to lower our revenue guidance. The revised guidance numbers are based on a range of $1.45 to $1.60 US dollars to a pound. I would like to reiterate that if the currency levels were what they were at the time we gave our revised guidance in July after the AGS acquisition, we would have been well positioned to beat our original guidance. Our operating business net of currency changes is still very strong and our AGS acquisition is delivering the expected numbers.

An obvious question then is how are we able to hold onto our profit prediction? Three reasons. Number one, first, we hedged our British pound revenue for our global BPO business, including AGS and our profits from the Auto Claims business. Second, our operating profit on constant currency including AGS had been ahead of target. Third, the Indian Rupee, the primary currency in which we incur our cost, has also declined as sharply as the British pound, thereby increasing our operating margins. This reason is a smaller factor this year in profit protection because our Rupee hedges of last year offset these benefits, but this is a major factor in protecting and increasing our dollar and pound profits in the next fiscal as we have been aggressively hedging at better rates. As a consequence of these three factors, we are comfortable with the previous profit guidance and see further profit benefits in the next fiscal year from the Rupee decline as we hedge at more favorable levels.

As my final point on our revenue outlook, I would like to talk about our new client additions and our existing business. In the last quarter, we added four new clients and expanded five relationships. I would like to provide some detail on three of these clients, which will have a larger impact on our business, particularly in the next fiscal year. First, we will shortly begin providing finance and accounting services to a large global entertainment company. This is a premier global bank and over time, we see great opportunity to expand this relationship. Second, we started a BPO and IT relationship with a chemicals and manufacturing company which I mentioned on previous calls. This deal was delayed for some time but we started work in September on a sizable initiative and are very excited about the growth potential. The third deal is both a renewal and significant expansion of work with an existing insurance client. We expect our core to grow and become more profitable as we cross sell additional services and enhance the profitability of our current business.

In terms of the pipeline, we have been seeing a high level of activity. However, some, are taking longer than expected. Again, this is not surprising, given the current economic environment. The early stages of our pipeline continue to develop well. And we anticipate seeing significant opportunities even in very challenging economic times.

From an inventory perspective, we're seeing significant activity in the insurance area and the industrial utilities and semiconductors. Industry specific processes in finance and accounting continue to be the two areas in which we see particularly strong growth opportunities. During the next two quarters we expect five key prospective clients to make closing decisions, potentially enhancing our revenue stream for the next fiscal year. On our existing business, there are some challenges that we anticipate seeing in the near future, but these have been factored into our guidance. Even in the current economic environment, our travel business grew modestly during the last quarter on a year-over-year basis but we are starting to see signs that volume forecasts put trends lower starting in the January quarter. While we see pressure in the banking and financial services or BFS space, I would like to mention that our exposure in this industry is currently less than 3% of our net revenue. Therefore any near term growth or reductions will have little impact on the overall business or on our guidance.

In all the other areas, our business is stable and we see normal growth and opportunities in our client base. Our auto claims business continues to perform well and has now begun to cross sell services between our historic clients and Call 24/7, a business that we recently acquired to expand the scope and market share. To reiterate, the primary revenue challenge we face for the rest of the results from currency changes and even in this challenging market, I'm pleased with the progress we are making to target and benefit from growth opportunities. I will now turn the call over to Anup to talk about our operating performance and touch briefly on

Thank you, Neeraj.

I will begin by talking about our margins. In our first quarter call, we talked about seeing positive impact to our margins as a group of employees who had been in training during the previous two quarters became productive. We have now experienced the positive impact of this change, as a benefit from the weakening Rupee this quarter, resulting in operating margins of almost 15%, quarter on quarter improvement of 400 basis points. Our gross margins improved quarter on quarter by over 225 basis points to 33%. And we are starting to see improving gross margins in the Call 24/7 business.

On the AGS front the transition from Aviva and other vendors from WNS has been successfully completed and signed off by Aviva. What we took over was an amalgam of four different seasoned cultures and in a relatively short span of time, we have been able to integrate these into, operating as a single unit. We have now embarked on the next phase of integration, where we will improve key operating metrics and enjoy some of the scale and synergy benefits that we anticipated. We are also identifying new opportunities to expand our relationship with Aviva and are in more than several discussions with them. Across the board, we have tightened the management of our bench, increased productivity and have been able to make some remarkable reductions in our variable costs such as transportation and electricity. This is starting to be reflecting in our margins. We see more opportunities for cost savings and are making great strides in this regard.

