WNS (Holdings) Ltd (WNS) 2011 Q3 法說會逐字稿

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

Thank you. Good morning, ladies and gentlemen, and good afternoon or good evening for 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 today. This release is also available on the Investor Relations section of our website, 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 third quarter ended December 31, 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 our actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those factors set forth in our Form 20-F, which was filed with the SEC in June 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 a reconciliation of these non-GAAP measures to GAAP measures in our press release issued earlier today.

Some of those 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 redeemable non-controlling interest. These terms will be used throughout the call. Now I'll turn the call over to Keshav.

Thank you, Alan. The third quarter's performance was consistent with the guidance previously provided, essentially flat revenues versus the preceding quarter and an improvement in profitability as ANI as a percent of revenue climbed to 15.9%.

But in Q3, and the back half of the year more generally, the management team is focused on returning the Company to profitable growth. I have previously spoken about the key ingredients to each, top-grading our client and prospect-facing organization and locating them in North America and Europe, focusing on and distinguishing between hunting and farming, investing in our transformational capabilities, verticalizing our go-to-market strategy and driving efficiency and effectiveness throughout the organization. We are making significant progress on these factors, which are critical for our future success.

There are three points that I would like to highlight on today's call. First, we are beginning to see signs of revenue expansion and increased activity in our pipeline. Second, we are making the necessary investments in our business to achieve this growth. And third, we continue to invest in our client relationships and are repositioning ourselves as strategic partners through our transformation and value-added services.

Specifically on revenue growth, I am excited to say that we saw good traction in our farming program this past quarter. As I have mentioned in the past, a number of our large clients have tremendous potential in terms of WNS providing additional services.

In the third quarter, we won two separate contracts with a large company for whom we were doing finance and accounting work in the past. Moving forward, we will now also provide a number of industry-focused insurance support processes and have also expanded into a more global delivery footprint with them.

We have moved up the value chain and are further cementing our relationship with this client. This should also open doors to additional opportunities within that organization. This is a great example of the success of our vertically-led and client-partnered strategies. This client told us that prior to establishing our client-centric approach, they weren't fully aware of the suite of services that we could offer them or our domain expertise in the insurance industry. We are now engaged in similar discussions on farming opportunities in new areas with other large companies. This same approach is now percolating across all key accounts.

We also won a contract with a company in the media and entertainment industry this past quarter and renewed our contract with a client within the auto claims business in the UK. I am pleased to say that we are at final contract stages with two other globally leading brands that are potential new clients and that should positively impact fiscal 2012 revenues.

In terms of the rest of the pipeline, the early and middle stages look encouraging and we are focused on converting some deals in the late stage to closure. In the US, we have been down-selected in a few deals and we see a fair amount of activity in the travel and healthcare spaces. In fact, we have been down-selected in a good-sized deal in one of our subverticals in the travel space.

The pipeline is gaining strength in the UK as well where we see some larger deals in the insurance, utilities and telecom industries. Our pipeline in Asia-Pac looks particularly strong right now. We are far along in discussions about some opportunities in these regions, particularly in the insurance, travel and banking spaces.

Our domestic India business is also picking up steam. We are leveraging existing relationships with global firms to serve their India businesses and are also looking at other new business opportunities in our core verticals. This business is still in the early stages, but this is an area where we see opportunity.

While there are plenty of positive signs from our sales efforts, it will obviously take some time for these opportunities to convert and produce financially tangible results. As such, we are as focused as ever on protecting and improving our bottom line. Our expense management and operational efficiency programs reduced overhead and directly contributed to our profitability in this last quarter.

However, we are continuing to invest in the business for growth. We have re-invested a large portion of the cost savings that we realized back into our sales and marketing functions to support the sales team and achieve the long-term growth metrics that we have set for ourselves. In fact, our SG&A increased this past quarter.

As I just discussed, this reinvestment is beginning to pay dividends. The reorganization of our sales team is almost complete. Our global head of sales and marketing and the new business head for our banking and financial services practice joined during this past quarter. We now have all of our business unit leaders in place. Most of our new vertical heads are based in the US and the UK, close to our clients. This is a conscious decision that we have made and a departure from the traditional BPO market.

As of today, we have 47 sales people, client partners and engagement managers, up from 41 when I joined WNS and flat compared with the end of the September quarter. This is a result of some churn to ensure that the appropriate people are in the roles based on our new strategy and domain-based orientation. Our plan is to add more high impact people to this pool by the time of our next update.

This number should increase further over the next year as we continue to invest in client-facing talent. We are moving to a more performance-based compensation structure that will distinguish our market and appropriately reward top performers.

We are also taking all the right steps to create a growth environment so every employee understands their role in contributing to WNS's success. We are creating stretch opportunities for talent and allowing employees and prospective employees to see WNS as the best place to work, to learn and to be recognized and rewarded. As a result, we are building a talent pipeline to sustain and catalyze WNS's growth well into the future.

