WNS (Holdings) Ltd (WNS) 2011 Q1 法說會逐字稿

Good morning and welcome to the WNS Holdings fiscal 2011 first-quarter conference call. At this time all participants are in a listen-only mode. After management's prepared remarks we will conduct a question-and-answer session and instructions for how to ask a question will follow at that time. Now I would like to turn the call over to Alan Katz, WNS' Senior Vice President of Investor Relations. Please proceed.

Thank you. Good morning, ladies and gentlemen, and good afternoon or good evening to those of you joining us from Europe and Asia. With me today I have Keshav Murugesh, our Group CEO, and Alok Misra, our Group CFO.

A press release detailing our quarterly results was issued earlier this morning. This release is also 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 contact us at IR@wns.com.

Today's remarks will focus on our results for the fiscal first quarter ended June 30, 2010. 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 20F which was filed with the SEC in June of 2010 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 and non-controlling interest. These terms will be used throughout the call today. I will now turn the call over to Keshav.

Thank you, Alan. On our last quarterly call I discussed how we would build WNS into an industry leading player in the BPO space. During the fiscal first quarter we've taken that the initial steps to establish the foundation to successfully reach that goal. That said, clearly the financial and operational performance in the first quarter was disappointing. We are not comfortable with these results, but I'm also mindful that there are no quick fixes; no fast acting silver bullet.

Still, we trimmed staffing levels, took steps to improve our debt structure, began dealing with underperformers, tightened the Company's strategic focus and organization. We understand that we need to reignite organic growth first and foremost. To that end we are adding top-quality sales talent, we are reorganizing our approach to the market, and it is important to realize that the reflections of these actions will not immediately appear in our financial results.

I fully expect the quality of our pipeline and our new and expanding client engagements to improve over the next three quarters and beyond. I already see new energy internally and high quality talent moving in our direction. And I see the quality and scale of our revenue discussions with current and prospective clients expanding.

I have spent 70 of my first 100 days with WMS on the road meeting with clients and prospective clients. And this was incredibly useful in terms of obtaining feedback and determining what our clients want to see from us.

Last quarter I had mentioned I would be organizing a strategy session for our team. During our strategy session earlier this month we focused on five key areas.

First, we turned to sales effectiveness and the structure of our sales team. The sales organization is now vertical lead with the horizontal metrics to allow for full potential of farming opportunities. We have restructured our sales organization broadly into independent farming and hunting teams to cross and upsell existing clients as well as aggressively hunt for new clients. We are bringing in a global sales head and growing the numbers of client partners and engagement managers. We should see a number of these additions in the second quarter.

Second, we focused on our vertical offerings. We looked at verticals in two ways -- carving out new offerings of verticals and creating sub segment in our existing verticals. In terms of new verticals, we are entering white spaces where we believe that we can create a first mover advantage. Within our existing verticals we are choosing specific sub verticals to focus on and are creating key offerings programs around each one.

Third, we are focusing on our transformation capabilities. The old days of lift and shift have run their course; we will provide a combination of on- and off-shore capabilities. We are creating a clear strategy of what a transformation offering is and how it will include our research and analytics offering and our lean and Six Sigma capabilities.

Fourth, we enhanced our focus on talent management in order to meet our mission statement of enabling our clients to outperform; we are making additional investment in our talent. We are focusing on increasing our employees' domain expertise, general management skills, soft skills and leadership capabilities. This initiative and investment in support of our talent ensures that our employees see their growth potential with WMS.

We want to be sure that our future leaders see themselves in stretch roles and have a clear understanding of their potential for carrier progression with our company. Similarly, we have launched succession planning exercises and specialist programs to surface talent within the organization and find those future leaders. We're also moving to a more performance based compensation structure offering higher variable compensation and weeding out underperformers.

Lastly, we will also use lean management techniques in our internal processes to become an even more efficient organization and to eliminate waste. Through these improvements we will generate savings which can be invested back into sales, marketing and our domain areas. While WNS has been strong in the operations area traditionally, we also want to be a strong sales lead company.

In terms of sales this quarter, we signed and F&A contract with a global media company and started a relationship with a client in Asia for whom we will provide both consulting and marketing support as well as more traditional work. We also signed expansions with five clients this quarter in the shipping, CPG and financial services industries among others. These should start to show up in our revenue line before the end of the year.

As far as sales cycles are concerned, timelines are still somewhat extended with the average time to close a contract at nine to 12 months, compared with six to nine months in a few years ago. However, recently clients have seemed more engaged and [conversations] have been moving up the ladder a bit quicker for us. We are also cognizant of the fact that a leading industry advisor as just issued a statement that they have recently seen BPO growth rates slowing across most traditional functional areas.

Headwinds we faced this quarter include a reduction in volumes from one large insurance client, a change in pricing for a large travel client, and the impact of a weaker British pound. Despite these headwinds we see significant runway for the BPO industry; we see activity and growth opportunities in travel, insurance, logistics, retail and CPG, as well as F&A and research and analytics.

