WNS (Holdings) Ltd (WNS) 2009 Q3 法說會逐字稿

Good morning and welcome to the WNS Holdings fiscal third 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 on 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. You may 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 third 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, I trust 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.WNS.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 email it to you.

Today's remarks will focus on our recently announced results for the fiscal third quarter ended December 31st, 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 our investors. You can find these reconciliations of the non-GAAP measures to GAAP measures in our press release issued earlier today.

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 of WNS' financial performance and some of the key developments that were announced during the past quarter. Second, I'll comment on the projected numbers for the current fiscal year. Third, I will talk about our commitment to corporate governance and some of the practices that we have in place in this regard. Finally, I will talk about our recent client additions and expansions and the state of the market.

Following my remarks, Anup will discuss our pipeline and some of our key operational achievements in the quarter. After, Alok will provide additional details on our financial performance, our balance sheet, and our outlook for the remainder of fiscal 2009. We will then take your questions.

To start, we saw another quarter of solid execution and we remain on track to meet the fiscal year 2009 adjusted net income and net revenue numbers that were discussed on the last earnings call in November. In terms of our financial performance this quarter, we grew our net revenue by 35% to $99.6 million compared to the third quarter of fiscal 2008. Our adjusted net income, or net income excluding amortization of intangible assets, share-based compensation, related fringe benefit taxes, and minority interest share of loss, grew by 60% to $12.9 million.

In terms of key developments and announcements since the last earnings call, a week ago I announced that I would be transitioning from the role of CEO to that of strategic advisor. The WNS Board has identified a leading global search firm and the process is now underway. However, as I mentioned on last week's call, I will remain in my current role until a new CEO is in the saddle. The management team is very supportive of this transition and we will make it as smooth as possible.

Shifting gears to our performance this quarter, the company is on track in terms of revenue and profitability. To that end, I'm pleased to reaffirm our net revenue and adjusted net income guidance for the fiscal year ending March 31, 2009. Regarding profitability, our guidance calls for adjusted net income of $46 million to $49 million for the current fiscal year. This is the same guidance that we gave in July when we announced the Aviva Global Services acquisition.

On our last earnings call, we reduced our revenue guidance to between $385 million and $400 million, a change that was driven primarily by the sharp decline of the British pound against the US dollar. These revised guidance numbers were based on a range of $1.45 to $1.60 dollars to a pound for the remainder of the year. Since that time, the value of the pound has been trending down, sometimes even as low as $1.36. If the pound continues to trade around its current rate, our revenues can be expected to be at the lower end of our guidance range.

I would like to reiterate a statement that I made on our call in November. If the currency levels were what they were at the time when we gave our revised guidance in July, after we completed the AGS acquisition, we would have been well positioned in terms of our original revenue guidance of $425 million to $435 million. Our operating business, net of currency changes, is still strong and we should continue to see organic growth.

(Inaudible) had talked that it was also important for us to spend a few minutes discussing WNS's corporate governance policies considering the current economic and political environment. WNS has been a firm believer in strong corporate governance. Our board is made up of illustrious business leaders from around the world, five of whom who are non-executive directors, of which four are independent. Two of our directors are in India, three are based in the UK, and two are based in the US. Mr. Deepak Parekh who has been on our board for three years has been recently chosen by the government of India to join the Satyam Board.

We worked with two of the four -- two of the big four accounting firms, Ernst & Young, and KP&G to perform our external and internal audits respectively. Over the last year, we have increased our disclosure to the financial community by providing a long form 6-K, a financial presentation, and a financial and operating metrics sheet, all of which are made available on our website immediately after the earnings call. Corporate governance and disclosure are extremely important to WNS. Following this call, a presentation with additional leaders of our corporate governance program will be placed on our website.

Moving on, I would like to provide an update on the current sales environment and new plan additions and expansions. Generally, volume and pricing has remained stable despite the worsening economy. In terms of growth in the last quarter, we added five new clients and expanded seven relationships. In terms of new clients, we expect to begin working on a sizable sales and accounting relationship with a large global telecom company within the next few months. This company has a long history of outsourcing and over time we see good opportunity to expand this relationship.

We also started a new relationship with a large commercial bank. Initially, we will focus on research and analytics. There is also an opportunity to expand this relationship. In terms of renewals and expansion of work with existing clients, we have signed four renewals, including a three-year contract with our third largest client, Centrica, and a contract with a large UK-based insurance company for our auto claims business. These renewals are especially important for several reasons.

