WNS (Holdings) Ltd (WNS) 2011 Q4 法說會逐字稿

Good morning and welcome to the WNS Holdings Fourth-quarter and Full-year Fiscal 2011 Conference Call. At this time all participants are in 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.

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.

Our press release detailing our quarterly and year-end results was issued earlier today. This release is also available on the Investor Relations section of our Website at www.WNS.com. If you have any trouble finding this information, please contact me at IR@WNS.com.

Today's remarks will focus on our results for the fiscal fourth quarter and full year ended March 31, 2011. Most of the matters that we will discuss on this call are forward-looking and you should keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such risks and uncertainties include but are not limited to those factors set forth in our Form 20-F, which was filed with the SEC in 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 that we will discuss are defined as follows. Net revenues are defined as revenues less [prepared] 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.

Tomorrow we will hold our Annual Investor and Financial Analyst Day in New York City. For those of you who wish to attend the event please e-mail me at IR@WNS.com for an invitation. The event will also be webcast on the Investor Relations section of our Website starting at 930 AM EST.

I will now turn the call over to Keshav.

Thank you Alan. In fiscal 2011 WNS executed on its plan and delivered revenues at the top end of our guidance range. Our ANI was also in line our guidance, and excluding some one-time charges which Alok will discuss, our ANI would have been at the top end of our guidance range as well.

While we see room for improvement in our topline results, we have also kept our focus on profitable growth. To that end, we have made great strides in protecting and growing our bottom-line. I'm pleased to report that our ANI margins have been about the 15% mark for the past two quarters despite our increased investment in the business.

Today I will briefly touch on the three points that I discussed in our last earnings call. We see these as the key ingredients for successfully growing our business (technical difficulty).

First, new business activity, we saw continued growth opportunities particularly in expansions with existing clients and in the early and middle stages of our new business pipeline. We closed a large deal and had success in penetrating some new markets.

Second, the investment in resources to achieve this growth. These investments are key. And we have been able -- and we have been successful on this front. We have built up our team and are investing in our infrastructure.

And third, moving up the value chain with our clients. Our client partners and engagement managers are gaining traction, confidence and positioning us as strategic partners particularly when it comes to our transformation offerings.

In terms of revenue expansion, I am pleased to say that our farming program continues to deliver this past quarter. In the fourth quarter we won a new contract with a logistics company for whom we were doing finance and accounting and transaction processing work in the past.

We will now provide support doing similar work for a new geography with this company. We see additional room for expansion with this client in the future. We also won three contracts with India-based companies this past quarter.

I have previously discussed our focus on growing the domestic India business. This is one of the fastest growing economies in the world and an area where I see opportunities. Gartner, one of the leading industry analyst firms, recently came out with a projection that this market would grow by over 23% to $1.4 billion this year. In fact, we are building out centers in Pune and Gurgaon solely dedicated to servicing this geography.

While the contract wins are small to start with, they are positive signs of traction in the space. On our last call I mentioned that we were in the final contract stages with two other globally leading brands that are potential new clients. As I mentioned earlier, we have signed a contract with one of these clients -- a large player in one of the sub verticals in the travel space. This is a good size contract out of Costa Rica.

The other potential client in the insurance space has not yet taken a decision. We hope to hear an outcome by our next earnings call.

The rest of the pipeline, particularly the early and middle stages, looks encouraging as well. We are still focused on converting the deal in the late stages to closure.

In the US we have now been down selected in a few deals over the past quarter and we see the most activity in the travel, retail and media spaces.

The pipeline in the UK and Europe looks good as well. We see some good size deals there in the insurance, travel and CPG industries.

Our pipeline in the Asia-Pacific and the Middle East regions also looks encouraging. We've signed a small deal with a travel portal in the Middle East and are far along in discussions about some other opportunities in these regions particularly in the insurance, travel and banking spaces.

While we're starting to see traction from our new business efforts, the sales cycle remains somewhat extended. It will take some time for us to see the opportunities I just discussed turn into revenues. However, our sales efforts and the investment we've made to date in sales and marketing should begin to pay off from the back half of fiscal 2012.