We also continue to expand and focus on value-add offerings and position ourselves as a strategic partner for our clients. As we mentioned in our press release, the reception to our new programs and sales structure from both clients and prospects has been extremely positive. In fact, I have personally heard from a number of CEOs and CFOs that they view WNS and the opportunity that we present as a business partner in a completely new light. This should begin translating into top-line growth over the next year.

We have also invested further in our transformation group where our focus on our consulting capabilities and better leveraging our people and technology resources has intensified. During this quarter, our business team engaged with a few of our clients in their strategic planning process on our new value innovation format such that both teams understood the full suite of WNS's offerings and these discussions are leading to expansion opportunities.

We are also looking at opportunities to establish an onshore presence in the US and increase our onshore presence in the UK so we can serve our clients in their home countries. We are also looking at various models for establishing a presence in China and growing our presence in continental Europe.

I am pleased to say that we have seen significant interest in our (inaudible) location over the past quarter and we anticipate filling the remaining seats in this location and expanding into a new location over the next few months.

I also wanted to address some headwinds this past quarter. On our last earnings call, I noted that we anticipated a seasonal volume decline in our travel business. As expected, travel volumes were down in the fiscal third quarter due to seasonality, but we expect these to come back in the fiscal fourth quarter.

The sales cycle also remained somewhat extended this quarter, but we believe that the recent trends in the market and economic reports should lead to an increase in decision-making. We are working with prospects and current clients to ensure that we can move quickly when they are ready to take a decision and begin adding value immediately.

In terms of total headcount, we ended the quarter at 21,213 compared with 21,416 in the previous quarter. We saw this slight decline in headcount as we optimized for productivity and adjusted for lower volumes in our travel business. Hiring should pick up in the fourth quarter. Attrition was flat at 42% this quarter. This remains the point of focus for us. I want to be clear that I am not satisfied with attrition running at these levels. My management team understands that attrition needs to be treated as a top priority. As such, we are adding additional employee-related programs over the coming months and aim to bring this number down in the near term.

The investment that we're making in talent extends through our ranks. This past quarter, we hired a new Chief People Officer and rolled out a number of carrier advancement and training programs for employees at all levels to help address this issue.

In conclusion, I am pleased to see the initial signs of success from our five-point plan, completely revamping and reenergizing our salesforce, making solid headway on reorganizing into a vertical-led company, investing in our transformation group and talent and eliminating waste through lean initiatives. We are seeing greenshoots from our hunting and farming efforts and are investing in the business to grow.

Most important, despite all of this change, our customer service and client feedback remains very strong. When I joined WNS, I made the commitment to profitable growth. To that end, our adjusted net income increased year-over-year and sequentially, both in absolute terms and as a percent of revenues.

While our top-line results will remain under pressure for the short term, WNS is well-positioned to grow over the next year. Our pipeline is strong and we should see opportunities to expand the business with both existing and new clients over the next several quarters.

We are clearly moving towards a positive trajectory of sustainable organic top and bottom-line growth. Our leaders and every one of our employees is energized, motivated and working hard to deliver great results. Let me now hand the call over to Alok to walk through the financials.

Thank you, Keshav. This quarter, our net revenues decreased to $92.7 million from $96.3 million in the same quarter last year. This reduction was primarily as a result of the change in pricing terms from a large travel client, the weaker pound and volume reductions in our insurance and travel businesses.

Sequentially, net revenues declined by less than 0.5% as a result of the seasonal decline in travel volumes and the impact of inclement whether on our travel business. These headwinds were somewhat offset by a stronger pound, volume improvements from several retail and CPG clients and an improvement in the volumes in the auto claims business.

We achieved gross margins, excluding share-based compensation, of 33.9% in Q3. Compared with the same quarter in fiscal 2010, this represented a decline of 335 basis points, primarily as a result of a change in pricing terms from a large travel client, wage increases and appreciation of the rupee and weakening of the pound.

Gross margins declined by 210 basis points compared with last quarter. This was comprised of a 130 basis point margin loss from FX, 170 basis points from lower volumes, primarily in the travel business, which was partially offset by a 90 basis point gain from improved productivity.

Third-quarter 2011 operating margins, excluding share-based compensation and amortization of intangible assets, was 13%. This compares with 18.3% of Q3 of fiscal 2010. The decline was due to the same reasons I just mentioned, as well as an increase in our investment in sales and marketing. Compared with Q2 of this fiscal, operating margins declined by 260 basis points. In addition to the 210 basis points from gross margins mentioned earlier, increased SG&A led to a 50 basis point adverse movement.

Our interest expense this quarter was $1.8 million against $3.5 million in the same quarter last year and $1.9 million in the previous quarter. We expect interest costs to come down further from these levels as we continue to pay down our debt.