First, the average pricing on all of these contracts was at current or better than previous billing rates. Second, in renewing the Centrica contract, we have now renewed contracts with all but one of our top ten clients. As it stands, these contracts extend at least until the end of 2010 calendar year, and some of them go until 2016. We are also in the process of renewing our contract with the tenth client.

Finally, these contracts provide WNS with a strong stable base of revenue, which will allow us to continue generating strong cash flows. Looking at the state of our existing client relationships, given the current economic climate, there are three areas that are likely to be slower in the near future, all of which we have factored into our guidance.

First, we are beginning to see some volume decline in our travel business. This business handled better than we had anticipated during the last quarter, since some of the volume pressure was partially offset by an increase in exceptions processing work in the US. However, as we've discussed in previous calls, we anticipate that volumes will continue to trend lower in the January quarter, and we have accounted for this in our guidance.

Second, we expect to see slower incremental growth in the banking and financial services, or BFS segment. However, as we have said before, this is less than 3% of our net revenues. Finally, our research and analytics business continues to experience challenges. We may see some declines in this business as a portion of it tends to be (inaudible).

But we have also seen a pickup of activity across these areas in aggregate. Earlier I mentioned that we had signed a contract with a financial services firm. We also see growth opportunities in travel, financial services, and R&A.

In all our other areas, our business is stable and we see normal growth in finding opportunities and our client base. Our auto-claims business continues to perform well. The integration of Call 24/7 continues to progress and we are improving profitability. Overall, we had a good quarter and grew organically net of currency. The impact of currency fluctuations on our top line continues to be our primary challenge, however we are managing this impact and mitigating the profit effect by activity (inaudible) as appropriate.

I will now turn the call over to Anup to talk about our pipeline and operating performance.

Thank you, Neeraj. I will begin by discussing our sales pipeline. On our November call, we had discussed that we expected to see five key prospective clients make sourcing (inaudible) by the end of the fiscal year. Of these five, we won two and lost one. The remaining two are still under discussion and we expect to have a decision on these by the end of this quarter.

In terms of growth opportunities and idea for expansion, we see a high level of activity in the finance and accounting area across all industries. From an industry perspective, we see significant activity in the CPG, Pharma, and insurance industries. As the global economy declines, clients see BPO as a survival tool. As a result, our pipeline is healthier than it was last quarter. However, given the present state of the economic environment, sales closures could take longer.

I will now turn to our margins for this quarter. Our gross margins quarter on quarter by over 510 basis points to 38%. This is on top of an improvement of over 220 basis points last quarter. Operating margins were over 31%, a quarter on quarter improvement of more than 600 basis points. Again, this is on top of a 400 basis point improvement last quarter. Our considerable margin improvement is a result of our continued focus on running tighter operations, to improve productivity and managing our costs more efficiently. The weakening rupee and synergies that we achieved through our acquisitions also contributed to this improvement.

SG&A costs, excluding share based compensation and related fringe benefit taxes for the third quarter of fiscal 2009 were slightly over 16% of revenue less repair payments, 620 basis points lower than the same quarter last year. This was a result of an improvement in operation, the weaker rupee, and the lower SG&A costs (inaudible). We anticipate that while we will continue to see this number improve, the trajectory of this improvement will likely not be as dramatic in the future, given that most of the synergy benefits have been realized.

In terms of Aviva Global Services integration, we have entered the (inaudible) where we are improving key operating metrics and beginning to enjoy some of the scale and synergy benefits that we had anticipated. We are continuing conversations with a number of business lines within Aviva to expand our relationship. Our operations outside of India in Romania and the Philippines have been growing as well. Global expansion is an important part of our business and we've made good progress in this regard.

Let me talk about some operating metrics. This quarter, our attrition declined dramatically to 39%, down from 37% last quarter and 29% in Q3 of fiscal 2008. I'm especially proud of our team for this achievement. (Inaudible) is an area that we've focused on for some time and we are starting to see the fruits of our efforts. We put in place many programs to provide long-term career opportunities to our employees and to offer a learning working environment. We are very pleased with our current retention efforts and aim for long term annual attrition rates in the low to mid 30s.