While our progress in these areas will not necessarily lead to an immediate revenue impact, it provides us with confidence that we're on the right track and are executing well on our plans.

Investing in this growth is the next key ingredient to our success. We focused much of our investment in our sales team. We now have 57 salespeople, client partners and engagement managers -- up from 41 when I joined WNS and up from 47 compared with the end of the December quarter.

We have plans to invest even further. The number of client facing people should increase in this fiscal as we bring additional talent on board.

In terms of our delivery footprint, we're looking at opportunities to establish an onshore presence in North America so we can serve our clients in their [home] country as well.

I am pleased to say that our initial Costa Rica location is now full and we have expanded into a new facility.

The third ingredient of success is for us to move up the value chain with clients. We have expanded our focus on value-added offerings and are positioning ourselves as a more strategic partner for our clients.

I have mentioned that a key point of focus for us is our transformation group. Our clients are looking to us for our analytics and technology capabilities. We see tremendous opportunity in several of our IT enabled offerings.

For example, a few weeks ago we showed a release about the relationship that we established with Star Alliance in which we will provide sales audit and revenue protection services. These services will utilize our web-based technology called Verifare which will allow us to audit all of the tickets sold on any of the member airlines. This is tremendously available for the client and this technology has a very high operating leverage.

In fact, the pricing in the contract is outcome-based, so it is very much a win-win for both of us. These are the types of opportunities that we expect to see more of in the future.

The conversations that we are having with clients about how to expand our scope are well beyond typical SPE-led growth. For example, we are discussing [in-building] our domain expertise and our analytics capabilities into crafting solutions for clients. These platforms will become of strategic importance.

We're also exploring utilizing our R&A capabilities to analyze the risk within our clients' portfolios and then help them de-risk their business. These are just some examples of the type of solutions our clients are looking at that fall well beyond the scope of lift and ship BPO.

While we have ingredients in place we also have some immediate challenges to address. First, the sales cycle remains somewhat extended [in] the fourth quarter. We are hopeful that the more recent positive economic news around employment trends and consumer spending will lead to an improved decision-making environment for our business.

From our perspective we need to have the resources in place to move quickly for our clients when they are ready to take a decision. Our clients need to know that value-add will be almost immediate and that the ramp time will be as tight as is possible.

Second, our auto claims business has had a difficult year compounded by low business volumes in an environment of economic uncertainty. Exceptionally good weather this past quarter did not help this business. However, our sales cycle in this business is looking far more robust as we move into the new fiscal. We have also recently added new verticals within this business in the property repair and non-accident auto repair segments. We will provide more details on this business at our event tomorrow.

Attrition is the other issue that we need to address. Attrition was up marginally at 43% this past quarter. We've lost a number of employee-related programs aimed at bringing down this number. As a management team we're treating attrition as a top priority and are investing the necessary resources to address this issue in the near-term.

We will be providing some more color around some of these initiatives that are investor day tomorrow.

In terms of total headcount we ended the quarter at 21,523 compared with 21,213 in the previous quarter. This increase in headcount is to meet client demand as we ramp up with some new customers, particularly in the travel business and in our Finance and Accounting horizontal. We should see hiring continue in the first half of the 2012 fiscal year.

In conclusion, we clearly see the initial signs of success. We have completely revamped our sales force, adding top-quality talent to our ranks. Our verticalization and focus on client relationships are leading to farming opportunities and our investments in our transformation group are leading to more strategic opportunities and conversations with both new and existing clients.

The traction from our hunting and farming efforts should begin to convert over the next few quarters, and most importantly, our customer feedback remains very strong.

As we have indicated with the fiscal 2012 guidance, we are committed to profitable growth. We should be able to maintain strong margins despite investing in the business.

We have discussed the near-term pressure that we will face on our topline results. However, WNS is well-positioned to grow both the top and bottom lines in this fiscal year. We are in a positive growth trajectory now and every one of our employees is committed to delivering strong results.