As we announced in a press release last week, on January 11, we made a scheduled payment of $20 million on our term loan. The total debt outstanding today of this term loan is $74 million as against $135 million on June 30 and $94 million as on September 30. Overall, we have repaid over $60 million on our loans this fiscal. Our next scheduled installment payment is due on July 11.

In terms of currency this quarter, the rupee was slightly stronger while the pound was weaker compared with the same quarter last year. This negatively impacted both our top and bottom line. Compared with last quarter, however, both the pound and the rupee were slightly stronger. We were able to mitigate the impact on our bottom line to a certain degree through our hedging program. We are hedged about 90% for 2011 fiscal, about 80% for fiscal 2012 and about 25% for fiscal 2013 using both options and forwards.

Net FX gains for the quarter were $4.1 million. Of this hedging gain, net of option costs were $4.4 million, partially offset by losses in the revaluation of non-functional currency balances of about $300,000. The hedging gains consisted of profits on our rupee hedges, as well as some other currencies and small losses on our pound hedges. We still expect to see gains on the rupee hedges while we will have some small losses on our foreign hedges at the current rate for fiscal 2011.

Our ANI for Q3 was $14.7 million compared with $11.1 million for the same quarter last year and $13.8 million last quarter. This is a 110 basis point sequential improvement, which was a result of a 60 basis point improvement from interest savings, a 300 basis point improvement from hedging-related gains to offset the 260 basis point sequential decline in operating margins. We also had a 10 basis point improvement on tax expenses.

Our balance sheet remains strong. We have access to capital and have improved our cash generation this quarter. As of December 31, our cash balance was approximately $30 million. We generated $12.2 million in cash this quarter from operating activities and our free cash generation was $8.5 million.

Last quarter, we noted that a large client in the auto clearance business had a higher credit period with us. The terms associated with this client have been renegotiated. However, it will take a few months for this to take effect. As a result, our DSOs increased to 47 days this quarter. The DSOs in our auto clearance business increased from 15 in the September quarter to 62 in the fiscal third quarter while BPO DSOs increased slightly from 34 to 35 days.

Our year-to-date CapEx spend is approximately $10.5 million, of which $3.7 million was in the December quarter. Our total capital expenditure for the year should now be closer to $20 million; although the actual cash flow of this account may be slightly lower. The capital expenditure, which will be used to build (inaudible) facilities in India and for expansion in the Philippines, Costa Rica and Eastern Europe, is loaded towards the back half of the year and some of the cash flow will spill into the next fiscal.

Given that we are into the last quarter of our fiscal year, we have tightened our guidance range for fiscal 2011. In our earnings release issued earlier today, we updated our net revenue guidance to $367 million to $370 million for the 2011 fiscal year based on an average British pound to the US dollar rate of $1.54 for the year.

Our profitability efforts are clearly on track. We continue to streamline operations and eliminate waste to produce these results. I believe that this level of ANI is sustainable barring any significant movement in currency. For the next fiscal quarter as well. As such, we have increased our ANI guidance to $44 million to $47 million, which is based on a rate of 45.5 rupees to the dollar for the fiscal year. This implies an adjusted EPS of $0.97 to $1.04 on a diluted share count of approximately 45.2 million shares.

Before I conclude, I wanted to note that, in fiscal 2012, WNS will begin reporting in IFRS. We believe that this is a best practice in terms of reporting by international companies and many of the larger India-based firms have already moved to IFRS. There should not be any significant change to how we present our financials, but we are happy to discuss this further in follow-up calls. Again, we will publish our numbers for Q1 fiscal 2012 in IFRS, but our Q4 numbers for this fiscal will continue to be reported in US GAAP, so we have approximately six months before we begin reporting in IFRS.

I will conclude my remarks by noting that we have made some great progress on both profitability and our sales efforts this past quarter. We are on track to meet our plan and I see significant opportunities with both new and existing clients. We will now take your questions.

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

Hi, gentlemen. My first question here is just on the demand environment. I know, Keshav, you said in your opening remarks that the decision cycle remains long. Maybe you could give us a little bit more color on exactly any changes that might have taken place and why it remains sort of elongated. And then my second question is I think you talked about the pipeline getting stronger. Is there any color that you can give us around hunting and farming at this particular point?

Right. As I mentioned, obviously, we are seeing elements of higher levels of spend coming on the IT side of the business already. So we are seeing discretionary budgets on the IT side already taking off. And I think it is only a matter of time before we start seeing a change in the approach in terms of spending from a BPO perspective.

I think every one of our clients and every one of our prospects understand that the recessionary trends that they have been seeing is not going to go away in a hurry, that they will need to continue to focus on cost savings, waste elimination and using smart partners like WNS to position themselves strongly in the marketplace.