Operationally, (inaudible) utilization was flat at 1.7 shifts for used seat and 1.3 shifts for total shifts this quarter compared with last quarter, including the impact of AGS' acquisition. However, excluding the impact of AGS, we maintained the used seat utilization of about two shifts per seat. Increasing both space and seat utilization remains a point of focus for us, and it allows us to better leverage our fixed operating expenses leading to lower CapEx in the next 12 to 24 months.

The employment market in India has continued to soften and we have further tightened the management of our bench, increased productivity, and reduced our variable costs. Rate inflation is expected to be significantly lower than it has been in the previous years.

In terms of headcount, we ended the quarter at 21,328, up from 20,966 last quarter, a net increase of 362. Let me know hand over the call to Alok who will take us through our financial performance in detail.

Thank you, Anup. Our overall financial performance this quarter was strong. Our revenue less repair payments grew by almost 35% to $99.6 million in this quarter, while gross margins, excluding share-based compensation, grew by over 510 basis points from 38% compared to the same quarter last year.

Third quarter fiscal 2009 operating margins, excluding share-based compensation, related fringe benefit taxes, and amortization of intangible assets, was 21.8% compared with 10.4% in the third quarter on the prior year. This significant improvement was due to the profitability associated with the Aviva contract, as well as the improved SG&A leverage that Anup mentioned.

The depreciation of the Indian rupee continues to benefit the cost side of our business. Over 70% of our costs are in rupees, so the decline against the US dollar helps to offset the hedging losses that we have from the rupee hedges that were taken last year. We are currently hedged out 100% for fiscal 2009 and are significantly hedged for fiscal 2010 as well.

We have also started hedging out into the first half of fiscal 2011. These hedges include a combination of options on all our contracts and are billed progressively. Our third quarter fiscal 2009 adjusted net income, or ANI, which excludes amortization of intangible assets, share-based compensation, related fringe benefit taxes, and the minority interest share of loss, was $12.9 million, compared with $8.1 million in the third quarter of fiscal 2008.

Total FX losses for the quarter were $4.9 million. While we had $3.6 million of hedging losses in the quarter, including the cost of options, we also had losses in our P&L from the reevaluation of non-functional currency balances, which were offset by gains we recorded on marking to market ineffective hedges. The net effect of these two was a charge of $1.3 million. Given the current economic environment, we understand the focus on maintaining a strong balance sheet and access to additional capital. As such, I will go through the same balance sheet metrics that we highlighted on our last earnings call.

As of December 31st, our cash balance was $36.6 million. We generated $26.9 million in cash this quarter from operating activities, due mainly to a significant improvement in working capital. Our current monthly operating cash flow remains above $6 million. This is approximately the cash generation that we anticipate going forward. This translates to a free cash flow of about $5 million per month prior to debt repayment.

Working capital management continues to represent an opportunity to unlock some cash. Our DSOs have improved dramatically over the past quarter and we believe that we are at industry leading levels today. We are paying our quarterly interest costs and continue to reduce our leverage through our cash flow generation. We remain within all of our long [converts]. We are very comfortable with our leverage and our liquidity position. Given that we are generating free cash, we should be in a position to prepay some of our debt.

In terms of working capital, we have paid down the short term (inaudible) that was drawn down at the time of the last call. We have continued to keep this line of credit available, as it provides us with additional flexibility and protection. We still have some short term debt outstanding in the Call 24/7 business, although it is lower than the level at the time of acquisition.

My team and I continue to focus on operational performance and we have made some great progress in terms of cash management, hedging, and capital expenditure. As I mentioned earlier, our DSOs have improved dramatically, coming down from 52 to 42 days on a gross revenue basis. Considering the turbulent economy and the fact that this improvement was during the holiday season, I see this as a testament to the hard work of the team and the quality of our customers. I believe that we have the lowest DSOs in the industry.

Operationally, we have seen significant CapEx savings opportunities from integrating recent acquisitions. We are on track for a CapEx spend of less than $25 million this year, and we will have further savings during fiscal 2010 due to these synergies. Finally, we reiterated our profitability guidance for fiscal 2009 on our last earnings call, but at that time we lowered our revenue guidance to a $385 million to $400 million range due to the decline of the British pound.

As we mentioned at the time, this guidance was based on a range of $1.45 to $1.60 US dollars to the pound. The pound has continued to decline significantly. At the time of our call in November, the pound was trading at approximately 1.49. Since then, it has mostly traded in the range of 1.36 to 1.45. While we are reiterating our revenue guidance today, I would say that our revenues would likely be at the lower end of that range for the fiscal 2009 year given where the pound is trading.