Let me now hand the call over to Alok to run walk through the financials.

Thank you Keshav. This quarter our net revenues declined to $94.3 million from $96.7 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 and volume reductions in our auto claims, insurance and travel businesses.

Sequentially, however, net revenues increased by 1.8% as travel and insurance volumes came back from seasonally low third quarter and the British pound strengthened. We faced some headwinds as well including low volumes in the auto claims business.

Revenues for the fiscal were $369.4 million compared with $390.5 million in the previous year. This decline was primarily driven by the change in pricing as I mentioned earlier, low volumes in the auto claims and insurance business and the decline of the British pound.

We achieved gross margins excluding share based compensation of 35.7% in Q4. Compared with the same quarter of fiscal 2010, this represented a decline of 50 basis points.

However, gross margins improved by 180 basis points compared with the last quarter. This was comprised of 110 basis point margin gain from better exchange rates, 100 basis points from higher volumes primarily in the travel and insurance business, which was partially offset by a 30 basis point loss in productivity due to projects being in the ramp up stage.

Gross margins excluding share base compensation for the fiscal year were 33.9% compared with 37.6% in fiscal 2010. This decline was the result of lower revenues, wage inflation and the strengthening of the rupee. These headwinds were offset by our productivity gains compared with last fiscal.

Fourth quarter 2011 operating margins excluding share based compensation and amortization of intangible assets were 14.5%. This compares with 16.2% for Q4 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 improved by 150 basis points. This came from the 180 basis point improvement from gross margins mentioned earlier and a 50 basis point improvement from operating leverage, which was partially offset by a decline of 80 basis points on the SG&A line due to higher investment in sales and marketing, [especially the increase in the sales force].

Fiscal 2011 operating margins, excluding share based compensation and amortization of intangible assets, were 13% compared with 18.6% for fiscal 2010. This was mostly due to FX and increased investment in SG&A.

Our interest expense this quarter was $1.6 million against $2.8 million in the same quarter last year and $1.8 million in the previous quarter. We expected interest cost to come down further from these levels as we continue to pay down our debt.

The total debt outstanding today on our term loan remains unchanged from our last earnings call at $74 million. Our next scheduled installment payment is due on 11 July 2011.

In terms of currency this quarter, the rupee was pretty flat while the pound was stronger compared with the same quarter last year. This positively impacted our topline. Compared with last quarter the pound was slightly stronger while the rupee was slightly weaker.

Presently we're about 85% hedged for the 2012 fiscal year and about 40% hedged for fiscal 2013 using a combination of options and forward contracts. Net FX gains for the quarter were $500,000. Out of this hedging gains net of option costs [were] $1 million partially offset by a loss [of] the revaluation of non-functional currency balances of about $0.5 million.

The hedging gains consisted of profits on our rupee hedges as well as in some other currencies, and small losses on our pound hedges. The FX line also included a one-time charge this quarter of about $3.7 million stemming from the discontinuation of hedge accounting of some hedges whereby we had to reclassify the fair market value of these hedges from our balance sheet to our P&L. This was a result of the transfer of a large customer contract from one WNS entity to another during the quarter.

Going forward we expect to see smaller gains on our dollar-rupee hedges, while we will also have smaller losses on our pound-rupee hedges at current rates for the 2012 fiscal. Overall FX gains will be lower in 2012 as compared to the 2011 fiscal.

Our ANI for Q4 was $14.3 million compared with $13.3 million for the same quarter last year and $14.7 million last quarter. This is an 80 basis point sequential decline which is the result of a 20 basis point improvement into savings; a 390 basis point decline in hedging related gains, which offset the 150 basis point sequential improvement in operating margins; and 140 basis point improvement on tax expenses.

The reduced tax expense was due to the adjustment to the deferred tax liability to the tune of $1.6 million necessitated by the same contact transfer as I mentioned above, and the change in tax status [of the] group entity. This one-time net effect of $2.1 million is purely an accounting impact and had no impact on the cash flow for the quarter.