Finally, in terms of headcount we ended the quarter at 21,406, down 552 from 21,958 in the previous quarter. We've been managing our cost structure carefully in response to pressures in the global economy. The employment market in India remained strong in this past quarter. As such attrition was at 42% compared with 43% last quarter.

Attrition is a key point of focus for the entire management team. We have launched learning and development programs as well as leadership programs to engage employees at all levels. In the past quarter we also took firm decisions to consolidate key functions and eliminate high cost but low impact performers, as well as restructured and reorganized positions.

In addition to the $2.1 million of severance costs last quarter this has meant approximately $500,000 in costs in terms of severance for this quarter. We also expect to see more of the same in the second quarter. In the long term goal this savings will enable us to continue our investment in sales, domain and functional capabilities.

So why are we confident about the long-term prospects of our business in spite of this poor quarter? First, recessionary teams will continue to foster demand for our services. Our pipeline is getting stronger both in the US and Europe. Our analyst and advisory program continues to create new opportunities for WMS.

Second, NASSCOM has now projected that spend on BPO will outstrip that on ITO in the near term. Third, verticals that traditionally did not outsource are now realizing the need to have outsourcing as part of their overall survival strategy. Fourth, within WNS we are now reaching the market as a vertically led organization with our horizontals supporting these verticals.

We are also investing aggressively in hunting and farming sales capabilities, are implementing client partner and engagement management programs and are refocusing our transformational capabilities. We are creating appropriate offerings within each existing vertical and adding new verticals as I previously spoke about earlier.

As I look at each one of our clients I continue to believe that every one of them is under penetrated. Clients that I've been speaking to like the new strategic and performance orientation of WNS. All of this along with the hiring of a qualified properly supervised and, most important, hungry sales team will lead to success in the future.

I'm pleased to say that as a management team we left our strategy session with a newfound energy and focus on growing the business. We are still finalizing some details of the plan, we should see traction from the changes to our sales organization and our formalized cross-selling process and we are well positioned to see organic constant currency growth in the future. There is enough opportunity out there and we have to execute much better. Let me now hand the call over to Alok.

Thank you, Keshav. This quarter our net revenues declined to $89.3 million from $97.9 million in the same quarter last year primarily as a result of the decline in the value of the British pound, the change in pricing of a large travel contract and volume reductions in our auto claims and insurance businesses.

We achieved gross margins, excluding share based compensation, of 30.1% in Q1 compared with the same quarter in fiscal 2010. This represented a decline of 880 basis points primarily as a result of the decline in revenues noted above, wage increases and the appreciation of the rupee.

First-quarter 2011 operating margins, excluding share based compensation and amortization of intangible assets, were 8.6%. This compares with 20.3% for Q1 of fiscal 2010. The decline was due to the same reasons I just mentioned.

On July 6 we announced that we were taking advantage of favorable conditions in the debt markets and refinancing our term loan facility at lower interest rates. We made the third scheduled repayment of $20 million on the existing term loan and then repaid the remaining $115 million of the loan with a combination of cash on hand and the proceeds from a new $94 million term loan.

We also announced that we established a $30 million line of credit in the UK which we will draw down from time to time to partly fund our UK business. The interest rate of the new term loan and the credit line is over 100 basis points lower than the previous facility and the payment schedule of the new term loan mirrors the previous loan. Going forward our effective interest rate will be approximately 3% per annum at the current LIBOR rates.

The prepayment resulted in a one-time charge of approximately $5.4 million primarily on account of the reclassification of the fair value of interest rate swaps from other comprehensive income on the balance sheet to earnings as the swaps on the existing term loan lost their hedge effectiveness. We also wrote off the remaining debt issuance costs associated with the earlier term loan taken in 2008.

Also as Keshav mentioned, we had approximately $500,000 in severance costs this quarter. Our ANI for Q1 was $2.2 million compared with $12.6 million in the same quarter last year. Excluding the refinancing costs and the severance costs we will have realized an ANI of $8.1 million for the quarter.

This quarter the pound was generally weaker while the rupee strengthened. This put pressure on our revenues as well as our costs. We were able to mitigate the impact to our bottom line to a certain degree through our hedging program.

In terms of hedges, we are about 90% hedged for the 2011 fiscal year and are hedged over 50% or fiscal 2012 using both options and forwards. Net FX gains from hedging for the quarter were $2.7 million. Hedging gains net of option costs were $4.5 million offset by a loss of $700,000 of mark to market on the hedges. We also had a $1.1 million loss in the revaluation of nonfunctional currency balances.

Recently the pound has strengthened a bit while the rupee has remained at around 47 rupees to the dollar. During this past quarter the hedging gains were higher as a result of gains on both our rupee and pound hedges. In terms of hedging gains and losses for fiscal 2011 we expect to see gains on the rupee hedges while our pound hedges will be primarily flat to marginal losses at current rates.

Moving on to our balance sheet, we have access to capital and are still generating free cash. As of June 30 our cash balance was approximately $39 million. We generated $4.5 million in cash this quarter from operating activities.