In terms of profitability, we are comfortable that we will meet our adjusted net income, or ANI guidance for fiscal 2009 of between $46 million and $49 million. This implies and adjusted EPS of between $1.06 and $1.13 on a diluted share count of 43.2 million shares.

In summary, we had a strong quarter despite continued headwinds from currency and the economy. We have made some great progress renewing some key contracts, and by focusing on operations, our margins have expanded significantly this quarter. We expect to continue to see further positive impact in the next fiscal year as a result of our operating focus and the declining rupee. Our cash flows our strong even in a challenging environment.

This concludes our prepared remarks for today. We'd now like to open the call for questions. I will turn the call over to the operator.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Joseph Foresi from Janney Montgomery Scott.

Hello, guys. My first question here is, I know you talked a little bit about the sales cycle and the pipeline. I wonder if you could talk about, it sounds like the cycles remain long. What are you seeing as far as people's inclination to spend money and to move offshore? Is this just an effect of the natural length of the sales cycles? Maybe you could just talk a little bit about what you see on that front.

Hi, Joe, this is Neeraj. I'm going to start this and maybe Anup might add later. The two aspects of the sales profits here which I want to highlight. First is what happens in the early stage where we are actually seeing a workup in our pipeline. We're seeing, especially both the December/January budget sessions that many of our clients and prospective clients have gone through, you're seeing a lot more things come into the pipe in the early stage. And in fact, we're seeing it across the board, even in financial services and travel.

So that's a very heavy trend. However, the later stages of the pipeline, we're seeing some sluggishness in terms of basically which things are getting pushed, and decisions are getting made. So in some ways, it's a mixed bag. We do see that (inaudible) are taking a long period of time, some of which is happening as a result of some organizational changes or uncertainties that our clients are going through. But there are also some early signs of the early stages of the pipeline looking a lot better.

So I guess just to be a little bit more specific, where are you seeing the perks? And it sounds like the organizational changes, are those people looking to protect their balance sheets? I mean maybe we could just drill down on that just a little bit.

Well, I think basically the first objective that people, what's very obvious to people is that they need to cut costs very, very quickly. And that is the reason we can attribute to the early stages of the pipeline beginning to perk up. But I think in general, if you picture any company today, they're going through organizational changes. They're going through a lot of talk, restructuring within their company, and therefore the ability to put their teams together and committees together to make decisions, on those processes, you're tending to see some delays.

It's less about the resistance in terms of the conceptual issue of moving more offshore and more about organizational processes that are (inaudible).

Okay, you talked about some new client signings. I wonder, are you now, and just renewals too, are you including any currency provisions now in the contracts that are being signed? And if so --

Joe, generally we deal with our contracts in two ways. Some contracts we are fortunate enough to have clients agree to some sort of currency protection. In other, we don't have that. Customers do want us to take on the risk. So we therefore hedge our profits from both situations. So it's a mixed bag there.

It's a mixed bag? And just, to you Neeraj, Neeraj, how often are you involved in the actual sales cycle itself? I wonder if you could give some sort of feel for that.

I think today we have Eric and Phil who are our field leaders in the UK and US respectively, and Anup, do the bulk of the heavy lifting in the sales cycle in terms of guiding our team and ensuring that we are doing the right proposals and orchestrating the whole process in the right manner. We have some very accomplished sales people under them who've been with the company for a long period of time, and like many other companies we have our rainmakers who do the bulk of the heavy lifting on managing the client relationship.

As far as I'm concerned, usually I play a role (inaudible) in the beginning of the process or at the tail end of the process, and so that's usually my role when I'm (inaudible) to make the initial sale, and sometimes come in to help with the closure. So that's primarily my role in the process.

And then just one last question here on the deal with Aviva and particularly the loan side. You guys covered the cash side of it pretty well. I was just curious, are there any provisions that deal with the covenants in light of sort of what's going on, on the currency side. And maybe you guys could just talk about any thoughts in that regard.

Joe, this is Alok. There are no covenants that cover the currency side. In fact, if you see our 20-F, and even our 6-K, we have listed out what the covenants are. So these mainly deal with debt EBITDA or debt service ratios, net worth to loan ratios, but nothing related to FX.