On the people side, we continued to build out our management team during the last quarter. Kartik Summa recently joined us as Chief People Officer and we will focus on positioning WNS as an employer of choice. He was previously with InFocus Technologies, where he managed human resources for its international operations and we are we pleased to have him as a part of our team. This quarter our (inaudible) remained at 37%. This continues to be slightly higher than what we would like and we remain committed to reaching our goal of low 30s. Operationally, (inaudible) declined to 1.7 shifts per rupee, and 1.3 shifts for total fee, when we include the impact of AGS acquisition. However, excluding the impact of AGS, we maintained utilization about two shifts per fee. We continue to aggressively focus on increasing (inaudible), and reducing corresponding CapEx over the next 12 to 24 months. Our headcount at the end of quarter was 20,966, up from 17,019 at the same time last year.

Let me now hand over the call to Alok who will take us through our financial performance in detail.

Thank you, Anup. Before I go into our detailed financial performance in the quarter I would like to first point out that Q2 was the first quarter that included the impact from the AGS transaction. This was a paradigm shift in terms of our financial and operational performance. First, we achieved quarterly net revenues of over $100 million for the first time. Second, our gross margins remained strong. And third, SG&A expense as a percentage of revenues was significantly lower than our corporate average. This dramatically in one quarter and we see additional opportunities for SG&A synergies in the future.

Moving on to our overall financial performance, revenues grew by almost 52% to $109 million in the second quarter of fiscal 2009. While gross margins, excluding share based compensation, remained constant at 33%. SG&A costs, excluding share based compensation and related taxes for the second quarter of fiscal 2009 was 17.1% of revenues, approximately 650 basis points lower than the same quarter last year. This was the result of a lower SG&A costs associated with AGS as I mentioned earlier. We will continue to see this benefit moving forward.

Second quarter of fiscal 2009 operating margins, excluding share based compensation, related fringe benefit taxes and amortization of intangible assets was 15.8% compared with 9.6% in the second quarter of the prior year. While our operational improvements were enhanced by the continued deposition of the Indian Rupee against the US dollar, we also continued to see hedging losses. We are currently hedged out 100% of fiscal 2009 and are significantly hedged for fiscal 2010. We have also started hedging out as far as the first fiscal quarter of 2011. These hedges include a combination of options and forward contracts. Our second quarter fiscal 2009 adjusted net income or ANI which is net income excluding share based compensation related fringe benefit taxes and amortization of intangible assets was $11.9 million, compared with $8 million in the second quarter of fiscal 2008. We believe that ANI is the best proxy for our operational performance.

Foreign exchange continued to have a slight negative impact this quarter on this number. We experienced a $3.2 million hedging loss in the quarter, including the cost of options, which was somewhat offset in our P&L by revaluation of US dollar denominated balances in the group's Indian subsidiaries. The net impact was slightly less than $1 million. Given the current economic environment we maintain very focused on maintaining a strong balance sheet and access to additional capital as required.

There are several balance sheet metrics that I would like to highlight. First, on September 30th, our cash balance was $31.3 million. We generated $15.6 million in cash this quarter. Our current monthly operating cash flow is about $6 million. This is approximately the monthly cash generation that we anticipate moving forward. We see the potential of improving working capital management in the business to advance more cash. We are paying our quarterly interest costs and continue to use our leverage through our cash flow generation. For the quarter ended September 30th, our overall debt to EBITDA ratio was 2.2 times, on an annualized run rate basis which is well within our loan covenants. Our debt to equity ratio is less than one time, which is also within our covenant limits. We are very comfortable with our leverage and our liquidity position and believe the debt facility has provided a unique and flexible financing source.

We also have approximately $17 million of working capital lines of credit between two large financial institutions. We enhanced this line of credit at the time of the AGS transaction to provide additional liquidity to our balance sheet. In light of the current economic situation we are keeping these lines of credit open as it provides us with increased flexibility and protection. We have currently drawn down less than $6.5 million and are positioned to pay back that amount at any time. We have indicated in our 20-F filing in August that the banks have been working to syndicate the loan that was provided to us for the purchase of AGS and have anticipated the syndication being completed by 31st March 2009. The loan agreement stipulated that the interest rate was subject to change as was necessary to complete the syndication.