During the quarter we generated a total free cash of $1.8 million. As I have discussed previously, quarterly cash flows may fluctuate depending on the business environment and seasonality. Our cash flow this quarter was also impacted by the bonus and insurance premium payouts we typically have in the first quarter. Our DSOs were at 36 days this quarter on a gross billing basis. I expect our cash generation to return to earlier levels moving forward.

As I mentioned, we have refinanced our debt and currently have $94 million outstanding on the new term loan which is at an interest rate more than 100 basis points lower than our previous term loan. This interest savings will flow through into our earnings starting with the fiscal second quarter. Our next scheduled installment payment of $20 million is due in January 2011. Our capital expenditure for the quarter was $2.8 million and CapEx should be less than $16 million for the year.

Finally, in our press release we noted the guidance that we established on our last earnings call of $353 million to $378 million in net revenues for the 2011 fiscal year based on a British ground to US dollar rate of 1.45. At this stage we have over 95% visibility to the bottom end of this range.

We also noted our ANI guidance which was also established on our last call of $43 million to $46 million based on a rate of 46.5 rupees to the dollar. This implies an adjusted EPS of $0.94 to $1 on a diluted share count of approximately 45.8 million shares. There is no change to our ANI or adjusted EPS guidance as we have factored the cost associated with the refinancing of our term loan into our original guidance numbers.

To summarize, we have made great progress in tightening our strategic focus and aligning this structure and the energy of the organization to that strategic direction. Our entire team is reenergized and we are putting the necessary resources towards seeing long-term sustainable growth.

However, while there are some signs of life from the economies in the US and the UK, which we hope will accelerate the sales cycle and lead to larger deals, the threat of a double dip remains. We are leveraging [fact/form] based technologies and higher level consulting services to move up the value chain and become a more strategic partner for our clients. With these changes WNS is making the necessary moves to see sustainable organic constant currency growth in the near future. We will now take your questions.

(Operator Instructions). Joseph Foresi, Janney Montgomery Scott.

Hi, guys. My first question here is just on the ANI guidance, even if we looked at the $2.2 million, that calls for a pretty good ramp in the back half of the year to sort of make even the lower end of that range. Maybe you could just talk about the factors that you're expecting to hit. I know even if you did a pro forma it would be about $8.1 million, but it still looks like it's a pretty good ramp in ANI. Maybe you could just talk about the factors that you're expecting to hit in the next couple of quarters that are really going to flow through to the bottom line.

Joe, Alok here, I'll take that one. I think what we were seeing in the first quarter were a large number of effects. The interest savings alone on a run rate basis for the year will save us about $6 million a quarter, that's $18 million for the year. There are other cost-cutting measures that we have put in place where we will see the impact come through. The FX gains should be pretty good for us in the coming quarters as well. So I think overall we're still pretty comfortable with the ANI guidance that we have given.

Maybe you could talk about what -- I mean, FX gains and obviously the interest, but that's more financial. Maybe you could talk about on the business side, Keshav, what you're expecting in the next couple of quarters?

Sure, yes, obviously what we're focused on is engaging with each one of our existing clients and cross-selling and up selling services. So we're actually seeing that -- based on the effort we've made over the last one quarter or so, we are seeing a number of discussions with existing clients, actually, go to next levels where spending should start taking place definitely around the second half of this year, that's one.

The second is we did talk about two new wins, one is with a very large consumer electronics company, media company. We expect again during the second half of this year to start seeing revenue flow through that will also impact profitability. (inaudible) -- overall if you ask me, the whole focus is now on sales, sales, sales. And deals in the pipeline we're seeing. We expect to start closing some of these deals during the next quarter as well as the rest of the year. Now some of that will flow through this year, some will flow through the following year.

In the press release you had talked about insurance and the effects of technology there and also on the travel with the pricing. Maybe you could just give an update on both of those verticals and if you're seeing any changes in volumes or, outside of what you're seeing in the press release, what you expect from those verticals going forward?

Joe, that's a good question. Actually from a WNS point of view, within broad travel as well as insurance, although I believe that there is huge potential in both the verticals, we have to some extent been affected by one large client in each of these verticals. I think the whole focus for us now is to understand the market is much bigger than just the one client in each of those verticals and that's where the management team is now focused.

So if you look at the insurance side, what we did was to consolidate leadership and put the whole of insurance under one leader as opposed to having the large client handled separately and the rest of insurance handled separately. And I think that is a big change because we are now beginning to see synergies flow across the insurance verticals. We are beginning to see knowledge flow from the large experience into other areas. Our pipeline is now beginning to build on the new client side both in North America and the UK. I think over the medium term, this is going to be very positive for WNS from a sales point of view.

The same thing with the travel site. Our focus has, to a very great extent, been on just the airline side of the business, which has been going through its own issues and at the same time, on the rest of travel, maybe one large client, which is going to through its own issues at this current stage.