So I think it is more a question of how effectively our sales people and our client partners are now beginning to interact with our existing client base, as well as spreading our value proposition to our new prospects. So if you look at it, I think, whereas, we are not seeing the decision-making happening as of now, the good thing that we are seeing is a lot of visits, we are seeing clients actually getting comfortable with the fact that this is something that they cannot avoid.

And the third is, in many cases as they interact with partners like us and see that we can actually provide some of the services that they think are very strategic to themselves and must be retained in-house, and they understand that we can now do it for them even on-site, it is now enabling them to begin thinking on lines of moving some of the work to people like us. So that is as far as the overall macroeconomic demand is concerned.

And then generally from a WNS perspective, I think clients are, for the first time, seeing our people interacting with them from a vertical-aligned organizational point of view. And as I mentioned earlier, many of our clients have actually seen some key horizontals of ours have generally (inaudible) that we are present in certain verticals, but actually haven't seen the impact of those verticals.

With our current go-to-market strategy and our value innovation program and the fact that both horizontals and verticals are now hunting inside of farming accounts or inside an existing client as well together, we are pretty confident that that should start resulting in more spend, as well as a better pipeline for the longer term and definitely into 2012.

Okay. And just on the travel business, have we seen the worst of the pricing decreases from that particular client and the pickup next quarter in volumes, is that related to seasonality or to the general weather issues that we have had?

So on the pricing, that was something that we had discussed three quarters ago. So from the first of April last year is when the pricing changed. So that is a one-time change and we won't see that change again. But when you do a year-on-year comparison to the fourth quarter of the (inaudible) that we continue to be a reason for the reduction.

As regards the volume increase, the third quarter of the fiscal is always the worst quarter from a travel volumes perspective and in the fourth quarter, it usually picks up and that is normal annual seasonality.

And just one final question, on the other income line, it looks like that came in a little bit higher than what we were expecting. Maybe you could talk a little bit about what you are expecting for the full year and what you have built into guidance on the other income line on the gain side?

So the other income that you see is essentially around the FX gain from hedging, which we explained. Net of about $4.1 million this quarter is a hedging gain of $4.4 million and a restatement loss of $300,000. Difficult to predict where the hedging gains will be because it depends on where the currency is. So if you see this quarter our operating margins are lower because of a stronger rupee, but then we made it up on the hedges. So it swings around about really.

But if the currency stayed where it is, would we expect the same sort of gain going forward?

Yes, slightly lower, but in the same region, yes.

Thank you.

Dave Koning, Robert W. Baird & Co.

Yes, hey, guys. I guess, first of all, just BPO margins this year have been about 11% compared to I think 18% in the fiscal 2010 period. I think part of that you just mentioned to Joe was due to the FX, I guess losses that you take through the income statement. I think this quarter, if you exclude that $4 million and just put it into the BPO operating profit, you would have probably a 16% margin or something like that if it wasn't for those FX losses that you have got a benefit on the other income line to offset.

So I guess I am just wondering are normalized margins in that BPO business going to be kind of mid-teens, maybe a little better over time and just this year was penalized a little bit by FX or how should we think about that as we move into next year and 2013?

So I think what you're saying is right. So there are two things that affected the margin if I look at it year-over-year. Pricing obviously affects your margin directly because what you lose on your top line falls all the way through. FX is what we try and hedge against, so we have a pretty robust hedging program and using which -- it is really a zero-sum game. So if you lose it on the operating line, you make it up on the other income line. So you don't make it up 100%, but pretty much you try and make it up through hedging. But on a sustainable basis, if you see this quarter our adjusted net income is about just under 16%, 15.9%. I think, on a sustainable basis, that is the range we would like to maintain.

Having said that, I would just add that whereas that's the general trend for the business and for where WNS is today, I think the focus of all our new vertical leaders is to really come up with more domain aligned offerings and more technology-based offerings so we will actually see higher value-add offerings going into the market over the next few months and with that, we expect to see margins also start to improve. So I think that is the longer-term trend discussion that we are focused on.

And the other point obviously to remember here is when you are looking at ANI is that there is a tax impact. In March 2011, the tax holiday expires on the STPI. At least it is scheduled to at this moment unless we get some last-minute surprise from our Finance Minister and that will have a significant impact of -- a 4 percentage point impact on your margins.

Okay, great. I guess secondly in the auto claims business, can margins sustain your 30% even if revenue continues to decline? I think you talked about a new contract with lower, it sounds like lower pricing terms. That is going to start -- I don't remember when the date was, but I mean is it fair to say that that will continue to pressure revenue and then pressure margins a little bit?

No, it is on lower pricing terms actually. We negotiated a credit period on that one. So you see our working capital has ballooned to a pretty large extent in December, but over the last 15 days in January, we have already seen that coming down. So what we renegotiated in that is really some of the volume commitments and the credit period that we give. So it used to be 180 days. We have reduced that to half now. So we would see that, over this quarter, that money should all start coming in and it will normalize our DSOs as well.