Given the current economic environment, it has been difficult tore the bank to syndicate the loan. In light of the challenges around this syndication, the banks would hold the loan on their own balance sheet and would put in place a 50 basis point increase in the interest rate. With the swaps that we have already made on the LIBOR portion of the loan, our effective interest rate on the loan is now 7.3%, compared with the 7% we indicated earlier. The increased interest will be effective from November 10th, 2008. This should result in an additional interest cost of around $390,000 for fiscal 2009 and the impact for the next fiscal will be about $930,000 assuming there are no prepayments of the loan. To clarify, this increased interest was factored into our guidance and in addition, the AGS business is operating slightly ahead of target which will make up for this increase. In the current environment, this was the most agreeable solution for all parties. We continue to focus on operational performance and we have made some good progress in terms of cash management, foreign exchange hedging and CapEx. And you can see from the metrics we have published our DSOs have remained constant even in these times of unprecedented liquidity crunch, a testament to our working capital management and the quality of our customers.

We also have significant opportunities to reduce our CapEx through our AGS acquisition over the next 12 to 24 months. At our Investor Day in September, I had noted that CapEx for this year would be less than $25 million, down from $30 million which we had guided to earlier in the year. We continue to look for ways to improve our CapEx spend in our core business and see this spend trending down during fiscal 2010 as well. Finally, we reiterated our guidance for fiscal 2009 at our investor day in September. At that time, we had discussed that despite the effects of the currency decline, we see growth opportunities in our industry as a result of our client's focus on reducing costs and increasing operational performance.

The British pound has declined significantly since mid-September. When we revised our guidance at the time of the AGS acquisition the pound was at 1.98. We reiterated our new guidance of 425 to $435 million for the fiscal year, the pound was hovering around 1.8. The pound is now trading at approximately 1.49. As a result of the volatility, it has become increasingly difficult to predict our revenues. We have reduced our revenue guidance to 385 to $400 million, based on a range of 1.45 to $1.60 per pound. It is less difficult to predict the underlying fundamentals of our business, however, which remain relatively strong in light of the unprecedented economic headwinds. To reiterate what Neeraj said earlier in the call, this is primarily a reflection of the currency impact on our top line.

In terms of proximity, we comfortable with meeting our adjusted net income or ANI guidance for fiscal 2009 of between 46 and $49 million. This implies an adjusted EPS of between 1.06 and $1.13 on a diluted share count of 43.2 million shares. Before I conclude, I would like to spend a few minutes discussing our, and the impact of currency on our top and bottom line. The past several months both the pound and the Rupee have declined against the US dollar. From a top line perspective, approximately [70%](corrected by company after the call) of our revenues are tied to currencies other than the US dollar. Primarily, the British pound. As these currencies decline in value against the dollar, this negatively impacts on our top line.

On the flip side, about 75% of our costs are tied to the Indian Rupee. As the Rupee declines in value against the dollar, we felt the positive impact on our cost structure. We also have hedges which were taken on last year when the Rupee was stronger against the dollar. The losses that we are now realizing are these hedges have a negative impact on our bottom line. However, as we have explained recently, as we move into next year, these old hedges will wear off and the newer hedges at better rates whim. Additionally, we have a greater mix of options which allow us to in the upside in the currency. This will be a boost to our earnings in fiscal 2010. In summary, we had a strong quarter.

Our business has sound fundamentals and good prospects, even in the current environment, and we have made a lot of progress in tightening our operations and integrating AGS. While our revenue guidance has been affected by the decline in the British pound our earnings guidance is still intact and we expect to continue to see further positive impact on our profitability in the next fiscal year as a result of our operating performance and the declining Rupee. This concludes our prepared remarks for today. We'd now like to open the call for questions, and I'll hand you all back to the operator.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Joseph Foresi with Janney Montgomery, SC, please proceed.

Hello. I guess my question here is obviously this is a pretty large drop to your revenue guidance in a short period of time. I wonder if you could walk us through what the impact is per month or give us a little more clarity on exactly how you derived this decrease?