While our fiscal 2011 ANI was $44.9 million excluding this one-time charge, we would've ended the year at the top end of our guidance at $47 million. Our balance sheet remains strong and we have access to capital and had solid cash generation this quarter.

As of 31 March our cash balance was approximately $27 million. We generated $14.6 million in cash this quarter from operating activities despite a $2 million deposit against tax appeals (inaudible) [from] prior years. Our free cash generation was about $10 million.

For the past two quarters we have discussed that we renegotiated the payment terms with a large client in the auto claims business that had a higher [credit period]. The impact of these new terms is starting to take effect.

As a result, our DSOs declined to 44 days from 47 in Q3. The DSOs in our auto claims business decreased from 62 in the December quarter to 58 in the fiscal fourth quarter, while global BPO DSOs decreased from 35 to 32 days.

Our CapEx spend for fiscal 2011 was $15.3 million, of which $4.8 million was in the March quarter. Our total capital expenditure for 2012 fiscal year is expected to be approximately $20 million.

The capital expenditure will be used for the expansion of our infrastructure in SEZ locations in India and expansions in our capacity [in the] Costa Rica, Philippines and Romania. It will also be used for the establishment of onshore centers and to set up smaller low cost centers for our domestic India BPO business as Keshav mentioned earlier.

In our earnings release issued today, we established our fiscal 2012 guidance of net revenue of $383 million to $407 million based on an average British pound to US dollar exchange rate of 1.62 for our fiscal year, which implies a growth of 4% to 10%. Although we have over 90% visibility to the midpoint of our guidance range, I would like to stress that we would see this growth as weighted more towards the back half of the year.

Revenues from the fiscal first quarter should be in line with our Q4 2011 revenues. As we move forward through the year, we would expect to tighten the guidance range.

Profitability also remains a key focus for us. As such, we established ANI guidance of $43 million to $47 million which is based on a rate of INR44.5 to the dollar on an average for fiscal 2012. This implies an adjusted EPS of $0.93 to $1.02 on a diluted share count of approximately 46 million shares.

Despite the significant change in reported taxes on our P&L, we believed that providing ANI guidance will allow the investment community to compare our operating and financial performance to historical numbers more accurately. We expect to have a tax impact on the P&L of about $11 million to $13 million which works out to approximately 21% of pretax ANI. However, the cash taxes that we will pay would be lower due to utilization of tax losses of earlier years.

Before I conclude I wanted to reiterate that fiscal 2012 WNS will begin reporting in IFRS. As we have said in the past we believe that this is a best practice in terms of reporting by international companies. There shouldn't be any significant change to how we present our financials, but we're happy to discuss this further in follow-up calls.

We will begin reporting in IFRS next quarter and will provide greater detail on the move to IFRS at our Investor Day tomorrow.

I will conclude now by noting that we have a clear vision to growth moving ahead. We came in at the top end of our guidance in fiscal 2011 and have given a prudent guidance range for fiscal 2012 which accelerates through the year.

The first half of the year will be contained by the nature of the business. However, we have confidence that the second half bodes well for a return to industry level organic growth. With the appropriate execution from our sales and operations team, we will deliver solid results in this fiscal year.

We look forward to providing more details on the annual financials as well as our long-term vision for growth at tomorrow's event. We will now take your questions.

(Operator Instructions) Joseph Foresi, Janney Montgomery Scott.

I guess my first question here is just on the demand environment. I wonder if you could talk a little bit about any changes to begin this year versus last year. And what are you seeing as far as the length of the sales cycle and decisions being made by customers?

As far as the overall environment is concerned, I think what we are seeing is more prospects and more clients actually looking a little more aggressively now than they did in the last year on some of these teams of both outsourcing as well as off-shoring itself. That is one.

And particularly we are seeing this in the travel space now. We're seeing this in the insurance space. And we're seeing this also in the retail segment from our particular perspective.