Thank you.

Your next question comes from the line of Tim Fox from Deutsche Bank. You may proceed.

Thank you. Good morning, and just the first question that would follow up on the previous question around some of the trends you're seeing out there, Neeraj. Regarding existing clients and not necessarily upon renewal, but have you seen any pushback with some of your existing relationships around total headcount, or in the second case, ramp up of some of the commitments? Are there any slow downs there around both the existing client base, as well as processes that are in the ramp up phase?

Yes, hi, this is Anup here. I'll take that. So with every client, what we do is we have typically some kind of a forecasting process with them, where we will look at the next three to six months in some detail, and the next year at an overall level to see how business will shape up. On the travel side, we have seen declines in volumes. We had been anticipating it for a while, but in Q3 we saw some effect of that coming through, not to the degree that we had expected, mainly because we had some offsetting work because of some better rated events, which happened.

We are expecting to see that trend in travel continue, and some pressure on volume, and have factored that into our guidance. And with some of our other clients, we have seen some small ramp ups (inaudible). I think one, maybe, I would call especially there is Philippines where we've seen a lot of interest and we have seen some growth with existing and with new clients in that regard.

If you look at our banking business, it's a very small portion of our revenues, about 3%. So we have not had a direct impact of the present environment there, but again in that segment we have seen one new client addition and we have some good prospects. So I think overall it has been a mixed bag, and some of the pressure on volumes, I do want to emphasize that we have built that into our Q4 activities.

I'll add something to this here, this is Neeraj, is that in general I think the behavior of clients both on ramp ups and ramp down has been mostly anticipated or predictable. We haven't seen anything unusual this quarter.

Okay, that's helpful. And you mentioned that you did close a couple of new deals but did lose one, and just wanted to focus on the lost deal, primarily from a pricing perspective. Can you talk a little bit about what the driver of that lost deal was? Are we starting to see more aggressive pricing from some of your competitors out there, or is this outside the pricing issue?

Well, I think the deal we lost, pricing was not a factor. It was a deal which involved participation in some geographies where we were not present. We just proposed to an interesting alliance that we formed with a company in another geography where we're not there, but somehow that wasn't considered appropriate. So we didn't that one, but there's a strong relationship that we formed at the time, and there will be another day.

Great, and just one for Alok. Can you break down in the improvements in the gross margin between the three elements you spoke about, the Aviva integration, SG&A improvements, and the rupee, just to give us some sense of which one of those are the key drivers of that significant improvement?

Sorry, it was in the gross margin and the SG&A improvement, you're looking in the operating --

I'm sorry, operating margin, Alok, thanks.

Okay, so the operating margin improvement, there's a large chunk of it that actually comes from the operating leverage that we get coming out of Aviva. And then we have a significant portion coming out of the depreciation of the rupee, and if you really (inaudible) out of the 510 basis points that we have improved, about 470, or sorry, 370 would come out of FX, and about 140 would come out of the operating improvements.

Okay, great, thanks for that detail. And Neeraj, good luck in your new role. Well deserved rest.

Your next question comes from the line of Ashwin Shirvaikar from Citi. You may proceed.

Hi, this is Nathan Rozof in for Ashwin. I wanted to ask a few questions as pertained to cash flow. First off, as we see the currency moves, how can we quantify how cash flow will be effected? Or how should we think about the impact of currency on potential future cash flows?

Good question. So if you remember, in the investor day presentation that we had had in September, we had explained to you how the impact on our operating for the margins, the impact of FX movements on our operating margins. So the net impact of rupee-dollar movements and pound-dollar movements. And then to that you have to add the FX in terms of what is the hedging impact. So the cash impact will be the net of these three.

Okay, and given that the currency has moved to such an extent, can you give us a little color on what the current levels of those three items are?

So like I mentioned in my prepared remarks, for current year we're completely hedged, and even for the next year we are significantly hedged. So without sort of, I really don't want to get into the rate at which we are hedged for next year, but we have indicated that we are comfortable at the current level of cash that we are generating. And even into the next year, we should be able to generate that level of cash.

But that would be the net effect of the operating environment and the hedging.

Got it. And then you mentioned that --

But (inaudible) the exact moment, I would have to tell you the average rate at which we are hedged, which I can't really do.

Okay, understood. You mentioned in your prepared remarks that working capital really drove the operating cash flow in the quarter. Can you give us a little more insight into what elements within working cap it was that drove the operating cash this quarter?

