WNS (Holdings) Ltd (WNS) 2010 Q2 法說會逐字稿

Good morning, and welcome to the WNS Holdings fiscal 2010 second quarter earnings 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'd like to turn the call over to Alan Katz, WNS's Vice President of Investor Relations. You may proceed.

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 2010 second quarter earnings call. With me today I have Neeraj Bhargava, our 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.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 e-mail it to you.

Today's remarks will focus on our recently announced results for the fiscal second quarter ended September 30th, 2009. 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-S which was filed with the SEC in May 2009 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 reconciliations of these non-GAAP measures to GAAP measures in our press release issued earlier today. Some of the non-GAAP measures we will discuss are defined as follows. Net revenues are defined as revenues less repair payments and adjusted net income, or ANI, is defined as net income excluding amortization of intangible assets, share-based compensation, related fringe benefit taxes and non-controlling interest. These terms will be used throughout the call.

I will now turn the call over to Neeraj. Neeraj.

Thank you, Alan. Before I begin our prepared remarks, I'd like to address two topics from the past quarter. First, as we announced on August 7th, we received some expressions of interest regarding a possible change of control during the last quarter. The WNS Board completed the necessary due diligence around these expressions of interest. It did not find value in the change of control and decided to end discussion with the parties that expressed interest. We informed the investment community of this decision on September 17th.

It is important to note that we strictly limited the number of people who are actively involved in this process. For the rest of our employees, it was business as usual. The Board was focused on reaching a decision quickly and we were able to make an announcement about our decision in less than six weeks.

The second topic is regarding the (inaudible). This process is still underway. The Board members are working on (inaudible) list of candidates, and we expect to conclude the search quickly. We will provide an update at that time.

I would like to take this opportunity to thank everyone on the WNS team for their focus on continuing to provide the highest quality of service to our clients to close deals and to enhance our [prospective] growth. These efforts are reflected in our operating results, increased margin, and quality of sales pipeline this quarter.

Our result this quarter and the number of deals that we closed underscore the fact that we remain focused on growing our business. In fact, our current [opportunities] are both global in scope, more complex in nature and larger in size, all part of the signs about the future of our business.

I will now quickly outline the agenda of our prepared remarks. I will start with providing a brief update on WNS's financial performance during the past quarter and will discuss our guidance for fiscal 2010. Second, I will talk about the state of the market and our business position. I will conclude by discussing some recent planned additions and expansions.

Following my remarks, Anup will discuss our pipeline and some of our key sales and operation achievements during the quarter. Alok will then provide additional details on our financial performance and our balance sheet. He will also discuss our guidance in more detail. We will then take your questions.

With that, we had a strong and a very profitable quarter. We continue to grow our adjusted net income and have generated significant cash this quarter. In terms of our overall financial performance, while we saw a decline in our net revenue of 8.1% to $100.2 million, compared to the second quarter of fiscal 2009, our adjusted net income grew by 15.6% to $13.7 million.

Let me take a minute to elaborate on our net revenues. Sequentially, we grew by 1.7%. Since last year, the British pound has come down from an average of 1.90 in Q2 fiscal 2009 to 1.64 in this past quarter. However, the British pound was, on average, up 6% compared to the first quarter of this fiscal. On a constant currency basis, our sequential quarterly revenue declined by 1.8%, mainly due to a pre-agreed contractual rate decline with Aviva. As we discussed previously, the pricing on the Aviva contract declined in the second year and increases again in the following year.

We were comfortable with this pricing because we knew that due to cost [synergy], the profitability of the contract would remain intact and this would impact the bottom line. This not only held true but we have actually performed better than our original [business case] and are profitability's ahead of target, not only on the Aviva business, but also in our overall business as we capture the synergy.

In terms of our top line performance, our sales team continues to be successful in closing new deals and we also saw some of the same revenue tailwinds from the movement of the British pound as we did in the last quarter. Over the past few weeks, the pound has continued to be highly volatile. Given the volatility of the currency market, we believe that it is prudent once again not to revise our guidance of net revenue of $385 to $390 million and adjusted net income of $50 to $52 million at this time.

As we noted in our press release, given the operating environment and where the pound is, we are well positioned to beat the top end of both our revenue and adjusted net income guidance. In previous calls, we mentioned that we experience an up-tick in sales activity in the US, but not in the UK or Europe. We also cautioned you that our travel and life insurance plans were forecasting lower volume, and that our (inaudible) business was slow.