But from an auto claims margin perspective, we would expect it to be around 25%. If volumes are -- because it is not a linear business, so if volumes are good in a particular quarter, you may make 27%, 28%, but I would estimate about 25% to be good operating margin in that business.

Okay, great. And then just finally, just you mentioned the free cash flow has been weaker this year than kind of what you talked about historically, $5 million per month or so of free cash flow is kind of the hope. Is it fair to say that given what you talked about a normalization late this year and into fiscal '12, do you think if we add fiscal '11 and fiscal '12 together that will average $5 million per month over the course of that whole period or isn't the normalization over the next few quarters enough to kind of average $5 million a month?

I think in the next couple of quarters, you should see that come back. This quarter, we generated $12.2 million in spite of an increase in working capital. So if you add back -- I think our working capital went up this quarter by about $4 million or $5 million, which is really the outcome of one client. So if we add that back, we generated about $16 million plus this quarter in sales, which is already back to your $5 million plus. We should collect most of that cash in the fourth quarter. So I think for us to be back at $5 million plus a month I think is just a matter of a couple of months.

Okay, great. Well, thanks a lot.

Tim Fox, Deutsche Bank.

Hi, this is Devin Crago calling in for Tim. I was hoping you could just provide us with some idea of what you are seeing in terms of wage inflation trends.

There is quite a bit of noise now in India on the wage side, on the cost of living and therefore, obviously (inaudible) companies are actually beginning to focus on where that number will be for next year. Currently, our expectation is that, based on some of the studies we have done and based on some of the instructions we have had with other companies, as well as HR professionals, I would expect to see it in the range of around maybe 10% or so.

Okay, great. Thank you.

So we have seen -- just to add a little color to that, we have seen some people say 8% to 10%. We have seen some people say 10% to 12%. So I think we will say 10% plus or minus 2%.

Okay, fair enough. And then secondly, you have made some new hires to the leadership team. I was just wondering if you can touch on what kind of value you think these individuals can bring in the coming year and maybe just discuss where you think you are stronger than where you were about a year ago.

Right. I think from a WNS perspective, every one of the leaders who have come in are focused on just one thing and that is growth, growth and growth. It is both revenue growth, as well as profit growth and so if you look at our sales head, our global sales head comes in with a tremendous experience and background in both IT and BPO running large businesses, [attracting] and actually selling to a number of clients and very, very experienced from one of the large brands.

And his focus essentially is completely on the hunting side. So the hunting team reports entirely to him and the focus there is on named client acquisition strategy and what kind of offerings we can use to get him to a new prospect, as well as needling strategy to get into competition.

In terms of the business unit heads, every one of the business unit heads selected are people who come in with tremendous experience of running large businesses prior to this, working for large brands and therefore, understand the global industry extremely well. Many of these people are actually, like I said earlier, based in the West where the cultural affinity is high. I don't believe that selling offshore or India as a destination is required any more. People get it. I think the whole idea now is having people landing at the client site and discussing value selling.

So our business unit heads are people who can run a P&L end to end and their focus really is on sales, particularly the farming side, working closely with Mike, our global sales head, on the hunting side, focusing very clearly on the levers of growth, as well as margins, bringing in the right profiles of domain-aligned people so that they can introduce more domain-aligned kind of programs, as well as focusing on platform-based kind of offerings, which is a high priority for them.

And other than that, new Chief People Officer, again, is someone who has a tremendous background both in BPO, as well as IT, understands this business, gets it, has handled large scale in the past and his single point agenda now is on ensuring that the message of creating the most exciting place to work in is done, one and the second is focusing very strongly on bringing down the attrition rate and therefore the cost of acquisition of people.

So if you ask me as opposed to nearly 11 months ago when I came in, I am much more comfortable with the strategic orientation of the Company, the fact that I am now surrounded with the right kind of business and sales leaders, that both horizontal and vertical talent are now integrating well, collaborating well and going to clients with one single value in one single space. And more importantly, there is this high energy inside the Company where everyone is just focused on growth and how best we can be the fastest growing company in the space.

Okay, great, thanks. That is it for me.

Robert Riggs, William Blair.

Good morning. Thanks for taking my question. I wanted to get a little more insight around your existing customers. How penetrated do you think you are among, call it, your top 10 clients and where does that business go over the next couple of years? Do you think you can double the amount of business with those customers?

And then the second part would be, I am sure all these will contribute, but what do you think are really the key drivers to realize that, the amount of business you are expecting from the customers? Is it selling into more different parts of the same organization? Is it more transformation services or is it just getting more volumes, getting bigger pieces of your existing engagements? Thanks.

Great question. I think the first thing is my very strong view is that every one of our top 10 clients is very underpenetrated because traditionally each one of them has actually seen a different facet of WNS as opposed to the entire strength of WNS and for us, the big opportunity really is to get into each of these clients and explain the overall value proposition and then get into each one of those three areas that you really spoke about.