It's really the debt reduction, the reduction of the DSO. So we've reduced our DSOs from 32 day to 42 days. That raised almost $8 million of working capital in this quarter.

Okay. And that seems counterintuitive. We would have expected in this quarter that the customers would have potentially delayed payment. What is it you guys are doing, or how is it that you're able to lower DSOs in that environment?

Well, it's really the fact that most of -- the quality of our customers, and I alluded to that in my prepared remarks. The quality of our customers. They're all marquee names who have solid businesses of their own, and of course the fact that we are diligent in our process and we have a process, following up on getting the invoices out in time, first of all, and then following up to make sure that we collect it on time.

I think it's also, if you see traditionally clients always speak with their checkbooks. If you deliver your clients will pay you on time.

I think Alok's being a little bit modest here. I mean, he's been a pit bull, himself, and I think the entire team has worked extremely hard and followed up very aggressively, and the results are very obvious here.

Okay, great. Thank you. And then just last question here, could we get any update in terms of the trends you're seeing within your call center business? Any update on the outlook by industry, things that are working or not working, or just what you're seeing within the call center business in particular? Thank you.

Yes, I think other than focusing on the call center side, I would say, or in terms of industries, I talked earlier about some trends we are seeing in travel and other areas. So I think the call center side is not seeing anything which is dissimilar to that overall industry trend.

Got it. Thank you.

Your next question comes from the line of [Don Brueth] from Baird. You may proceed.

Yes, hi guys. Nice quarter. I was wondering, it looks like in the 10-Q there that you guys broke out some of the revenue contributions from some recent acquisitions. I was wondering if you could maybe provide the revenue piece that comes from the Aviva acquisition that you didn't have before the recent deal.

Yes, so in our breakup of revenue, we essentially list the revenue by the top client. The top client is Aviva and it does account for roughly a quarter of our revenue right now. The (inaudible) business we have from Aviva compared to what we had before, it's about roughly 3.5 times roughly of what we had before. So some of which we already had earlier, but the rest of it has come through the acquisition. In fact, technically all of it has come through the acquisition because of the (inaudible) we would have lost what we had earlier.

So Aviva, in this quarter, provided for roughly 25% of our revenue.

Okay, that's helpful. And then, secondly, it looks like the operating margins in the BPO business this quarter were upwards of 20%, which is obviously a very strong improvement from the past couple of quarter. We were just kind of wondering if that kind of 20% level is sustainable given a reasonably stable FX environment.

Yes, at the current currency levels it is. We'll be obviously be (inaudible) quarter, we will have some effect of salary rises going into that, which every year we have a seasonality of margins trending up and down that quarter. But I think what you're seeing is that the operations, again, our second pit bull is (inaudible) who's really to make sure that everything is done very tightly. And in addition to that, we benefited from currency. We benefited from significantly lower attrition as well, which has allowed us to keep a lower bench, and all I think this is by far been our best quarter operationally.

Great. Thanks, guys.

Your next question comes from the line of Vincent Lin from Goldman Sachs. You may proceed.

Hi, thanks. A couple housekeeping questions. First of all, can you give us the constant currency organic revenue growth for this quarter?

Compared to last year, it would be roughly 5%.

Okay, great. And then can you also comment on the expected FX losses on the non-operating side that you're expecting over the next few quarters?

Well, I can do it for next quarter but don't really want to get into the next year at this stage. So if you look at the FX loss, I tried to break that down in the prepared remarks. This quarter we had an FX loss of about $4.9 million. That's (inaudible) 3.6 of hedging losses, which includes the cost of options, and 1.3 is the net effect on (inaudible) losses. So non-functional currency balances that get restated, the impact goes into the P&L.

So the 3.6 number of hedging losses would be slightly lower in the fourth quarter.

That's helpful. And then, can you also just on the deals that you're currently pursuing right now, it sounds like two additional deals are expected to, the results are expected to be announced by the end of this quarter. Just wondering if there's any additional deals that you are pursuing right now relative to the five that you had originally announced last quarter.

Okay, so I'll take that. We have, as we mentioned earlier, we have many deals, especially in our early stages of pipeline. I would say in addition to the two that we have talked about from previous quarters, there are probably another three to four which are in the later stages of the hopper. And while I'm not sure that the decision on those will get made by the end of this quarter, but I think in the next two to four months we should see decisions made on the bulk of them.