Finally, we continue to emphasize the strength of our F&A business and high activity in the [consumer investor] sector. Let me update you on each of these aspects of our business. We're sensing a strong sales activity in the US, our pipeline is healthy, and we see new growth opportunities across the board. We are also starting to see increased activity in Europe and the UK as well. [These are roughly], are a few months behind the US in terms of economic cycle, but our sales teams are busy and we expect to see totals pick up in the second half of the fiscal year.

In the (inaudible) segment, clients continue to be cautious in their forecast and you should also expect [the normalcies] noted in the (inaudible) December quarter. However, we have begun to see modest levels of new client booking, including in the hotel industry (inaudible) sector.

In the insurance business, we have mentioned that our client has forecasted declining volume, but we are bringing to [civilization] any (inaudible) business. In our auto claims business, volumes have come down slightly, some of which are seasonal in nature and some from economic conditions. Our core insurance services business remains solid. Overall models of the auto claims business have been steadily picking up as a result of improved [models] in our recently acquired (inaudible) business. This is a very profitable business and we are well positioned in the market to see significant growth opportunity.

We see some softness in our R&A business, although early (inaudible) interest on (inaudible) strengthening. Currently R&A accounts for approximately 9% of our business. These pressures were offset last quarter by new client ramp up and expansions with existing clients. Specifically we experienced rapid growth in our F&A business across all industry. We're clearly emerging as a global F&A leader, as we are booking new [logos] every quarter.

A significant portion of our [new business are] global in nature, or, in other words, they're going to serve our clients from marketable countries. Our strategy of globalizing our operating footprint is now bearing true and the pipeline has (inaudible) that we're excited about.

Overall, we had a strong quarter and grew our profitability even in this difficult environment. I remain bullish about the currency's pipeline, which has strengthened in both the US and the UK. As the economy turns, we are well positioned to take advantage of the growth [trajectory] in our [Dallas] market.

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

Thank you, Neeraj. Let me start by talking about some recent sales closures. We grew our roster of top-tier clients in the last quarter and we averaged five new clients, expanded five relationships and renewed six contracts, including clients in the retail, airline, hotel, and insurance sectors. We will be delivering an [attendant] program for a global retail company and see an opportunity to expand this client into new geography and new services. We also expanded some of our insurance relationships.

(inaudible) travel space this past quarter, including one with a major hotel chain. The hotel market we feel is under penetrated and we see this as an opportunity to gain a foot forward in the [media that is growth potential]. Our overall pipeline remains active. As you see from the number of deals we signed this quarter, we are experiencing good traction in terms of sales figures.

This last quarter, we completed one full year for the transition of the Aviva business. Our operating performance has exceeded our initial expectation. While we have experience on volume pressure from the economic environment and some top line pressure from volatility in the currency market, our team has done a tremendous job with cost rationalization, which is reflected in our margin.

Our relationship with Aviva grew from 10% and the (inaudible) of the business can be (inaudible).

In terms of pricing for this quarter, we experienced a rational environment. Our (inaudible) continue to place with [delicately narrow band], and although it is an important factor, business is generally not won or lost based totally on size and we benefit from our (inaudible), the quality of our services, and our global footprint.

I will now turn to our margins for this quarter. Our gross margins before share-based compensation remained strong this quarter at 38%. This was down slightly compared to gross margins of 38.6% in the last quarter. This slight decline was a result of a marginal increase in our wage expenses, the second year pricing on the Aviva contract, and a stronger rupee, which was partially offset by the stronger pound.

SG&A costs, excluding share-based compensation and related fringe benefit taxes, for the second quarter of fiscal 2010 were 18.6% of net revenue, flat compared to first quarter of this fiscal. Operating margins, excluding share-based compensation, amortization, and related fringe benefit taxes were also [heavy] this quarter at 19.4%. This again is slightly lower than operating margins of the first quarter of this year, due to the deal I mentioned earlier.

Our operations outside India continue to grow and we are now -- we now have over 1,800 employees in our non-India locations. The Philippines remains the fastest growing of all our geographies where we now have almost 1,000 employees. We are opening a second location in the Philippines, too, and have (inaudible) lines for the additional capacity.

Last quarter we mentioned that we established a Latin American subsidiary. This quarter we finalized negotiations with a new client to take over their share of (inaudible) in Costa Rica. We see an opportunity for growth in this area, not only with this client but with other interesting clients as well. Establishing a location in Latin America is an important step in the continued expansion of our global footprint.

In terms of our headcount, we ended the quarter at 21,243, down from 21,494 in the previous quarter. This decrease was a result of tighter [bench] management and lower volumes in travel and insurance sectors that Neeraj discussed earlier.

In summary, our field [employees] are strong this quarter and our operations (inaudible). I would like to put on the call my appreciation for the [work] of the WNS team in maintaining operating margin in the range of 19% to 22% for the past four quarters, despite the challenging economic environment.