So Joe, hi, this is Neeraj. Go back to the last time we spoke, or rather we talked about our guidance it was in mid-September. The pound was between -- hovering around 1.8, 1.85 somewhere in that range at that time. If you look at corresponding declines in Euro as well and Canadian dollars, these are all currencies which collectively account for roughly 70% of our revenue. If you look at the fact that these have declined by somewhere between the range of 17 to 20% over the last couple of months, the straight math on the balance part of our revenue would suggest that they would be 30 to $40 million decline in our revenue. Just on the impact of our currency which is exactly what -- where we are. We initially gave the guidance was at 1.98. On that number today just on what we've got totally booked today, we would be beating our revenue at 1.8 to 1.85 we were trending towards the lower end of our guidance last time. What we're talking about right now is a straight impact, happy to work through the mathematics and show it to you but this is purely -- if you look at the fact that 70% of our revenue is coming in currencies that are impacted for the balance of the year you do come up with these numbers.

What was the impact then this quarter from currency on a top line?

We would have lost about 2 or $3 million in this quarter so if the currency had remained flat compared to the previous quarter we would be at 111 to 112.

Okay. And then I wonder if you could maybe walk me through, you how much was the Aviva, how much did that contribute to revenue this quarter?

Aviva was approximately $20 million.

Incremental.

Incremental revenue this quarter. It was lower than what we expected because you can recognize the British pound had some impact on that.

What are your projections for its contribution this year?

We don't make predictions for Aviva but as we indicated in the past, this is -- it's a very volatile currency environment so I prefer to say it will be ranging between 20 and 25% of our revenue.

20 and 25% of your revenue.

I would say more 20 to 22 rather than 20 to 25.

Okay. And just if I go back and maybe you can help me reconcile this, you've taken on the Aviva acquisition and it's about 20, 25% of revenue. If I looked at your guidance prior to the acquisition, the top end of the guidance was roughly near where the low end of this guidance is, in fact, they're only about 7 or $8 million apart. Maybe you could just help me reconcile, you've done this acquisition, it's obviously contributing well to growth but yet the guidance isn't much different than where it was prior to the acquisition. I wonder -- I'm just trying to sort of work my way through those numbers.

So a few things here. First of all, the impact on this revenue, the overall guidance, that's number one. Number two, we also had a substantial amount of non-US dollar revenue in our business before that. So that revenue starts to come down. If you recall, the other acquisitions we made, which were Call 24/7 and a larger part of that revenue also comes from the UK. So all that together affected the changes. In addition to that, the Aviva revenue coming from the UK as well, gets affected. So if you work through these numbers, you'll come to exactly the same conclusion as what we're providing in the guidance.

All right. Thank you.

Your next question comes from the line of Tim Fox with Deutsche Bank. Please proceed.

Hi, thank you. First question, I just wanted to confirm the interest rate. Is that 7.3% that you've --

Yes, it's 7.3% prospective from tenth of November.

Is that confirmed at this point or is that an estimate based on --

Confirmed at this point.

Okay. Great.

We need to complete some paperwork but from a rate perspective it's confirmed.

Great. Second question was you talked a little bit about renewals, one of the three deals you talked about a renewal and a decent sized expansion with a client. I was wondering if you could talk a little bit about the pricing and if you saw any pricing pressure on the renewal and the expanding business with this customer, given the environment. Are you starting to feel some pressure on the pricing side from customers?

I think this question, two parts to your question, one, what happens with this renewal and secondly what's happening with pricing in general. As for this renewal is concerned it was a more favorable terms and also we expanded our business significantly with this client. So this was a very good situation for us. In terms of pricing in the market, Biologics is holding unstable but we are seeing a lot more competition in the market. A lost aggression from IT services companies, in particular, that are trying to move their revenues and trying to discount very heavily and that is one factor in the market that is new. That is pushing the pricing on new deals down a little bit and that's only changed from what we've spoken to you in the past.

As a follow-up to that, we have seen some increased activity from some of the IT services folks out there. Just wondering, going forward, how are you differentiating yourself and winning business from some of these larger players out there and how do you continue to do that going forward?

So, Tim, very good track record, not just for winning business against them but also when winning business when they were incumbent IT service providers with their clients. When you look at the wins we announced, one of them is actually an IT Company, we are actually helping with an Oracle migration and then executing financial accounting for the client across two geographies. The second win was also hard fought win against another IT services player which was an incumbent. Our differentiators are basically a couple of points. Number one is our industry expertise. Most of the time. We deal in areas where we got a track record and running very high quality operation. Secondly, in general, clients tend to gravitate towards good operating skills, the ability to provide strong productivity benefits and our track record on doing some of these things is significantly more than many IT services Company so therefore we see ourselves as very differentiated in the market.