However, travel really is far more wide than just the airline side. And again, the whole team is now focused on building opportunities in the rest of the travel side -- the hotel chains, the cruise lines and the leisure side as well. And I think with this new focus, with the bringing in of new hunters who understand that area, with really introducing much more demand-based kind of sales, that will again begin to impact us positively.

And in terms of what is happening overall in the industry, actually insurance is a very fast-growing area and I think it grew 9.6% in the last quarter as per one of the leading industry analysts. So we are very clear that that is an area of growth and WNS has not executed well in the past. We are going to execute far better there.

As far as travel is concerned, the situation really is travel is coming back. Now whether values are increasing, we are not clear yet, but volumes definitely are beginning to show up and we are definitely going to focus on getting more share out of that spend.

Joe, sorry, Alok here. Just on your first question, one point I would like to add is the -- our large contract in the insurance vertical will go on to the third-year pricing effective July, where, if you remember, last year in July the second-year pricing kicked in which was lower. Now the third-year pricing deal will kick in which is higher.

And that starts in July?

That starts on July 11.

Okay. And then just my last question here -- I know you've talked about where they were some severance charges this quarter and there are going to be some next quarter. Keshav, were those more than you expected, less than you expected? And do you expect to be done by the end of next quarter with those changes? And also, just how much of that is captured in the guidance, was that included in the ANI guidance?

Yes, Joe, from my perspective I think it was more than what I expected coming in. I really thought that I wouldn't have to do that much. The good thing is they've got down to work very quickly in that area and I think the signal across the Company is we do not tolerate underperformers and there is a hunger for growth. So wherever we've had to bite the bullet, we've bitten the bullet.

We will need to do a little more during this quarter, we will get that done. But I think from here onwards all this money will just get directed into really focusing on sales initiatives domain as well as leading with the new verticals. Alok, do you want to take the rest of it?

Yes, so, as far as guidance is concerned, no, we didn't factor in severance costs. But I think once you -- we're in the second half of the year we will get some savings out of it. So that should really offset the costs that you're having in the first half. It's really more a question of (inaudible) some of the cost rather than the overall cost for the year going up.

Thank you, guys.

Bryan Keane, Credit Suisse.

Hi, this is [Alvin Goshee] in for Bryan Keane. You guys mentioned several times the US and UK pipelines have improved and obviously you're investing in sales to sort of capture this. Can you just try to flesh out a little bit where you've seen strong demand and what are you guys really focusing on?

In terms of verticals I think logistics, shipping, insurance, travel and healthcare, and again parts of banking and financial services are all areas that are looking positive and where, based on a renewed energy from the Company, we're beginning to see pipeline growth.

Having said this, our recent wins and our recent kind of very positive momentum has been in Europe. And again, out there it's been around -- a lot around the finance and accounting and the research and analytic side and again consumer electronics and media, insurance and again banking and one or two of the other sectors.

So if you look at it from our perspective, I think there is definitely demand out there in the market, a lot of industries and companies within those industries are quite stressed out, they need the help, they need to reduce their cost, they need to build efficiency. And I think finally WNS people are actually following a named account strategy and getting after some of these clients, I think that is positive.

I don't know if I could just add quickly. Beyond the vertical focus, from a horizontal standpoint F&A is as strong as ever, it's a great opportunity there. And our research analytics business has been ticking up pretty nicely recently as well.

That's helpful. Also, last quarter -- and you guys -- this quarter you guys said you won a couple of deals. And last quarter you guys down selected. Is that just a fall through of that?

Yes. In fact the ones that we -- the ones we were -- where we were in the top two or three, of them two have actually been selected. And as of now we're again in the top three in a number of other deals where over the rest of this year we would expect to see some of that flow through.

And then just going from there, from a competitive landscape what are you guys seeing?

So, well, definitely a lot of activity. The key thing is I think that the two or three pure plays in the business, as well as our IT brothers also focus on this business, are also active and doing whatever they can. Having said that, I think a big opportunity for WNS really is to farming its existing clients, set of clients. Huge opportunity there.

As I mentioned, every one of them is really under penetrated because as I look at some of them I realize that we have actually attacked them with a particular service offering or a horizontal offering and have not really introduced the entire length and breadth of WNS services in there.

So the big focus really is how do we up sell and cross sell into each one of those clients. The good thing again there is every one of those clients like us, respect us, like the new strategic and performance orientation, most importantly like the attention that they are now getting from everyone at WNS and they want us to succeed. So I am pretty sure that's over a period of time each one of these clients will ensure that WMS succeeds.

At the same time, what we are doing is making sure that we are becoming very, very relevant to them by focusing very strongly on domain lead offerings and offerings that not just reduce cost and build efficiency, but actually come up with ideas for them around their top line, around new products that they can launch, things like that we're becoming far more relevant to them. So that's on the farming side.

On the hunting side again, the fact that we're leading by verticals with horizontals following behind and where we're creating a clear strategy in terms of what our offerings will be in each one of those verticals, as well as the two new verticals that I spoke about, what I call white spaces, where I believe there is huge opportunity in the market and we want to be the leader there. We're already having very good discussions with one or two firms in that area. And I'm pretty confident that over the next few quarters some of these will get converted into bids.