We have laid a strong foundation to sustain these margins going forward, which is a testimony to both our strong operational management as well as our ability to (inaudible) and generate (inaudible) from our acquisition.

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

Thank you, Anup. As we have already discussed on this call, our financial performance, in terms of profitability this quarter, was very strong. Our net revenues were $100.2 million this quarter, a decline of 8.1% compared to the same quarter last year due to the strengthening of the pound and the second year pricing in the Aviva contract.

Sequentially, our net revenue growth was 1.7%, while on a constant currency basis, compared with the same quarter last year, our revenues were flat.

Gross margins, excluding share-based compensation, were 38%, an increase of 510 basis points compared to the same quarter last year. This increase was due to [facility] benefits and tighter control over operations.

Second quarter fiscal 2010 operating margins, excluding share-based compensation, related fringe benefit taxes, and amortization of intangible assets, were 19.4% compared to 15.8% in the second quarter of the prior year. The improvement was due to operational efficiencies that we have achieved over the past year at a beneficial exchange rate.

Adjusted net income was $13.7 million compared with $11.9 million in the second quarter of fiscal 2009, an increase of over 15%. As a percentage of net revenues, [ENI] has increased to 13.7% this quarter up from 10.9% in the same quarter last year.

Although the Indian rupee continued to strengthen this past quarter, it was still weaker as compared to Q2 fiscal 2009, but this benefited the cost side of our business. The softness against the US dollar helps to offset some of the hedging losses that we have from the rupee hedges that we have taken in fiscal 2009 and the early part of fiscal 2010. Our hedging losses were almost flat this past quarter compared to first quarter of this fiscal. The current expectation is that the rupee will strengthen in the long term.

The British pound has also been very volatile in the recent past and indications are that this volatility will continue for some time. We are addressing these pressures to our hedging program and cost management initiatives. In terms of hedges, we are fully hedged for the rest of this fiscal year, hedged over 70% into fiscal 2011, and about 15% for fiscal 2012, using both options and forwards.

FX losses for the quarter were $3.2 million, consisting almost totally of hedging losses in the quarter, including the cost of options. The evaluation of various non-functional currency balances negated each other such that there was no net effect on the income statement.

We had higher ESOP charges this past quarter, due to the correction for the removal of the [FBT] and it's purely an accounting issue.

In terms of our balance sheet, we have access to capital and are generating a good amount of cash. We remain comfortable with our liquidity position.

Let me now outline some of the other key performance indicators. As of September 30th, our cash balance was approximately $44 million. We generated over $24 million in cash this quarter from operating activities. Our current monthly operating cash flow remains above $6 million. This is approximately the average monthly cash generation that we anticipate going forward.

We also anticipate that our free cash flow of the capital expenditure will be an average of $5 million per month, prior to debt repayment. During this quarter, we generated total free cash of $21.7 million. And as previously discussed, cash flows in the first quarter were lower due to payouts for accrued bonuses of the previous fiscal year and insurance payments. But, as you can see, we have more than made up the gap by our high cash flow generation this quarter. I am confident that we will exceed our target of $5 million of average free cash flow some month for the current fiscal year.

We maintained our track record of efficient working capital management this past quarter and improved our DSO levels to 39 days. DSOs are an important method, and the improvement of this number is testimony to our relationships with our clients and the efforts of our team. As this low level will not always be achievable, we believe our DSO should continue to be less than 45 days on a sustained basis.

We have bid all of our quarterly interest costs and are reducing our leverage through our cash flow generation. During the quarter, we paid our first scheduled loan installment of $20 million, together with the second prepayment of $5 million. With this, we have paid down $30 million of our loan in the first year, as against a scheduled $20 million. That is 50% more than we were required to pay. We are very comfortable that we will make our next scheduled installment payment of $20 million, which is due in January 2010. We will also look at prepaying a portion of our debt at that time. We remain comfortably within all our loan covenants.

In terms of working capital, we have a line of credit available to provide us with additional flexibility and protection. We have repaid the short-term debt that was outstanding in the [call 24-7] business with the cash that we've been able to generate through collecting some old debt from that business.

Our quarterly CapEx was $2.4 million. As we previously discussed, we have focused more on capacity rationalization in the first half of the fiscal, while the second half will be focused on capacity expansion so will require more of our CapEx spend. Our annual CapEx is still expected to be within [$15] million during this fiscal year as disclosed earlier.

Finally, we have strongly reiterated our net revenue and adjusted net income guidance. We are pleased to see the revenue tailwinds from the British pound all in the last quarter. The pound has been extremely volatile in the past several weeks. And given the volatility in the currency market, we believe it is prudent not to revise our guidance position.