Great. That's helpful. Lastly, you mentioned I think that there was a couple of late stage discussions going on with AGS regarding some expansion opportunities. Can you talk just in general about what that encompasses, whether it's a new geography or a new operating division, if this is one of the interesting things about this acquisition that gives you some opportunity to spread your wings there.

Well, first of all, I just want to make a point, we made a very strong start here in the first three months in terms of, operations, building -- agreeing on new, building our relationships with some of their operating managers in the new environment. All that has been done very successfully. We're seeing opportunities across the board, not just in some of the new geographies, but very attractive opportunities with the existing clients that we're working. It's a bit early to detail them but all we can say right now at this point is that we're very excited about the pipeline. These guys were very charitable to us immediately after signing up. Internal road show to demonstrate our capabilities across their entire Company and so far, everything that they had promised us, they delivered exceptionally well and we feel very good about the relationship.

Great. Thank you. Nice execution this quarter.

Your next question comes from the line of Mark Marostica from Piper Jaffray. Please proceed.

Yes, thank you. I wanted to ask a question about the travel business. You mentioned that you may be seeing some pressure in the January time frame. I'm curious what you are factoring in your guidance in terms of volume growth or declines going forward.

So first point really is that we have been pleasantly surprised by how well our travel business has held up so far. We also have the benefit of seeing what happened in October. Things were as projected. So it's a very good surprise for us. We were expecting things to soften and building some of that in our guidance but so far things have held up very well. What we're beginning to see is some lower core cost on volumes by a few of our clients, that these clients typically forecast two to three months in advance, so there is some anticipation of softness that we see from January which we have factored in our guidance. Also it's important to note a point we made earlier, is that we saw some of the largest in the industry, that relatively were stable so we haven't had small airlines as clients which have gone bankrupt or closed shop as our clients. We serve all the larger clients. Another point is that a lot of what we do is not related to travel transactions, it is back office activities which don't have a linear relationship with change in travel volumes. So in general, we do expect things to soften but even in the next quarter we don't expect to see very dramatic changes.

Thanks for the color there. One other business line I'd just like to touch on and that's the analytics business and maybe you could clarify. I think it's around 11, 12% of revenue. I'm curious whether you're seeing any softness there, arguably it might be on the more discretionary side of things but can you give us a sense of what kind of traction you're seeing relative to your expectations in that business line?

Well, compared to a lot of our other competitors, we have a lot more of our analytics business, in fact, I would say somewhere around 75 to 80% of our analytics business in long-term contracts. So that's point number one. Point number two, yes, you're right, we are seeing softness, we are seeing some discretionary spending with some clients down. At the same time we're seeing new clients come in too, and very very high interest in the general area because the level of savings you can get in that area on a per person basis is significantly higher. So it's a mixed bag right now. There are some clients that are pulling back work. There are other clients that are adding work as well. So it's a stable business.

Great. And wanted to also touch on with your relationship with Aviva, it begs the question of whether or not you're seeing any US companies, insurance companies, beginning to discuss offshore opportunities, outsourcing opportunities. I'm just curious if those discussions are happening and if there's any prospect for that to maybe pick up into late '09, into 2010?

So we have a healthy pipeline in insurance, both in North America as well as in UK and Europe. This transaction has clearly a lot of interest in people looking at different areas. Part of the change we've been implementing right now, given that we've inherited a much larger footprint and much greater, just change our entire sales approach in the sector by aiming for a very different set of things that we could do compared to what we were targeting earlier. So we see exceptional opportunities here. This is clearly the market in which we see the maximum amount of growth prospects in the next 12 months and we are gearing up to do that, both in North America as well as Europe.

And then one last housekeeping item. I'm not sure if you mentioned this or not and I apologize if you did but your assumption on the Rupee exchange rate in terms of your guidance?

Well, at this point in time, the Rupee exchange rate makes very little difference because, you know, we have hedged across the board. So we haven't made any assumptions on Rupees because whatever assumptions we make it doesn't change anything for us because any changes the Rupee causes on your operating side it is offset either way through your hedging.

Got it.

That's not a very important consideration.

Okay. Thank you.

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

Hi, guys, how are you? My first question is if the bank's unable to syndicate the AGS loan is there any risk to WNS from that?

Not any more. Like I said, we've agreed with the banks that they would hold up their balance sheet and we've agreed with them that they will -- we will increase the coupon by 50 basis points because of that. So that the risk of not being able to syndicate now goes away and therefore our effective interest rate becomes 7.3%.