And in terms of growth from here, I think it is all about really penetrating these accounts, enabling the buyers globally across each one of these clients because each one of these really is a global client, enabling each of them to understand what all services we provide, what kind of impact we can have on their cost line, on the productivity line, on the efficiency line and more importantly, on their business prospects itself. And I think that is where the whole team is now focused in terms of just creating account-wise strategies and then using our value innovation format to get into their strategic planning cycle and then explaining the entire value proposition of WNS.

Great, thank you.

Joseph Vafi, Jefferies & Co.

Hi and good evening. I was wondering if we could get an idea of -- I think, Keshav, you said you have 47 sales people now and there had been some churn. What percentage of those people would you say are new and then secondly, what was the sales headcount say a few quarters ago?

Well, I would say that close to 20 of those people are new at this stage. And again, those are -- the overall numbers have increased by just 6% or 7% against the beginning of this year. I think the quality of the salesforce is what I am most excited about. We have now brought in people who are from the industry, who are domain-aligned and who are clearly, who clearly have the hunger and the passion of either hunting or farming because we have separated these two areas.

And in terms of the number of people we probably had a few quarters ago, I thought we had quite a few lesser number of people than what we should have had as one of the leading BPO companies in the space.

Okay. And then, secondly, I know it is maybe a little bit early here in the economic recovery and outside of the travel vertical where there is some seasonality, are you seeing any increase in volumes from other clients just due to, on existing contracts, due to better economic activity?

Yes, we are actually seeing a lot more activity on the insurance side for one. And I think it is basically fueled by the fact that WNS has now been able to integrate the large acquisition well and have the entire team understand the entire value chain of the processes that we provide and therefore, both hunt and farm effectively. So we are actually seeing quite a few deals in advanced stages of discussion on the hunting side there.

In terms of the farming side, the insurance itself, I just must remind you that, even with our existing large clients, we have actually penetrated them only in the UK and Ireland. I think the rest of the world is where we are now also focused in addition to new areas in the existing locations. Again, there is a lot that can happen there.

On the healthcare and utilities side, again, there are some interesting discussions that are taking place. Some clients are going through a significant business transformation and WNS is actually at the front end there, helping them to make those changes and then carving out for ourselves new areas of revenue.

The auto claims business that I spoke about I think is very strategic, has a lot of opportunity because there is a lot of knowledge there. We have our own software technology platform in place there and I sincerely believe that all that knowledge, the people as well as the technology that we have, can actually be leveraged in another exciting couple of businesses where we won't have to make too much of changes, but can add revenue over a period of time. So that is where we are focused. We have got that leader and that team now focused on getting into new areas of business using the proprietary tools that we already have.

And obviously, banking and financial services from a WNS point of view is completely underpenetrated. So we are growing our existing engagements and obviously we're starting to see more interactions and therefore higher volumes starting to be committed. But I think the hunting ability on the benefit space is high. It is huge for us and that is where we are focused.

Again, interestingly, the shipping and logistics space is another interesting area. We are seeing volume growth now on the logistics side and we believe the shipping area lends itself to very decent (inaudible) over a period of time. So again, a lot of this is based on how well we achieve on the strategy and our offerings program, but I'm pretty comfortable that, over the next few quarters, we will see a lot of the efforts that we have put in over the last few months actually begin to bear fruit.

Okay, thanks, Keshav. And then just finally on the attrition front, I know you're working on that. Is there -- if you look at attrition, do you see a large differential in attrition rates between say India and rest of world, including the Philippines or is it relatively even across geographies?

So I think in the Philippines, the attrition rates are similar because, again, there it is mostly widespace processes that we run. So we do have similar kind of attrition in the Philippines. I will say in Costa Rica and Romania and -- in the UK, of course, our attrition is very low. Costa Rica and Romania are relatively lower. India and Philippines, about the same.

Okay, great. Thanks, guys.

Ed Caso, Wells Fargo.

It is actually Rick Eskildsen on for Ed. First of all, just a question around -- you said the pipeline was expanding, but are you seeing delays in work actually ramping up once you have won it or has it been smooth from winning it to actually transitioning into doing work for clients?

No, actually once the decision is taken, we don't see delays. In fact, what we have seen is (inaudible) they are (inaudible) hurry to start the work and to make up for some of the lost time in taking the decision.

Okay, and then another question around the recent high-level additions you guys have had. Is that fully baked into the SG&A run rate or should we see an increase somewhat in the March quarter from adding on the new sort of sales heads? And then also should we expect an increase in stock comp in the March quarter and then going forward if you had sort of expectations around stock comp?