We are, however, confident that we will beat the top end of our guidance range of $390 million on net revenues. We are also confident that we will beat the top end of our (inaudible) guidance of $52 million, which implies an adjusted EBS of $1.17 on a diluted share count of approximately 44.6 million shares.

We do anticipate that due to some softness in the travel and life insurance industries in the fiscal third quarter, which has historically been a seasonally subdued quarter for these industries, the remainder of the year from both a top and bottom line perspective will be rated more toward the January to March quarter. In Q4, we will have the twin benefit of volume increases as well as the ramping up of some of the new business that we won in the first half of the year. This should allow us to end the year on a strong [look] and we will be well positioned for growth in the next fiscal year.

This concludes our prepared remarks for today, and we'd now like to open the call for questions. Over to the operator.

(Operator Instructions) And our first question comes from the line of Joseph Foresi from Janney Montgomery Scott. Joseph, you may proceed.

Hi, guys.

Hi.

I was wondering if you could talk just in general about what you're seeing in a demand environment. It appears that sort of things are getting better in the general economy. And I wonder if you could just talk about what you're seeing presently, how it compares to maybe last quarter, the quarter before, and maybe what you see going forward and how you're ramping for it.

Hi, Joseph, this is Neeraj. I'll take this one. I think we mentioned in the last quarter as well that we were beginning to see some up tick in demand in the US. That trend has continued. We were fortunate to close quite a bit of new sales situations in the US in the last two quarters. So that's been the highlight of what has happened so far.

We also mentioned that the European sales were -- our sales activity was much lower and in many ways the economy recovery was at least a couple of quarters behind the US. The good news is that since September we've started to see more sales activity there. We are beginning to see an up tick there as well in terms of deals within the early stage of the pipeline. And I think one of the other -- the other two important points is that as the economy has been soft, people have been getting more aggressive toward pursuing outsourcing discussions as an important aspect of how you deal with the challenges in the current economy.

I think the other important part for us which is working well is that a lot of (inaudible) the market are global in nature. We've during this year closed a few situations, and perhaps Anup can elaborate on them a bit later on where our sales are coming not just from our India set up, but a combination of India, Romania, and then Philippine. And in many ways, our strategy, we had [open] to globalizing our operation is also now beginning to deliver for us.

So we'll be seeing demand environment getting better we think (inaudible). And in terms of some of the volume pressures, as well as from travel and insurance, which we highlighted earlier, we've seen some stabilization. Having said that, both sets of customers, as well as some of our customers in other claims areas are still very cautious about the forecast for (inaudible) forecast for the next two quarters. But having said that, I think in the past quarters when we saw the forecast, we ended up doing better, we're hoping it will be the same [way].

Is there any, I mean it sounds like the pipeline's getting a little bit better. Is it -- these new projects, are they ramping slowly, quickly? I mean, if it takes six to 12 months to ramp a project, can we expect maybe the beginning of next year to be when things really start to fall into place?

Well, one thing Anup mentioned in prepared remarks was that the up tick for us in terms of the revenue begins to show in our book more in the fourth quarter of the fiscal year, and that's a reflection of some of the business we won in the earlier part of the year beginning to deliver numbers.

So our [strength] is that that came from the [boost] we got from deals we were closing in the US market (inaudible) and finance and accounting. So our strength is that if that sort of trend continues, both in terms of available deals as well as closing them, then that trend could be probably good for us next year as well.

Can you comment just real quickly on sort of the pricing environment and any comments about the large players sort of getting more involved in the BPL side of things? Is that putting any pressure on contracts?

Sure, Joe. Anup here. I'll take that. As I said, in general, we continue to see a rational pricing environment. So I think other than some [runoff] situation, we have not seen any real change in that environment. All the top key players continue to beat the pricing in a narrow range and we compete with them, and, as you've seen from our commentary this quarter and in the last quarter as well, even more than our fair share. And what we are finding is that beyond a point, as long as we are in that [realm] trying to, [in fact] look at the [thick] -- look at our capabilities, look at our global footprint, and may be able to see them on deciding to work with us.

Okay. Thank you.

And our next question comes from the line of Bryan Keane from Credit Suisse. Bryan, you may proceed.

Hi. This is [Alvin] calling for Bryan. I just have a quick question on looking at cost. You guys mentioned that wages have been increasing. Just looking at your future expectations of the wage inflation of the current talent pool, I also noted [there's some] spike up just a little bit in the quarter.