Healthcare is another vertical where we're actually seeing much more discussion, much more activity. And I think a lot more comfort from prospects and clients that they need to now start moving ahead with decision-making. So that's, if you ask me, the high-level comment I would make in terms of the demand environment [itself].

I think with some of the changes that we are seeing in terms of unemployment rates and some of the other general economic news that is coming out, again, there is a little more comfort in terms of slowly but steadily stepping on the gas as far as the off-shoring teams are concerned.

Having said that, from a WNS perspective, I think a lot of clients and prospects also watched with a lot of interest what all WNS did in the last year or little more than a year. And I think got quite excited with the kind of changes that we have created now for them in terms of not just an accelerated sales focus, a much more client centric approach, and greater focus on technology, platforms as well as much more outcome based kind of [in traction]. And I think all of this with the focus on the domain we have brought in is actually enabling some of our existing clients to really accelerate some of the discussions they are having with us in new areas.

And of course from a client prospect point of view, that is resulting in a much better pipeline. So from that point of view I think we are seeing definitely a change now from what we saw last year.

So just to ask bluntly, so sales cycles sound like they're getting a little bit shorter?

Yes, I would say that -- no, again, sales cycles may not be getting necessarily shorter. But I would say that the ability or -- at least the ability for some of our clients to take decisions now is far better than it was before.

And just on the attrition side, at what point do you start -- obviously you're probably concerned about attrition now. But at what point do you start to get -- does attrition become a problem in servicing clients? And then, any thoughts on your wages this year, wage increases this year versus what they were last year?

I think from an attrition point of view obviously we've got a total focus in that area. And as I mentioned we have launched a number of initiatives that first of all present to our people that this is a growing Company. This is a Company that creates a good environment for them. And most importantly this is a Company where they can learn.

Having said that, we have to accept that attrition is a way of life in this industry. And the big focus that we now have is really to look at the lifecycle of an employee and then really create interventions across that lifecycle on a quarterly basis. At this stage, I think whereas the number is a problem, it is not really impacting our delivery metrics, our client relationships, because we plan for our business on this basis.

From a wage inflation point of view I would say that at this stage 8% to 9% is what is our expectation.

Okay. And what was it -- I'm sorry, what was it again last year?

Last year was around the same; about 7% to 8%.

Okay. (multiple speakers)

It might be a couple of percentage points higher this year.

Sure. And then just my last question, you gave a range on the top end for guidance. Maybe you could talk about what puts you at the top end of that range and what puts you at the lower end. Thanks.

You know, Joseph, as we mentioned we have more than 90% visibility to the midpoint in that range. And I would say maybe 95%, 96% visibility to the low end of the range.

And I think from our point of view, I think some of the questions you asked earlier were extremely relevant because if -- we actually see that we have a decent pipeline; we're having a lot of conversations happening. We have a number of deals which are mid level if you ask me, and there are some deals which are larger in size.

Now, the ability for us to bring in numbers at the higher end of that guidance range is very much based on clients really taking those decisions quickly, accelerating those spends and aggressively moving up the value chain. That is one. And at the same time having some of our new people coming into the Company or for the last few months start delivering on the new client side of the business in particular.

So I would say that right now either end of that range, we don't have a higher probability of achieving either end. Right now we are confident that we can get to the midpoint based on the certain visibility we have. But with some of the new changes we're seeing on some of the investments we've made, our ability to get to the higher end of that range is also very [much there].

Ashwin Shirvaikar, Citigroup.

Good morning. So Keshav, Alok, these are -- you are clearly showing progress here. The world is not ending anymore. Keshav I have a question for you.

You are talking about investing in a lot of areas simultaneously. I mean, there's the full-year impact of adding sales. It sounds like you're adding centers. There is a ramp of contracts. You're investing in outcome-based work; there is attrition.

How do you think of all of these cumulative costs in the course of your planning? And what is the outcome, let's say a year out on margins? What is your target margin given all of these things?

Great question and what I will do is really focus more on the qualitative aspect of that question, have Alok talk about margins. But the old BPO business has changed dramatically. And the way this business was done in the past and the way probably this and other companies grew in the past is not the way this business would actually shape up for the long-term.