So I think on both counts, SG&A, it is not fully baked into the December quarter because we had some people joining towards the middle and end of October, a couple of weeks in December. So you should see a small increase in absolute SG&A, but we have got sort of waste elimination in other places that will offset that to a certain extent. But on the [ease-off] costs, there shouldn't be much of a difference.

And just to guide you, I don't believe our sales hiring program is complete yet, so we are actually continuing to hire and we should see a few of those people come in during this quarter and some of this will also go into the next year as well. So from our perspective, we will continue to invest in the sales and marketing line. We do not believe that this is a time to underinvest in this area. But at the same time, like Alok mentioned, we are also working on other initiatives around lean and waste elimination and just making sure that we are spreading our assets better and recouping some of the money there so that we can invest it back into the areas that I spoke about.

Okay, great. And then last question is have you seen political risks and clients' sort of thoughts about political risk quieting down after the mid-term elections?

No, we haven't. So we haven't seen any pressure there. In fact, we don't hear about it at all now.

It has quieted down significantly since after the elections.

Okay, thanks.

Bryan Keane, Credit Suisse.

Hi, this is Ashish calling on behalf of Bryan. I had a quick question regarding the two contracts. I believe you mentioned in your opening remarks that you had contracts with two global brands, which were very close to signing a contract. I was just wondering if you could provide some more color on the contracts, IT or BPO and color around how long, once they are signed, how long will they take to ramp up. And also just to follow up on that, are you seeing a return of the big deals? So if you could just provide some color.

On the two new global brands that I spoke about, obviously, we will give more color at the next call because I am sure by then we will have started work as well. But I think what is exciting there is that obviously the sales cycle was long. In one case, it actually will start adding revenue to our travel portfolio, which has caused me a little bit of concern in the past because we have been quite dependent on one or two clients. There have been the usual seasonality and volume changes, volume challenges, but the focus within the travel portfolio and with our new travel leader is to really diversify the risk and look at new areas within travel, and not just focus on airlines or the usual business that we have been. So we are looking at new areas and this one actually is quite strategic from that point of view.

Similarly, the second deal that we spoke about, again, is in a new client and in an area that is exciting for us. And in terms of the large deals, we are actually working on at least two or three of them at this stage. And I would prefer to update you on details as and when we actually close them out because we really don't want to give too much information to competition on this call.

Sure. And thanks for that update. A quick follow-up on pricing, and I know there have been a lot of pricing questions asked earlier, a couple of things that you have highlighted as selling of more value-added service, which will also improve margins. I was just -- two of the Indian IT services firms, which reported recently, they have indicated an improvement in pricing, like-to-like pricing, not just a shift. So I was wondering if you are seeing a similar improvement in pricing as well.

It's Alok here. I think what we are seeing is rationality in pricing. So it is not that you don't see prices going up and we don't see people sort of undercutting in BPO deals. So pricing has been rational and I think clients are also accepting the fact that, if you want quality, you want to make sure that the service provider is also making his necessary profit margin.

The other thing I must mention, and I think the other exciting thing that we are starting to see is the fact that our business is now getting in there and talking about delivery from so many of the other new locations, right? And like I mentioned, Costa Rica for one had a certain number of seats, but some recent deals that we saw are very cost (inaudible) oriented as well. So the ability for us to get in there and therefore charge a better price is very exciting and interesting for us. So some of the new locations and the focus that we now bring to actually selling each one of these locations and doing the heavy lifting from the India and Philippine sectors is also being seen very excitingly and will impact margins.

Thanks for the clarification. That is all for me.

Mark Skitovich, Piper Jaffray.

Thank you. Just a couple questions. First, on SG&A, I was just curious if there is a tangible sort of targeted range you are looking at for FY '12 either as a percent of sales or in absolute dollars and if you could maybe talk about the sort of puts and takes at meeting that objective. Thanks.

So FY '12, I guess we will provide that update when we give the guidance for next year. I think it is a little premature to start talking about FY '12 right now.

Well, maybe backing away just specifically in FY '12, I guess I am trying to get a sense of if you are at a point where you are looking or comfortable at a targeted range, whether it is --

I would say in absolute terms somewhere in the range of $78 million to $80 million.

Okay.

But that is excluding the stock compensation.

Got it. And then separately on attrition, just curious if you look at sort of the FY '08 or FY '07-'08 levels, which are similar to where you are at today, I was hoping you could maybe compare and contrast those two periods or those periods with today and sort of speak to maybe what is outside of your control in sort of managing these levels being that they are more a function of the demand or competitive environment and versus what you feel you can sort of carve out on your own absent --.

If I were to be brutally honest, I think the simplest way for us to reduce attrition is once the growth returns, the attrition will, to a large extent, take care of itself.

Yes, I completely agree.

People want to work for a growing company and once we are making all our investments and we are putting in place all our systems to make sure that this Company is growing. Once the Company starts growing, I think that will take care of the attrition to a large extent.