We have actually, as we've been saying, for pretty much for most of this year, we've seen a [benign] wage environment in this fiscal and our wage increases, our annual increases became effective from this quarter, which is why you saw that increase. I think looking forward, the Indian economy is picking up, so one should expect that next year the wage inflation will be a little bit higher than what it was this year. But again, as we look at the overall economics it's something which we are not unduly worried about. And if we look at the overall year, [year-over-year continuity], and the benefits, benefits and some other factors, I think economics will not -- it will not affect our economic (inaudible).

Okay. And just looking at demand from Europe. You said you're starting to see signs of it returning even though it's a little bit lagging to the US. Can you [go down] a little bit on that? What are you seeing from Europe?

Yes, I'll take that. I think the first half of this calendar year, we saw a combination of [inertia] as well as [macro probability] of people to discuss our (inaudible) situation. But as people reconciled with the situation that they were in a tough business environment with revenues not rising, what you saw was that the people were beginning to come to the table.

The other important obstacle, [in monitoring] the European market is that they tend to have various different motives of adopting share services centers where they combine resources from different countries and usually put them in one location. What you are sensing is that people are looking to change that model and often quite dramatically. So many of the [open] share services centers are now looking to be sort of either dismantled or restructured in a manner that some of the work is actually going to move to lower cost English-speaking geographies like India or the Philippines. And even within Europe, you will see a lot of standardization and centralization of some of the focuses and movement to lower cost European locations like what we bought in Romania.

So overall, I think the trend is very positive. The good news now is that people are coming to the table as they are looking at developing their budgets for the coming year. Outsourcing is becoming a very important weapon for them to reduce their costs further.

Okay. Thanks a lot, guys.

And our next question comes from the line of Dave Koning from Baird. Dave, you may proceed.

Yes. Hey, guys.

Hi.

I just had a question about the pricing comments that you made on the Aviva contract and how that impacted Q2 revenue. I'm just wondering if all the pricing adjustment happened already in Q2 or if there is some residual impact or incremental impact that's coming through on Q3, if that could cause kind of an additional sequential decline.

Dave, hi. This is Alok here. I'll take that one. Remember we signed the Aviva contract in July of last year. So in July this year, it moved into the second year. And I think we've been quite transparent in saying that in the second year the price (inaudible) down because they'd always anticipated that after one year we should be able to get some (inaudible) out of this, so we would pass on the benefit of that in the second to them. But in the third year, the price goes up, and then after again it keeps going up. So there is more residual impact from a rate perspective. The rate at which we've been billing for July to September, we will continue to bill on -- at those rates until June of next year. And in July of next year, the price goes up again.

Okay. And I probably should have been a little more clear. What I meant was, did the price adjustment happen on July 1, meaning you got a full quarter impact, so there's no real incremental impact to Q3? Or did it happen a little later in the quarter so that Q3 --

It happened on -- it happened on July 10.

Okay.

That is a nine-day (inaudible).

Okay. No, that's very helpful. And then my second question is, attrition seems to have picked up a little bit across several companies in the industry this quarter. And I'm wondering, is I guess the demand for labor really starting to pick up kind of reflecting the build of demand in the industry right now?

Yes. No, I think that -- Anup here. Yes, I think as I mentioned in the wage question, there is definitely a pickup in the economy, and that is leading to some increase in attrition. Having said that, I think like we've said in the past, our attrition levels have come down significantly from where they were a year ago. And, yet, why we will caution you to make sure that we work on keeping this number down, some of the increases that we had this time were runoff. And we will -- we -- our internal [process] is to keep attrition in the [mid-20], and that's what we are striving for.

Great. That's great to hear. And I guess finally (technical difficulty) it did pick up, and you mentioned why. Is it just going to come right back to 3.5 million a quarter for the next couple quarters?

If it come back, we will be slightly higher than $3.5 million per quarter.

Okay. That's great. Thank you.

Thanks, Dave.

And our next question comes from the line of Tim Fox from Deutsche Bank. Tim, you may proceed.

Hi, This is [Devin Craigo] in for Tim. My question is, given all the moving parts around some of the travel volume in the second year Aviva pricing, has your expectation for constant currency growth in the second half of the year changed at all since we spoke last quarter?

Our expectation is that, no, in terms of constant currency, we will be marginally lower than what we have projected. But overall I think we are well positioned to beat the guidance that we've given, both in terms of revenue and adjusted net income.

Okay. Fair enough. And my second question, can you give us an update on your utilization rate at Aviva and the impact of any changes they are having on margins?

When you are talking about utilization rate is it people or is it seats?

Probably seats to start with.