So I think that WNS, what we've done is recognized that, regrouped as a team of leaders and focused on what our strategic initiatives and imperatives should be, and then backed that decision with investments.

Having said that, we have also kept a very close tab on lean techniques as well as waste elimination at the Company. So in spite of the fact, as Alok mentioned earlier, we're investing in so many of these new things. If you look at it we have not taken our eyes off the ball in terms of profitability.

In fact, based on these initiatives, based on success that we expect to see around each one of these areas, and based on the new offerings programs that we have just introduced from our verticals as well as our horizontals, our drive really is to start moving up the value curve and actually enable margin uplift through these initiatives.

I think the other thing that we will -- there are two other levers I would say when it comes to margin. One of course is operating leverage. And while we are making investments on the SG&A side, as the revenue grows the operating leverage itself will give us better margins.

And secondly, if we see the kind of work that we're beginning to do or do more of, I would say, is really work that is not pure lift and shift, only FTE-based revenue. We alluded to one of them in our prepared remarks, which was on the Star Alliance deal. We've got a few others like that, that are ongoing.

If you see the new areas that we're getting into in our auto claims or assistance business that we will talk about in greater detail tomorrow, you will see that some of these businesses will give us obviously much higher leverage and the ability to improve our revenue per employee, improve our contribution per employee and in general margins overall.

Okay. And Alok you had one comment there, industry level growth in the back half. What are you thinking of in terms of industry level growth? Is it a low teens number? Because if that is the case, then 7% -- the revenue growth at the midpoint -- would imply that the first half would be close to flat.

That's what we said. Our first half would be relatively flat, maybe a small growth from the fourth quarter. But we believe that by the fourth quarter on a year on year basis we should be at double-digit growth rates.

Okay. So you're really heading into next year on a very comparable basis to everybody else.

Yes, I think that we believe that we need to set up the exit rate well, so that will really position us well going into next year.

Right. Thank you guys. See you tomorrow.

Dave Koning, Baird.

Just a few things. I guess first of all just a little bit on Ashwin's question, too, just with margin.

In the auto claims business, obviously they step down from 10% of that 25% to 30% margin range, the last probably four quarters down to about 12% margins this quarter. And you did talk about kind of the new terms on a contract as well as the soft volumes in Q4.

But does some of that commentary mean that it snaps right back to 20% plus next year? Or due to the new terms of the contract, are we going to stay at this lower range for a while? Maybe just give a little commentary on how you see that playing out in 2012.

So if you see the auto claims business has -- is not an FTE model at all. It is purely a transaction-based and outcome-based pricing business. There is absolutely no business that we have in that division which has a fee-based pricing.

So when volumes drop, the impact on margins is higher because of the higher operating leverage. So when volumes come back and we get the growth, the same operating leverage means greater margin expansion. So, it kind of works both ways.

Okay, got you. So high incremental margins mean that if we do bounce back to $10 million, $12 million of [revenue] (multiple speakers)

It has a high fixed cost component and a low variable cost in that model. So as you get more volumes and because it is largely platform-based, as you get more volumes and you push more volumes through that same platform, the margins that you make incrementally are much higher.

If I may just add to that statement, the comfort we now have around that business for the next year in terms of volumes as well as in terms of new areas of business are much higher. So we expect therefore to see changed metrics from that business for the next year.

Okay. Great. And then I know in the past -- this goes back to when you acquired the Aviva operation, you talked about free cash flow I think being about $5 million per quarter, which would imply about $60 million a year.

Now, this year was $20 million of free cash flow. And I'm just wondering, is there a pathway back to that $5 million per month of free cash flow? Is that still kind of the expectation or has that been pared back a bit?

Yes, so if you see from the business perspective, we are generating more than that. So if you look at our ANI for this year, it is what (inaudible) -- even after the one-timers, it's about $45 million. You add back about $20 million almost, about $19 million of depreciation to that and you will end up with about $64 million of cash flow this year.