Got it, and just lastly on your research and analytics business, you did comment on you're seeing some challenges and softness there. Just wondering if you can update us on the current, in terms of the size of that business and in terms of being able to quantify what is the magnitude of the softness that you are seeing right now, and any sort of data that you can provide there would be helpful.

So we had mentioned in the beginning of this fiscal year that that was around 14% of our revenue, and what we want to also add is that roughly about 80% of that revenue base is on regular, long-term contracts and about 20% is discretionary work. What we're seeing is a couple of trends here. First of all, some of the existing clients are controlling the discretionary spending. So the discretionary part of our work will have some challenges retaining that. And therefore the business has been soft on that hand.

But on the other hand, what we have also found that in recent times, particularly with CPG and pharma (inaudible), we've seen a lot more interest in new work. We have 13 proposals right now in the hopper there and this is over and above what Anup mentioned because these contracts don't tend to be very large when you start. So we tend to treat them separately as we view our pipeline.

But the reality is that our pipeline in this quarter has really jumped up dramatically, and so we expect to offset some of the recent softness with some wins hopefully in the next quarter or two.

Okay, great. Thanks.

Your next question comes from the line of Sachin Jain from Jefferies & Company. You may proceed.

Hi, this is Sachin Jain for Joe Vafi. So can you just mention the organic growth on a quarter on quarter basis, (inaudible) currency, the December quarter?

So quarter-over-quarter December compared to September, at a constant currency, our organic growth was flat, about .5%, so you can take it as flat.

Yes, coming on the back of a quarter on which we were on a tear in terms of our organic growth last quarter was close to 9%. So our business sometimes tends to be bulky.

Right, and then you had these contract renewals like with Centrica and a couple of other clients. So can you just talk about the minimum volume commitment trends you're seeing on these renewals? Is there any change there?

So again, depending on what kind of contract it is, some of them have minimum contract -- some of them have minimum volume commitments. Some of them don't. I think which is important to highlight is that all these contracts have ramp down provisions, which again will depend on the size of the relationship. But a large contract would have a three to six month ramp down at the bare minimum, and sometimes even longer. So I think if you look at that through a combination of some volume minimums plus a ramp down, we normally use that as a risk mitigation tool in our business.

Okay, that's helpful. And second, could the recent developments at Satyam drive more (inaudible) and decision making, or let's say sales cycle, given increased oversight on behalf of clients?

No, no, I don't think so. I think it was basically a two-day heading for us in terms of some clients and some investments calling us to find out, just get more details on our corporate governance policies. But we provided more details and we shared more information about our practices. People want more assurance. I think it's been a non-issue since then. Also, I think keeping in mind that we've got a fairly well thought through and comprehensive practices here, some of which are detailed in a special presentation we put up on our website on that.

I think in general, our customers and our investors have a lot of confidence (inaudible).

Fair enough. Thanks.

Your next question comes from the line of Ed Caso from Wachovia. You may proceed.

Hi, good morning. This is Chris Wicklund for Ed Caso. Turning back to DSOs, have the terms for the legacy Call 24/7 customers transitioned to more traditional WNS terms?

No, those will not transition. Those are longer term contracts, so while we renewed one of those contracts, the payment terms don't change because the basic business has not changed for that. You don't get a benefit out of that in our DSOs. This benefit we've got is purely an improvement in the process and collecting better.

Great. No, that's very helpful. Thank you.

But what does help is actually the Aviva business, we have good payment terms. So that does help that 22% of your business you collect much faster.

Okay, and then also could you give us an update on your expectations for the tax expense this year?

Tax expense for the year will be between $3 million and $3.5 million.

And then lastly, if you could talk about seat utilization on the Aviva business then also excluding Aviva.

No, I think, again, in my prepared text I did mention seat utilization. I don't think it would be appropriate for me to get into more specifics, but it's fair to say, and I think we've talked about it in the past as well, that seat utilization on Aviva is lower as happens to be the case with most [captives], and that's actually an opportunity for us in terms of synergies. And we actually, our team is already working on that to make sure that over a period of time we increase that seat utilization to close to the (inaudible) level.