So our seat utilization continues to be lower and it's the reason, one of the reasons it fell so low is that we never (inaudible) to create more seats. And, therefore, we now have capacity which we can use very productively in the future, and that's one of the reasons why our CapEx is low to date and why we expect low CapEx in the coming year as well.

As the group comes back into our industry, in our company, I think we benefit a lot from a margin standpoint because we have people in (inaudible) that we have for them, which we're dedicated to them, but we will be able to use that for other clients as well.

Okay. Thanks. That makes sense. And my last question is just, as you build out some of the facilities in Latin America and the Philippines, are your clients expressing any kind of preference for the type of work that's delivered from those facilities?

Yes. Anup here. I think our model, which is being developed, shaped by the clients is that, as we look at doing -- as we look at doing business across the world there's a compliment of world which requires [either] separate languages or it needs to be done [near shore]. And what we are able to do successfully is to package that appropriately in the world mix so while in many of these deals a lot of the work is still done from India, we can import the European language capability or some Spanish capability in Latin America and some mutual requirements to put in overall [submission] for our clients. And that is one of the reasons you've seen us win the kind of [leads] that we have in the last --

Okay. Thanks very much.

And our next question comes from the line of Brandon Dobell from William Blair Research. Brandon, you may proceed.

Great. Thanks. Good morning, guys. Or good evening. I just wanted to focus on one thing in particular. As you think about ramping new capacity over the course of the next six to 12 months, how should we think about the cost of that capacity? And how should we think about your ability to ramp it up on a relatively short order, depending on how the demand environment looks? Can you do it rapidly without incurring extra costs? Or do you think you can tighten up a schedule and still maintain the same kind of cost per seat or cost per location ramp-up cost? Thanks.

Yes, if you -- so I think we're on the (inaudible) of we have demonstrated enough nimbleness in this area that we are able to irrationalize all, bring up capacity in a relatively short period of time without affecting our cost to ship all that capacity by a (inaudible) amount.

So what we have been doing is to look at the (inaudible) and look at the geographic spend of our capacity and making sure that based on that we are rational in capacity and adding it in appropriately. And normally it does not take us very long to build -- to get these seats online as we see demand in (inaudible).

And then one quick follow-up. As you look across different geographies and (inaudible) capacity, any material difference in terms of what you think the returns on investment would look like in Latin America versus Philippines versus capacity in India for you?

I don't think there's going to be a difference on that [dimension]. The fact is that some of the (inaudible) locations do not have the same skill as India has at the moment. But (inaudible) will be fine as they become skillable and we see -- I think at that point (inaudible) one should expect -- one should expect (inaudible) to be in a (inaudible).

Okay. Great. Thanks a lot.

And our next question comes from the line of Vincent Lin from Goldman Sachs. Vincent, you may proceed.

Hi. Good morning. I wanted to follow up on the -- it looks like from the datasheet, the top clients in terms of top one, top five, 10, 20, on potential revenue basis it all came down sequentially. Was that purely due to the pricing discussion from Aviva or was there something else going on there?

Yes, the bulk of it was due to the pricing change in Aviva. Plus, as we mentioned, there is some softness on the volumes front as well in travel and life insurance business. But basically it was the pricing reduction in Aviva.

Got it. And from a six-month perspective, it looks like the emerging business is continuing to grow nicely both on year-over-year quarter-over-quarter basis. Can you just provide a little bit more color in terms of what you are seeing in terms of the emerging segment part of your business?

That's mostly the finance and the housing, and, as we have mentioned on our call, that's where we see our maximum traction that we've had our biggest deal closures. So most of our finance and accounting what goes into the margin services, logistics, and the consumer -- consumer business, consumer retail segments that we operate in, which we have seen some good deal closures. That goes into the merging services and that's where we've actually seen probably the largest or best traction over the last, I would say nine to 12 months.

And just finally, in terms of headcount, it looks like both headcount and seats kind of came down sequentially, and I think you mentioned that it was due to some volume decline, so cost management. Should we expect headcount to resume the [interstitial] growth for the next couple of quarters as you ramp up for recent contracts and as you prepare for growth next year? Thanks.

So I think Q3 we should be relatively flat and Q4 we should definitely see an up tick in our headcount.

And our next question comes from the line of Ed Caso from Wells Fargo Securities. Ed, you may proceed.

Hi. Good morning. This is Chris Whitman for Ed Caso. I just wanted to touch on the Aviva relationship. Can you provide and update on the ramp of the Hibernia business?

Chris, the Hibernian ramp is very much on track. We've completed two phases and we are now in the stage of transitioning the third phase. If you look at how that [worked out] from the perspective of how we announced it about a year ago when we talk about the contract, I think we may be slower by maybe a quarter. But overall we're getting to the same level of activity as what was originally planned.