And so I guess with these new offerings and new products you expect pricing to sort of hold steady?

Yes, I would expect pricing to hold steady. So I think on the bread and butter kind of offerings, as some of them start getting into becoming more commodity side, you always go through the pressure of building your margins back to productivity efficiency gains and those other models.

The challenge for us and really the big focus for us is how do we keep taking the quality of our offerings higher. How do we keep coming up with offerings that move up the value chain such that we can continue blending and getting higher pricing power.

That's great. And just a final question for me. Regarding your headcount, obviously this quarter you guys went through a little scrub down. How do you foresee hiring utilization and wages sort of going out?

The first quarter of every fiscal is when we give our increments or our wage increases as also the bonus payouts for the previous year. So the first quarter invariably sees a slight amount of churn as people take those, the new salaries that they have and use that as a benchmark to look at opportunities outside as well. But we see that attrition trending down as we go into the fiscal and also as we improve some of our employee engagement initiatives.

Thanks a lot, guys.

Tim Fox, Deutsche Bank.

Thanks. Alok, I was wondering if you could walk through the gross margin a little bit and break out what impact the revenue decrease, the wage inflation and rupee might have been within that 880 basis points?

So, if I did the -- just the impact of the FX between last quarter and this quarter the pound has appreciate -- depreciated by almost 5%, which itself will account for a large chunk of the decline in the revenue. If you look at the rupee side, the rupee has appreciated by about 6% and the salary increase impact is roughly about $2.2 million for the quarter, vis-a-vis the previous quarter.

$2.2 million quarter over quarter, okay.

And the pricing decline on the travel side is about $1.5 million impact for the quarter.

Okay, great. And you have maintained that ANI guidance for the year, but obviously you've got to hit some moving parts below the line. And just refocusing back on the margin structure, where do you gross margins and maybe even adjusted EBIT margins going for -- across the year and for the full year?

For the full year we should be able to pull the gross margins back to around the 32% to 33% level. And EBIT margins for the year will probably come up to -- well, right now our EBIT margins this quarter were a little low. But for the year we should bring it back to about 12% to 14%.

12% to 14%, okay.

We have a significant hit in the first quarter on interest that is below the (inaudible) the EBIT line. We will make up most of that in the remaining three quarters, so the $5.4 million hit we have taken we should make up about $4 million of that in the remaining quarters. But you will still have a net effect of just over $1 million for the full year.

got it, okay. And then one more question on the debt related side of things. I think you mentioned that the interest savings alone would result in a savings of about $18 million a year. Did I get that right? I was just looking at fiscal 2010, your total expense, interest expense was $13.8 million, so I'm just trying to reconcile.

I say that between first quarter in the second quarter is a $6 million delta.

Got it, okay, with that one time (multiple speakers).

Because of the $5.4 million one-time hit and about a $600,000 savings in the base rate. So $6 million between first quarter and the second quarter, then therefore in the remaining three quarters 6 times 3, 18 -- annualized. So if you're taking the first quarter and multiplying by 4 to annualize you're going to add back 18 to that.

Got it. Okay, lastly maybe, Keshav, if you could just talk a little bit about -- there are some positive signs here in your prepared remarks talking about seeing some volumes in both the travel and insurance clients improving more than you had previously expected. Has that been just in the more recent months? Because it sounds like this first fiscal quarter actually saw pressure on volumes. So I'm trying to reconcile the pressure that we saw in Q1 and in these comments here suggesting that the volumes are actually picking up a bit.

Yes, like I said, first on an industry level both insurance and travel are beginning to spend more. So at an overall level there is opportunity for WNS in the space. The second is even within our existing client base what's happening is our focus really is to cross sell, upsell new services into each one of these clients. And there again the discussions are very positive and it's very clear that the way we are now interacting with these clients, the feedback from them is that they want to really spend more with us.

So, overall if you look at it at an industry level things are positive, at a company level every one of these clients now want to spend more with us. However, having said that one or two specific clients are going through their own internal issues right now. They're going through their own set of issues right now. And so therefore we can't expect to see a very significant change with at least one or two of them on the travel side immediately.

But overall I'm pretty confident that as long as we can keep having those good discussions with existing clients, as well as keep building the pipeline with new clients, that the future for us actually is positive on both those areas.

Great. And lastly if I may just sneak one more in. You mentioned also that you're hoping to get back to an organic constant currency growth at some point. So are we to presume that the guidance for this year assumes that there isn't any constant currency organic growth or do you see that returning later in the fiscal year? Thank you.

I think we will see that returning in -- probably starting the fourth quarter, when you look at it quarter over quarter.

Thank you.

Vincent Lin, Goldman Sachs.