In parallel, obviously, we have got a new HR head onboard and we are working at a feverish pace to introduce some of the (inaudible) more people-facing sort of new programs, which will contain the attrition to a certain extent as well. But I think, at the end of the day, if it is a growing company, that itself will take care of a large part of the attrition.

Yes, and I endorse that because I think, in the last year, youngsters at the Company have seen a lot of uncertainty. I think there has been a little more stability now over the past few quarters. People are now liking that and along with growth coming back, I think this will be an issue of the past because we are so focused now on attrition programs at the Company.

Okay, is that the differential versus sort of the FY '07-'08 period is some of these new initiatives because, obviously, growth is strong and you saw similar levels, so I am just trying to get a sense of what maybe the differential --.

I think the only difference I will draw from that parallel, I think the attrition numbers are in a similar range. You are right. They used to be about for 44% and then we brought it down to around 22%. And a lot of that has to do with the economic climate as well. So if you go back to '07, '08, that was really boomtime for the Indian economy and the Indian economy is right now again sort of pretty much looking to be the fastest-growing economy in the world. So that offers people a lot of opportunities outside the BPO sector as well.

And don't forget that a lot of the population that we target in terms of the source from which we hire are also the same sources that a lot of other industries are targeting and they are able to also provide similar opportunities and similar compensation levels and things. So we are all kind of fighting over a limited pool of resources and that is going to increase attrition in some cases.

Okay. And just one final quick one if I may. I know we are running over here a little bit. But just more of a clarification. I know you mentioned sales cycles were expanding. I didn't quite hear where specifically you were seeing that. And I am curious how that may compare to the previous couple quarters.

No, actually, it has been consistent with what we have been seeing over the last two quarters. What was traditionally maybe nine month sales cycle for the industry, we have seen it expand to maybe 11 months or so and two or three months beyond that. But again, once the client has taken a decision, the speed to move fast is also there. So that is the positive side of that story.

Great. Thanks very much.

Tien-Tsin Huang, JPMorgan Chase.

Thanks. I think you guys addressed most of the issues. I just want to clarify the SG&A buildup on the sales side. I am curious what kind of talent are you looking for specifically? Can you give an idea? Is it really some lateral hires, is if folks from industry, folks from competitors or multinationals?

It is a combination of all of them. What we really do is we have an assessment board of a few people who are interviewing each of these guys. Frankly, what we are looking for are the best people in the business. So it is not necessary that they must be from the BPO business or the IT business, but people who are smart, who will quickly get our model, who understand what our strategic orientation is and can quickly get into a strategic discussion with the buyer.

Now what has happened is the places from where we have actually got these people are the usual suspects, so IT and BPO. But we have also brought in a few people from the [FLCD] branch, particularly because we also do a large chunk of analytics, we have brought in some very senior people from the big four because we, again, do a lot of work on the finance and accounting side. And so these people are from all over, but these are people that CFOs and CEOs can have a great conversation with.

I see. And is the conversation to lure them into your firm? Is it providing more equity? It sounds like obviously -- you have talked about higher variable comp as well. I am curious what the comp structure looks like for some of these hires.

Right. In fact, we've moved it the other way. We have actually (inaudible) and moved it into a fixed and a variable comp model. So the people coming in are coming in because they believe in our story, they believe in the long term, they believe the BPO business actually is capable of delivering growth rates higher than many other businesses. They believe in the brand. They understand that we have a pioneer status. They want to be part of a group of people that is remaking this Company and at the same time outperforming and then earning high multipliers on their variable compensation. So the way we position it, fixed compensation is fair, but low, but the variable compensation on outperformance can be significantly higher and that is what they are signing up for.

That makes a lot of sense. I will --.

And again, you asked about stock, we are not using stock to bring in the (inaudible). We are using stock to only bring in the strategic long-term hires that we want in the Company and driving the P&L of the Company over the next few years. And so there, again, we have moved to a performance-based vesting schedule.

Understood, understood. Last question from me, any change in the competitiveness of whom the IT services firms coming into the BPO space and along the same lines as before, the prior question I guess, on your attrition side, have you lost any big producers in the last couple of quarters that are worth noting? Thank you.

From a client point of view, no, we have not lost any one that -- any client that had been producing for us. And from the IT point of view, I think what is good for the pure play is the fact that the IT business has taken off. So if anything at all, we would expect to see less focus on clients, and I know -- I think a lot of these guys have also grown through acquisitions.

So having said that, I think we are completely focused on building value, driving value and growing our top line and bottom line and in every deal, we compete with each of these guys and where we win, we win against the best competition.

Very good, thank you.

We are now done with the Q&A portion of the call. I would now like to turn it back over to Keshav Murugesh for closing remarks. Please proceed.

Thank you very much for attending this third-quarter call of WNS. We now look forward to interacting with all of you at the next quarterly call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.