The other important part is that we just finished a plant review with Aviva in general and Hibernian in particular. I think while we had a very happy client with the way the transition had gone. And we are quite optimistic that the phase two will also go well, and that will allow us to capture the full potential of what we outlined earlier.

Okay. And then also, in general terms, how is the number of initial processes you're ramping from new customers compare with 12 or 18 months ago?

I think in general we are ramping up more processes. What we've seen in the last 12 or 18 months, that clients were a little bit more cautious in terms of how much they find in phase one of the [activity]. Part of it was also they were short on resources themselves to help the transition.

So a lot of our stocks, and often with big companies, which are, you know, big globals and very important long-term clients with a lot of potential, people tended to talk more. But over the last three months in particular, we are now beginning to see some much bigger deals come in the pipeline and we are hopeful that next two or three quarters overall (inaudible) will be an important boost to our top line next year.

Thanks. And then lastly, can you quantify the wage increases this year and also if there's a variable component?

The wage increases, we still are in low single digits. I didn't get your second question. Sorry.

If there was a variable component to the wage increase.

No, there was -- there is a variable component to our compensation structure, but there was no change to that variable component this year compared to last year.

Thank you.

And our next question comes from the line of Tien-Tsin Huang from J.P. Morgan. Tien, you may proceed.

Thank you. This is Baneve for Tien-Tsin. Question on your volume-based business. What percentage of your total revenue stems from (inaudible) based pricing contract? And also can you talk about margin, in fact, from (inaudible) direction driven revenue in such business? We would assume incremental margin on these contracts will be very high.

So let me answer that in part. Alok here. Overall, our UTP or transaction pricing [margin] -- I prefer to say non-FT. We do have some sort of success-based fees and things like that as well in our models. Is about 35% of our revenues. I guess that's pretty high by industry standards. And you think that we make higher margins in this business? Yes, we do generally make higher margins, but it also depends on the volume fluctuations. So there is a higher volatility in volumes. You have to absolve that volume fluctuation.

Right. So if you get higher volumes than incremental margins, you would -- generally it will be much higher, much higher than like 19 --

Absolutely. So in UTP, we do general incremental volumes. Then there's an incremental fall-through to the (inaudible).

Okay. Thanks. And other question on bookings. Is there any way to size the new contracts that you had won over the last couple of quarters?

These are mostly in the $2 to $5 million range.

And overall impact on maybe fiscal '11 growth from these bookings in terms of like --

Then you're asking me to give guidance for next year now. I don't think that's very smart of me if I did that.

That's fine. Thank you.

And our next question comes from the line of Marc Marostica from Piper Jaffray. Marc, you may proceed.

Hi. It's actually Mark Skitovich for Marostica. Just a few questions. On the pricing front, last quarter you mentioned seeing some irrational behavior. And I'm just hoping you can remind us again where you were seeing that and what you saw there this quarter.

I'm sorry. Can you repeat the question, please?

Sure. Last quarter you had mentioned on the last quarter's call, that you had seen some irrational pricing behavior. I don't know if that was in a particular segment. But just curious if that continued this quarter and, if so, what the trend line looks there.

Well, I think what you are [representing] is that pricing in general has been irrational. We have seen some select situations where given that certain factors some players have taken a rational approach. I don't think we have made a general comment which was [geared] to a specific sector. And, in general, we have not seen a dramatic change in pricing environment last quarter to through this quarter.

And what I will also add is that I think over the last 12 months or so, we've renewed about over 10 contracts and some of them have been at higher prices, some of them have been at the same price, some of them have been at marginally lower prices. And overall, I think we have done quite well in those renewals in a manner that would be -- impact on our revenue as well as profitability, has [marginal] growth for sure and, in some cases, it's actually been (inaudible) positive.

Okay. Great. That's helpful. And then on the wage and attrition front, I'm just curious what type of wage inflation you're budgeting for, and if, by '11, I think on the attrition side you said you were sort of targeting at a 20% level. And then given the strength of the Indian economy and a greater involvement of your IT services peers in this sub-cycle, could you potentially be underestimating the upcoming pressures you'd seen on the wage and attrition front?

Okay. This is [early days] for us to (inaudible) so, again, what one should expect is that the wage continues next fiscal will be higher than what they have been this fiscal. But I don't want to get into more details at the moment because we will start planning for that in the next couple of months or so.

In terms of pressures building up, yes, the economy is beginning to pick up. But are we concerned about it? No. I think we put a lot of props in place for but on the recruiting and on the retention side, and we are pretty confident that as the economy does pick up, we will still be able to [effect and begin] the talent that we want.