Thanks. Most of my questions have been answered, but maybe just a couple more. The first is regarding the client specific issues in terms of volume on insurance side you cited during the first quarter. Just wondering whether that, in terms of the specific decline, has been stabilizing. We should expect stable trends going forward or there's still going to be some lingering pressure from that particular client that we should be incorporating for next couple of quarters?

Yes, I think it is stabilizing with that particular client. The second thing is we do have volume protection with this client as well, that's the second. The third is, based on the way we're engaging with them, we're looking at offering new areas of services to them and these are discussions that have been going on for the last month or two. So I would expect that by the second half of this year we should actually start seeing growth coming in from this client. So overall I would say the position is stable.

Got it, that's helpful. And then secondly, maybe Keshav, you highlighted in terms of having formalized cross-selling strategy in place in terms of further penetrating your current client base, can you just give us a couple of examples in terms of what you are planning to do and just in terms of the kind of opportunities that you see in the near to intermediate term in terms of helping you get back to the constant currency organic growth?

Excellent question. So if you look at the WNS still has been structured traditionally, we went to the market with horizontals and verticals all leading as verticals, right. So whereas our track record in terms of winning new clients has been strong, I think intuitively when I looked with my team at the numbers, we realized that after winning those clients the ability to farm them was actually suspect.

And the reality is if you look at every one of the clients that we have in our portfolio, they are outstanding to die for clients, right. And therefore we looked at what could be the reason for the lack of performance there and realized that first and foremost the structure itself was not the most amenable structure for growth.

So if you look at a client being one through a horizontal offering, for example, a finance and accounting or research and analytics area, quite often we went in with that offering, we took control of the client in that particular department or function and provided outstanding services there. But then the ability for WNS to enter with the domain-based kind of offering as well as the other horizontal offerings was very suspect, because the client was now all the time dealing with the vertical kind of group as opposed to -- with the horizontal group as opposed to verticals.

What we've now done is to make sure that every client that comes in is first tagged into a vertical. So whether it's insurance or travel or retail or healthcare or banking, we make sure that people who understand that domain first take charge of that account, at the same time we realize if it's an F&A kind of an offering that the client wants to start with, we bring in our (inaudible) capability which is extremely strong, our leaders there are outstanding.

And remember, as we deal with the F&A side, we're actually dealing with the CFO's office, the comptroller's office, the people who take decisions and probably the most important influencers within the Company. I think the big change we're now seeing is we're telling our people that we will go in if required, do a horizontal, but they must quickly introduce our client engagement and our hunting teams into the rest of the corporate, map the corporate, really put them under their specific vertical domains and get the rest of WNS to really come in and sell their services.

So, we're already seeing that with some of our large insurance clients as opposed to just F&A we're now beginning to talk to the rest of the client about insurance offerings, contact center offerings, legal process kind of offerings, research and analytics offerings and this is actually beginning to resonate well for us.

Got it, that is very helpful. Thanks for all that color. And maybe just last one real quickly for Alok. It looks like free cash flow was a little bit weaker this quarter and probably the lowest level over the last few quarters. Can you just quantify in terms of the one-time items that you highlighted in terms of severance payments and the insurance premium payout? And going forward for the next few quarters is there things -- just give us some sense in terms of the kind of run rate free cash flow on a normalized basis that we should be expecting. Thanks.

Yes, so if you compare first quarter this quarter -- first quarter of the fiscal to the first quarter last fiscal you will see that the cash flow generation is about the same. Because this is -- the first quarter is the one quarter where we have our largest payouts in terms of bonuses that we had approved for the previous year.

So it doesn't affect P&L but it affects cash flow and the insurance premium payouts. If we add up all of these I think the one-time effects would be close to about $12 million. So, without those I would expect our cash flows to return to the earlier levels of $14 million to $15 million per quarter.

Great, thanks.

Robert Riggs, William Blair & Co.

Good morning, thanks for taking my question. Just given your ability to refinance the term loan, can you touch on your appetite for acquisitions or maybe just walk through your priorities for use of cash?

So I think probably what we mentioned earlier was a capital expenditure of about $16 million. Essentially we have capacity in terms of space. We will have a little bit of capital expenditure without that space. Not just in India, but also we have expansions in Philippines, in Eastern Europe, so all of that will take a large part of our investment this year. The other is, of course, paying down the debt. We have one more scheduled repayment due in January. So that we will pay down in January. It's about $20 million that is due to be paid back.

And just to add to that, there's just so much that is now happening within WNS that my focus with the team the leadership team really is to make sure that we really focus on all the strategic areas as well as the key tactical and operational areas and really focus on our hunting and farming kind of capabilities and really getting all of that in place first as opposed to really going out and looking aggressively for acquisitions on inorganic growth. The focus really is organic growth.

Having said that, we will be opportunistic about tuck-in kind of acquisitions because with some of the new verticals we're talking about, some of the new offerings we're talking about, we might want to do one or two small kind of tuck-ins later for which we believe we have the capital.

And finally, as we look at growth and as we look at some of the new delivery centers as well as locations that Alok alluded to, we're also looking at capability in other countries like China, and over the next few months we'll also formalize some kind of a strategy for that location as well, to make sure most importantly we are seen by our clients as a true global provider of services. If you ask me that really is our priority.