The issue has really been on the working capital side, where the large contract that we did in the assistance business has actually taken up about $34 million of working capital because of [the] payment terms that we have [out there]. In that business, we have all these years been used to working on a negative working capital. Now the large contracts we're getting there come with extended payment terms. And that is the nature of the economy today and we have to factor that into our business plans.

As far as next year is concerned, yes I will provide a little more color tomorrow. But our expectation of generating cash next year is also about $60 million and we don't see the same increase in working capital. If anything, we might see improvement in working capital next year.

Great. And then just one final question; the tax rate that you talk about, the $11 million to $13 million, is that something is sustainable going forward now? Or is that a one-time step up that might come back down in future years?

So we would expect that the average rate to come down in future years, mainly because the growth of -- all the growth in the business will grow into special economic zones which will be [in a] tax-free. So this is a one-time reset that happens when all your existing business that is today running in tax-free or in tax holiday sort of facilities, those effective 1 April -- that's about three weeks ago -- no longer have that tax holiday. So there's a one-time reset that will happen.

And going forward, as we put incremental business into -- all the new business into the special economic zones, the average tax rate will come down. So I think the 21% effective tax rate that you are seeing on the pretax ANI is probably the peak.

Okay, great. Thank you.

Edward Caso, Wells Fargo.

It's actually Rick Eskelson on for Ed, just following up on the sales cycle and client decision making. It sounds like the tone has improved but the actual sales cycles aren't shorter. Do you expect them to shorten? Or is this kind of the new reset of where sales cycles are going to be longer?

Based on what we are seeing currently across the industry, as well as based on the discussions we are having with a number of clients and prospects, as well as the confidence we're now seeing with people who need to get their costs down, we actually think that sales cycles should start coming down.

Now, have we actually seen that in terms of the metrics? Not yet. But if I were to take a punt, I would say that some of the trends that we've obviously seen on the IT side of the business should start also coming back to our side of the business as well.

Okay. And then moving onto the sales investments, do you have any high-level hires that you're planning? Are you pretty much done with that? And it is more filling in with incremental sales people?

We're pretty much done with the key, the top-level hiring -- our global sales heads, a lot of the client partners, as well as many of the vertical sales leaders. So, currently, we are focused on a few -- one or two vertical sales leaders in each of the geographies as well as some of the medium-level kind of people that we need under those vertical sales leaders. So if you ask me, it's more business as usual now.

Great, thanks a lot.

Tim Fox, Deutsche Bank.

Thank you for taking my question.

One question really with two parts. Relative to pricing, can you talk a little bit about your guidance for this year? Assuming that that is 4% to 10% constant currency, is there any risk at all to that number relative to any big contracts that are up for re-pricing?

No, none. Not this fiscal at all.

Okay. And then just in general on pricing and the competitive environment, we have heard that there's been some larger global players getting fairly aggressive particularly in the F&A space. Could you talk just about what you are seeing on the pricing side, both from renewals from existing customers as well as some of the competitive takeaways that you have had?

So I think most of our F&A contracts are relatively recent. They're less than three years old, so I don't think we have enough empirical evidence [on] renewals of some of those contracts. But in general, renewal of contracts, we have not seen pricing pressures. If anything, we have price increases in most of our contracts now.

The only price reduction we had was a year ago on one travel client. And that is pretty much done with. Actually, that same contract gives us a price increase now going forward. Our big insurance contract gives us a price increase every year.

So as far as pricing is concerned, we don't see any pricing pressure coming out of renewals.

And if I may add, although on our here and now business, the regular day-to-day business we're not actually saying specific pricing pressure, you are right. In terms of -- when you actually have some of the large players trying to get into the commodity side of the business, sometimes they undercut on their provision in terms of pricing.

Having said that, our focus really is just to send out a strong signal to our clients that we are adding tremendous value. The reality is clients don't take decisions only based on price. They take decisions based on the value that the partner is bringing to the table, as well as -- as they see what we're doing in terms of investments in some of the new areas.