Okay. Great. And then final question relating to travel and insurance. I think you mentioned seeing or expecting a pickup there in Q4. I was just hoping you could quantify that on a year-over-year basis, sort of what your expectation is there and then how your visibility looks in the first half of next year in those segments.

This is Neeraj here. I'll take this. I think we mentioned that we'll have a revenue pickup in the fourth quarter. And also we mentioned that our travel and insurance volumes continue to be under pressure, at least based on the forecast that our clients are giving us. So I just want to put that in perspective again. We are quite fortunate about our prediction for the travel and life insurance business. And so that's factored in our revenue increase assessment of the last quarter. But more importantly, I think the point we're really making is that these are new client bookings, particularly in the finance and accounting space that are giving us the impetus to grow our revenue in the fourth quarter.

And so what we're really seeing is that revenue growth coming from both contracts are expected to offset the (inaudible) and perhaps continuing declines in volume that you might see in travel and life insurance.

Okay. Great. That's helpful. Thanks very much.

And our next question comes from the line of [Madolli Gosh] from Bank of America/Merrill Lynch. Madolli, you may proceed.

Thanks. I was looking for a little more detail on the deal closure that you have had this quarter.

Yes. As I mentioned, our deals have been the [prospectors] (inaudible) even the airlines, some of the hotels, hotel sector, which is actually something we are very excited about because we are just entering the market. And there is some good (inaudible). We also (inaudible) the rent to use in the retail space, F&A [contends] to be doing pretty well for us.

And if you look at our prospects, again, it's pretty much a mix of we're achieving the shipping deal at the moment, which is looking good. There's another opportunity in the (inaudible) entertainment space, which we are very excited about. And we've also seen some uptake in the high-end customer care site as well. So a pretty diversified bag, and I think also plays to our extent of having the wide variety of services that we can offer to our clients.

Sure. And in terms of like you mentioned that you are now participating in larger, more global deals, so if you could give us a sense of how the competitive environment may have changed for you over the last few quarters.

Well, I think (inaudible) [building capability] has been in anticipation of changes in competitive environment. As we grow bigger in order to grow at the same pace, it's very obvious that we have to grow bigger and perhaps differently. And what we started seeing in the market a couple of years ago was that many of the clients as they look at bigger outsourcing [reports] look for (inaudible) of running operations in multiple geographies. They look for language capabilities. They sometimes look for near-shore capability. And in some cases that we also see they also look for some level of [exposure] to even have some resources on shore.

So if you look at the nature of doing the (inaudible), we have, for example, for our medical products company, we had our deal where we were also having some on shore components for [a comparable] products company, an F&A situation. They were -- they were run -- they run their operations in India and Romania. Or another situation we had in (inaudible), we were looking at a combination of India and Philippines. So this is part and parcel of what the market is increasingly going to become for us as we look at [building] bigger things. And our sense is that people appreciate our (inaudible). People appreciate our culture and comfort of working with us. And the people [as to that], what we would call at the minimum (inaudible) on the (inaudible) capability of some of the lateral (inaudible) companies. We've become very well positioned in the market, and (inaudible) testimony to all the efforts we put in that direction.

Thanks. And one final question. You mentioned that [once you got] the basis, you're probably looking at slightly lower revenue than what you were anticipating all year. Is this even versus what you were anticipating about at the beginning of the -- of this quarter? Because back then I thought the travel volumes were actually tracking better than what you had factored in the guidance. So just trying to understand what has changed possibly in the last three months in terms of volumes you anticipated from travel and life.

So, Madolli, that's a very good question. And I think we've had both in travel, as well as insurance, while the forecasts were low and perhaps even weak at the beginning of this fiscal year, we did see some evidence that the declines were lower than what people have anticipated.

However, in recent times, our clients have maintained their [global accounts] and are extremely cautious about guiding us to what they would be in the (inaudible) and we also have a -- this is not at issue. And so while it's too early to say whether the same trend of what we saw in the first half of this year in terms of volumes being better than expected will hold. But we're being very prudent and very cautious about how we look at the volumes in those areas. And as Anup mentioned earlier, we've been adjusting our benches accordingly.

So our benches set at this point are fine, continue to be conservative in this area. And our -- and we are -- our commentary about our guidance reflects that conservatism.

So if I understand you correctly, come back to the beginning of the quarter, the clients are more cautious today?

I would say in the travel area, definitely they're more cautious today.

Okay. Thank you very much.

And at this time we are showing no further questions available. Neeraj Bhargava, you may proceed.

Once again, thank you for taking the time and thank you for your support, and we look forward to tracking with you further in this year.

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