Great, thank you.

Tien-Tsin Huang, JPMorgan.

Thanks. Real quick, I just want to ask about the focus on sales. I'm curious how significant the hiring will be on the sales front and what kind of impact it might have on the P&L?

Well, the guidance assumes that these costs are in, but I can tell you that that's the biggest focus area for me, really getting the right people in, getting hungry people in, getting people are willing to work on a low base and a high variable compensation plan and people who want to be here for the next 10 years and drive growth as well as build this as the most respected company in the space.

Again, as we look for these people we are looking for people not just as good hunters or farmers, but people who understand the domain, who understand what's happening in the respective vertical and can therefore lead our client as opposed to just be there as an order taker.

So, I would say that that is the biggest focus area for WNS. And you can see that -- you should expect to see that over the next two quarters that we would have maybe in North America another 10 to 12 people come in and in Europe another four or five people come in.

Okay, that's good to hear. I'm curious just on the variable comp, how do you anticipate structuring that? Is it going to be some equity as well or is it really cash comp on new signings or EBIT contribution, [TCV]? I'm just curious what you're thinking on the structure of that variable comp.

Essentially, based on sales performance, so which means on actual billing for the year and growth therefore in the revenue. So based on -- we expect that people are in the Company and earn a base salary just to keep the Company growing at a particular level. But to get -- for their variable comps to be triggered we expect them to deliver higher growth than that.

So it will be completely related to revenue growth, combination of [ACV] where the value, contact values and actually bill and collect revenues. And that's -- so for the farmers -- for the hunters it will be much more a commission based kind of a structure, and for the farmers it will be much more a bonus lead kind of a structure, where they will be essentially compensated not just on growing the overall revenue in the account, but also ensuring that they're introducing every one of the service lines of WNS into the client, kind of special bonuses fixed for each one of them.

Got it. And then on the attrition side, can you just construct that for us a little bit by level of employee. I'm curious how much of it was at the lower level of the delivery level versus management level?

So at the management level I don't think there's been any voluntary attrition, the attrition has been one where we have sort of mutually agreed to part ways, shall we say. If I look at the breakdown of attrition, it's really been predominately in the voice part of the business where even historically our attrition is higher on the voice side than in the non-voice side.

And typically the first quarter we do see higher attrition mainly because that's the one -- that's the quarter where you get your rate increases. So people to tend to shop around once they've got their sort of increment letters. I think the bulk of the attrition is at the junior levels, at the agent level and more on the voice side.

Okay, good to know. Last one from me, just the stock comp was a little bit light this quarter. What's the outlook for stock-based comp for the rest of the year?

Sorry, could you -- did you just say it was a little bit?

Equity comps, stock-based compensation, what is that going to look like for the rest of the year?

For the year we would expect it to be under $10 million.

Less than $10 million, thanks so much.

In fact, about $7 million is carried forward from grants already made in earlier years. We can't change that to an extent it will come down thanks to the people who are leaving, but it will be in the range of about $7 million and $3 million roughly will come out of grants to be made this year. We actually haven't yet made our grants for this year, usually we do it in April or May. This year we're doing it slightly later.

And I think that has a lot more to do with the fact that we're again looking to move some of that into more performance oriented vesting as opposed to time vesting.

Right. It makes sense. Thanks.

Dave Koning, Baird.

Yes, hey, guys. I guess my first question just to clarify, the guidance for ANI this year, the $43 million to $46 million of ANI guidance, that assumes the $2.2 million or so of net income in Q1, not the $8.1 million, is that right?

That's correct.

Okay, good. And then the other clarification. You mentioned the interest-rate of 3%, and I know you answered a couple questions on this already, but does that imply by Q2 about $1 million of interest expense on the $120 million or so of debt?

Actually it's $94 million of debt now effective July 12. And you can take roughly 3% on -- so it's about $94 million of term loan plus we have some working capital facilities. Like I said, in the UK we took a new working capital facility. The reason we took working capital was that from a flexibility perspective it's a lot more flexible as of when we have cash we can pay down, as when we need we can draw.

So effectively we said that our interest rates should be in the range of about 3% and that means on -- say roughly $100 million worth of debt including working capital at 3% per annum, I think you're better at math than I am.

I don't know about that, but that makes sense. And then I guess the last question, the auto claims business, in the supplement I think you mentioned about $9.3 million of quarterly revenue. That's -- we're getting close to about half the size of what this business was right after you bought, I think it was called [24/7] a couple of years ago. I guess what's the status there? Do you expect that to continue to bleed or are we near kind of a trough point where that can start to grow again?

So you must firstly realize that is a completely UK-based business. So when you're comparing it to two years ago when it was $2 to the GBP1 and to $1.5 now, that's 25% decline for no decline in price volume, nothing. Just a straight 25% off the top purely because of exchange rates. And that's a completely UK-based business.