The note that you took on, then, for AGS, it does have -- does it not have a paydown requirement for July 2009?

That's right.

Do you intend to keep refinancing or do you intend to pay down just from a capital -- ?

We paid down the loan. Looking at our cash generation, we will have enough cash to pay down the loan well before July.

So from a capital structure perspective, that is your intent, to keep paying down?

Exactly.

On the P&L, could you step through the delta between lowered revenue guidance, which from the math it seems like pretty much all of it is for currency, and the unchanged earnings, so that does imply that you're doing better than expected on some other lines; right?

Yeah, so Ashwin, I'm going to try to walk through some numbers. It's hard to do it on a phone call. Given that we got the question from Joe as well, earlier, I'm going to try again. In case it doesn't work, we talk to you later, we'll be happy to explain again.

Numbers is what I was looking for.

If you look at the combined revenue of the last two quarters, it was -- it's about $190 million. If we were to end at the lower end of our previous guidance, we would have needed to generate $235 million in revenue. So that's the first point. Second thing is roughly 70% of our revenue comes from non-dollar denominated currencies, all of which are down very substantially. Let's take a simple number. Let's take a simple number like 20%. If you take 70% of 235, you are roughly ending at about 165. If you take 20% of 165, your revenues go down by about $33 million. That takes you to about 392. Right? So we have taken that as a mean and taken, just to leave some room for movement up and down and said well, that's where our revenue guidance will end up. That's very simplistically. There's a little bit more science behind that but as we said, this is largely in response to what has been happening with the currency.

I guess my question wasn't about that stepdown. I was talking about the fact that you lowered revenue guidance but your earnings --

So why is the profit not changed? The logic is as follows. The currency that we have, has been hedged all the way, 100% till March of this year. So therefore, any changes that you have in revenue, you gain the same benefit from hedging. Okay. So it all evens out and as a consequence your profit doesn't change because of the benefit that you get from it.

So it is not because of operational factors?

There are operational gains as well. If you look at our numbers, we're beating the guidance of all you guys this quarter on profits as well and that's a reflection of some very strong operating numbers that Anup put up. What we're saying is basically it's hedging that's taking care of it. The other important point we're making is that as you start looking at the profitability in fiscal '10 we have been progressively hedging at superior rates to what we hedged the numbers of fiscal '09. Much of this year's hedging was down between 39 and 41. As far as the hedging losses are concerned, they start to lower and our overall adjusted net income gets closer to our operating margin numbers that we've been demonstrating right now, which are significantly higher. In other words, what I'm basically saying here is that we've had operating gains as well but it is the hedging that is covering that with the profits.

So how much of the SG&A improvement was because of the low level of SG&A at AGS versus concrete actions you've taken.

Well, the SG&A typically what we have guided to, in our normal core business we intend to -- all things being equal, because currency affects SG&A as well, all things being equal we have a goal of improving SG&A by between 50 to 100 basis points annually. The AGS SG&A obviously seems helpful. And I think Alok in the opening remarks made the comment that this is a step change for us. You want to add something?

Currency impact on SG&A was a little over 2%. 1% came from the -- on the operating margin, the improvement in operating margin that we saw, about 2% came out of currency and 1% the operation.

Got it.

It's not just currency that has been helping us improve our operating margin.

My last question is, in the next couple of quarters, any impact of seasonality that you expect?

I think in general we see travel, the volumes are lower in this quarter but are high in the January quarter. So based on seasonality, that is there. But it's baked into our overall guidance.

I was just -- I'm quite sure it's built into your -- I was making sure it's built into mine. So any comment on seasonality that we should expect out of -- ?

I think seasonality, usually seasonality favors the January, March quarter a little more but it's not material.

Okay. Great, thank you.

Your next question comes from the line of with (inaudible) with Robert W. Baird. Please proceed.

Hi, guys, nice quarter. Just a couple questions on the segments. You put up pretty nice margins on the BPO segment. I think they're about 13.5 this quarter. Just given the currency movements, can we expect those to improve sequentially throughout the year? How should we think of that going forward?

The BPO segment, the operating margins, we should see some improvement because AGS business falls into that segment. You should see improvement in margins in most our segments, because as you know, we made a substantial acquisition two quarters ago and we've shown an improvement in that. So we should see the acquisitions improve its margins so from last quarter's dip you will see that number come back up.