Yes, I'll just add to that that what we said in our prepared remarks, again, was that our current utilization of used seats 1.7, including Aviva. Excluding Aviva, it continues to be over 2, which historically we've maintained it between 2 and 2.2. So we're still in that zone, and the fact that it is 1.7 average gives us an opportunity to increase or grow our business without necessarily adding more seats.

Okay, thank you.

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

Hi, guys, it's actually Mark Zgutowicz for [Miraj Dakat]. I just wanted to ask about the travel business, if you could possibly quantify the declines, the volume declines you're anticipating on a sequential basis that's built into your guidance. And if you could maybe provide what kind of visibility you have on this.

So in general, I think what we have done is that we're based our guidance excluding that the travel industry declines by 20%. Now, that does not translate into our business declining by 20% because in a few of our previous calls, we explained that a lot of work we do in the travel area is core back office processes, which are not sensitive to volume transactions. So that is factor number one. Secondly, travel is also affected a lot by exceptional circumstances, and ironically when there are weather distractions or any other problems in airports, our volume spikes up. We tend to get more refunds. There are more ticketing changes. There are more situations (inaudible) accounting gets more complicated.

So what we found in the last quarter, we actually did benefit considerably from these exceptions, and we've seen some of that effect in January as well as (inaudible) effect of distractions there as well. So it is not linearly proportional to travel declines. We have built a lot of conservatism in our numbers, but so far our numbers have held up a lot better than what we've anticipated.

Okay, great. That's helpful. And then just a general question --

Sorry, just one other thing I do want to reemphasize is that if you look at the quality of our travel clients, you see here all top tier names. We deal with the top five or the top ten European or US airlines, and these are more stable names in the industry compared to some of the smaller players.

Okay, great. And then looking, this is a general question and IT budgets specifically, in looking at your existing customer base. Could you sort of quantify what percentage of your existing clients have sort of firmed up their budgets for the year, and maybe give some clarity on what we have left there and how that may give you less or more visibility coming out of this current quarter?

Yes, sure. I think the first thing to comment on there is that our business is not necessarily allocated to IT budgets. If you look at a lot of our work, it is on core industry specific processes, which is more tied into operations and tied into the core business of our clients. So we are not that effected by IT budgets per se. What effects us more is, as clients make their decisions for next quarter on their businesses, what kind of cost pressures are they facing. And consequently, what kind of targets do they need to meet, do they need to hit, to hit their overall business expectations.

And as Neeraj mentioned earlier, as these budgets have been firmed up, for many of our prospective clients we are seeing a perk up in our release stage (inaudible) activity, because they need to move offshore to achieve some of those targets that they've given for themselves.

Okay, great, and then just one final question, just actually three quick clarifications. The two key contracts that are in your immediate pipeline, do I understand it right that you expect to close both of those contracts this quarter?

Yes, we've got what we call confirmation from the client that they want to work with us, and we have also, in both those cases, begun looking at the transition process. Some of these contract agreements take a little bit of time to close --

Sorry, we should clarify. What Neeraj is talking about is the two ones we have won. The two which we have not taken the (inaudible) on, they're, as for what our clients contacts are telling us, they do expect to (inaudible) by end of this quarter.

Okay, fair enough. And then lastly -- no, that's fine. Lastly, just as a relation to guidance, did you change the implied currency ranges that you had set last quarter, or are those last in place, the implied currency range implied in your revenue guidance?

Yes, so we had (inaudible) on a currency range of 1.45 to 1.6, but what we're saying now is that even at 1.4, we will be able to meet our revenue guidance, though we will be at the lower end. If it falls below 1.4, then we will come back to you.

Great. Thanks for the clarification.

Your next question comes from the line of Vincent Colicchio from Noble Financial. You may proceed.

What sort of wage inflation are you expecting this year, and how does that compare to the year ago period?

Sure, I'll take that. So the labor market in India is soft at the moment. If you look at our wage inflation, in this fiscal 2008 we had about 7% to 8%, which is lower than the previous year. And if we look at next year, we're definitely expecting the wage increase to be much lower than what we had then done (inaudible).

One other question on Aviva. Can you get us up to speed in terms of incremental business development there?

Well, I think we continue to have good prospects there. The relationship is very strong and we've been introduced to many new situations that we were not in touch with before planning the transaction. So we've had some success on smaller incrementals, but more importantly, I think the pipeline is very good, and we've got a team working very aggressively, and we hope to see more business signs sometime in the next quarter or two.

Thanks, guys. Good quarter.

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