So, I think what we have done is churned that business a little bit where we've reduced what we call the credit hire work and increased the credit repair work. And since the middle of February we've been doing a fair bit of that churn. You're seeing some effect of that, about I would say between quarters there's been some decline as we're doing some of that churn. But that will mean that we will start improving the profitability of the business.

Secondly, the first and second quarters of the year are typically lower in terms of volume. Now I've explained this before, it sounds a little funny, but that business is extremely dependent on weather. If the weather is good there are fewer accidents, if there are fewer accidents we get fewer repairs to manage. It's as simple as that. So good weather is actually bad for that business. And despite its notoriously fickle weather, UK has had pretty sunny and clear weather for the last couple of months. And that typically leads to a reduction in volumes.

That makes sense. Appreciate the follow-up.

Mitali Ghosh, Bank of America-Merrill Lynch.

This -- I'll touch upon the lean management techniques I think that each of you mentioned in the beginning. What sort of efficiency increase are we really looking at in possibly the SG&A and even the cost of goods line?

So, I think if you look at me the last thing that will come to your mind is lean, but let me still try and talk about it. I think one of the things we're doing is across-the-board looking at some of the way we have expenses, not just in terms of the rate at which you buy stuff, but the necessity of having some of those expenses in the first place. And I think it's also a question of a mindset to bring in a culture that says we need to be a leaner organization.

In terms of the people that we have our focus is really to have more and more people on the sales and marketing side and reduce or have be more efficient in terms of our overheads by bringing in improvements in process, by bringing in a certain amount of automation, and use that to drive down costs.

So I think over a period of time you'll see that we have shifted some of the higher cost functions that we had, we're shifting them offshore to reduce those costs. We've reduced some of the higher cost people that we had already looking to replace most of them. The replacements will come more to sales and marketing where we will look to supplement the top line or drive the top line by investing in sales.

And Mitali, if I may just add, I think the key is to really create a paranoia about expense reduction, waste elimination and the fact that lean is very, very critical for an operation that leads other clients as well. That's one.

The second thing is, as I mentioned, that's one of our five key initiatives and the teams are actually working on specific detailed plans. So while we're only operating, every time there's a renewal coming along, or every time there's a change taking place in terms of getting share services and things, we're already implementing some of those things.

We're also working on specific initiatives and the team is coming back with specific kinds of targets that the Company will take as well as into the leaders we'll take to drive some of this. So we'll keep you updated sometime later on specifics around the initiative.

Sure, thanks. And just sort of broadly keeping this in mind, if we were to look at your steady-state kind of gross margin and adjusted EBIT margin outlook, what should we look at, what sort of numbers should we really be thinking about?

Well, if you look at it and this is when I say medium-term I'm not literally talking about this year. So please don't call me in April and say that's not what you achieved. But I'm saying medium-term we would look at gross margins of 34% to 35% and EBIT margins of around 18%.

Okay, and then would like three to for years be a goods (multiple speakers) of medium term?

We feel about two years kind of timeframe.

Okay, sure. Thanks. And just (multiple speakers).

Nobody has the patience to wait for three years for us to deliver these margins.

Right. And just in terms of -- Keshav, you spoke about some of the new verticals you're looking at and some of the top segments I think you also identified in that travel vertical. Any details around that that you might be wanting to share at this date?

Well, within the existing verticals, Mitali, obviously it's very intuitive and it's very logical. But if you look at banking and financial services, capital markets, cards, retail, wholesale, these are the logical areas. So we think we're choosing the ones that we want to be capital leaders in and focusing our energies there.

If you look at healthcare it can be payor, provider, pharma, product device. So again here, the team is focused on two or three specific areas there and again, creating plans to be again category leaders there as well.

And within travel, I already spoke about two or three areas. Within insurance you know what the logical areas are. So life is a strong area for us and how they also attack the PNC and the rest of it. So that's the focus on the existing ones and really sub verticalizing and building deep knowledge in there so that when we go to a client our knowledge and our capabilities are inch wide and mile deep, that's one.

The second is on the new verticals -- I really would not want to talk about them at this stage because, like I said, we believe these are white spaces and we would really like to focus our energies on creating our vertical strategy, creating the offerings and coming back to you at some later stage and saying here are the clients that we've already won here.

Sure, sure. Thanks. And then just one quick housekeeping question. Any update on the income tax on the tax kind of outlook for the year, Alok, or will it remain the same?

Yes it remains pretty much the same. Roughly $3 million is where we should end the year.

Mitali, once again, I just want to clarify that I'm sorry I didn't answer your last question very clearly, but the reality is we also understand that competition is on the call so we'd really not like to alert them in advance.

No, absolutely. We understand.

(multiple speakers).

Thank you so much, yes. Thank you.

It appears there are no additional questions. I will now turn the call back to Keshav Murugesh for closing remarks.

Thank you very much for your attention and your questions. We look forward to interacting with all of you soon again. Thank you and goodbye.

This concludes today's presentation. You may now disconnect. Good day.