That's helpful. Just on the tax rate, the tax rate's been kind of funky the last couple quarters. Can we assume a 25% tax rate?

Last time I think what we had told people is that we would rather give out an amount because the rate depends on what you divide it by. We had indicated in the last call that we were looking to a 4 to $4.5 million tax charge for the year. Currently we are looking at just under $4 million. That's because we have some deferred tax credits that we get out of the business we've acquired in Aviva. So our tax chart comes down by roughly half a million dollars. So we're now anticipating a tax charge for the year of just under $4 million.

Great, that's helpful. Finally, just on the headcount, looks like it was up about 3,000 sequentially. I was kind of under the impression that Aviva would add about 4 to 4,500 employees. Is there anything we should think about there?

Anup here. One of the things we've been focused on is to make sure that we welcome productivity and tighten the bench practices that we have. Also, given the present hiring environment which has softened up a little bit, we've also got to make sure that we look at our bench policies. Based on both the effects of productivity improvements that we've been able to drive, plus bench reductions that we have done in both of these, you saw the numbers. The one thing I would like to clarify is that the Aviva business had some dual accounts with part of the business that we had already with Aviva. The math actually is a little different from the way you intend.

That's very helpful. Thanks a lot and nice quarter.

Thank you.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Sachin Jain with Jefferies & Company. Please proceed.

This is for Joe Vafi. So first on your Aviva deal, given the recent dislocation in the markets, including insurance verticals since July, has there been any change on your revenue expectation over the entire life of the Aviva contract, including the expected ramp-up in Ireland?

Constant currency terms, we are slightly ahead of target today. And we feel quite good about the assumptions we made in the model. Obviously, with currency changes from a revenue standpoint, the currency would reflect what -- or the revenue would reflect what the currency is at given the point in time. In terms of how we're dealing with that effect, we are consistently hedging this. Very large portion of our next year is already hedged in order to protect our profits from currency changes. On a constant currency basis we feel pretty good about where we are.

Okay. That's helpful. And then at a broader level, as you already mentioned, I guess, that we are seeing some of these larger IT players getting more aggressive on BPO, especially given the $0.03 EPS. How do you think like this is changing the deal structure, are you even seeing any signs of vendor consolidation, let's say from the same vendor?

Well, I think we haven't seen vendor consolidations happen for existing situations. But what we are seeing is that IT vendors, especially incumbents, are being a lot more aggressive in trying to secure BPO deals with existing clients as well. And are pricing very aggressively for that. Largely we still see the market looking at best of breed. It is always nice to have the same vendor but you have to have comparable capabilities and if you look at the companies there have been very few that have really made a dent in the BPO market. In general, I think yes there is increased competition, increased competition not from just the larger ones but mid-sized players are attacking the BPO market but we've been able to hold our own and win deals against them.

Okay. That's helpful. Thank you.

Your next question comes from the line of Tien-tsin Huang with JPMorgan. Please proceed.

Hi, thanks. Nice quarter. I just had a couple questions. First, has your the hedging strategy changed given the volatility in foreign currency. I didn't catch that.

I didn't quite get the question.

I hope you can hear me. Curious if your hedging strategy has changed going forward given all the volatility effects, have you changed your hedging strategy?

I think what we're looking to do is obviously keep a good mix of options, which is already part of our strategy and we're looking to lock in opportunistically above some target rates that we have set internally and we have extended the horizon of our hedging, right out to 24 months and we've got a system by which we try to progressively hedge. So I would look at it akin to systematic investment plan where we try to systematically hedge a certain percentage and we adjust that percentage up or down depending on whether the rates are favorable or unfavorable.

How much of your repeat base hedges are done through options versus forward contracts?

Right now, it's about 50/50.

It's about half, half. Okay. My last question is just on the auto claims and the accident management services business, any impact there we should consider given what's going on in the auto market and the insurance market?

I think that business is first of all holding quite steady and as Alok mentioned we are making all efforts to increase margins.

We've had some revenue bookings in the recent quarter that have helped us there as well. So it since continues to be a very good business.

Very good.

I think that's supporting drivers it's mostly motor claims.

Auto accidents, it's more weather dependent than anything else, to be honest .

This concludes the question-and-answer session. Thank you for your participation in today's conference. You may now disconnect. Have a great day.

Thank you.