So whether it is in the finance and accounting side, when they see our investments in the XBRL area, the IFRS area, the risk management areas and some of the other areas and in subrogation and other specific offerings, it allows them -- it allows us actually to introduce different ways of interacting with them. Different pricing kind of formulae, and to some extent allows us to ensure the gap between us and competition is maintained.

Great. And just lastly from me, the domestic business is interesting and encouraging, relative to what's gone on over the past decade or so from a sourcing perspective.

What has changed in your view? Is it more a focus from the providers? Or is it more a focus on customers looking to outsource within India? And what impact might that have long-term on the margin structure of your business?

Thank you.

Yes, I think what is happening in India is that India clearly is integrating extremely well with -- in other global economies. And therefore the companies there, as well as people there, want today the same level and quality of services and the same ideas and analytics that global companies are used to receiving from partners like WNS.

So I think what is really happening there is that as the economy integrates and as some of these -- as companies in some of these verticals, particularly in insurance, travel, banking and retail -- as they look to climb up the value chain and create strong capability for themselves to prepare for higher levels of demand, they are looking for providers like us to come in and help them with their back office. So that is where we see the opportunity. And our focus really is on those four verticals that I just spoke about.

Obviously we're dipping our toes there. We're looking to actually add on some top quality logos there, as well as follow some of our global clients into that geography as well. Because all of them are looking at building capability and capacity in India as well.

Having said that, the new logos that we announced this quarter are all brand-new to WNS and really were not an expansion of our existing base. Longer-term I would say obviously we are positive [off the] spending patterns that are emerging from India. So we will take it one step at a time.

I think we will first focus on bringing in three or four good logos. We will focus on bringing -- creating the right delivery mechanisms. Creating some low-cost delivery centers, because we don't think that Indian companies will want to spend as much, at least in the early stages. [Then they] start seeing the impact of analytics and ideas from WNS that actually impact their topline and their bottom line.

So we're quite conscious about our cost base there and we will keep updating you as we make progress.

Joseph Vafi, Jefferies.

Good evening. Most of my questions have been answered, but just one on existing business. I know that some of the auto business is a little weak. But are seeing any volume increases yet on existing functions and on existing outsourcing engagements that's being driven by a better economy yet?

Yes. Actually we are -- we're actually in a lot of those discussions right now. And in some cases we have actually started benefiting from higher spends emerging from some of our existing clients in terms of aggressively taking some of the programs forward, moving or expanding their own base to new geographies. And again implementing some higher value-add solutions based on the new offerings program from WNS.

So would say that, yes, I'm much more positive about the quality of discussions, the fact that spending has started being seen by us. And in the longer-term we expect these clients to actually move faster.

That is helpful Keshav. I guess I was just kind of more focused on the ongoing volumes that existed kind of not growing in the new functions or new geographies. But just the day-to-day of volumes and your existing, I guess, projects more or less -- just a better economy is at all translating into more transactions, which is translating into better revenue.

Right, right. Yes. So forgive me for not answering that specific question earlier. But yes, we're actually seeing that particularly on the travel side of our business as well as the insurance and banking side of our business.

And more recently, we're also seeing that trend impact our Health Care business as well. So we are actually starting to see expansions in the existing programs itself.

Okay. Just on the one large client in your pipeline where a decision hasn't been made yet, if you did win that large client, would that have any effect on the guidance in terms of maybe margin because of ramp up costs? And would that client actually contribute to any revenue, do you think, in this fiscal year?

Right. At this stage I can just give you comfort that we are having accelerated discussions with this client along with others. And we're quite far down along the way.

So, from our perspective we don't expect that by winning that client is actually going to impact margins. If at all, it should actually have a positive impact in terms of getting us closer to the higher end of that guidance range.

Okay. Great, thanks a lot guys.

Tien-Tsin Huang, JPMorgan.

Alok, I just want to clarify. I guess the first -- the June quarter when you said flat growth, was that year-on-year or sequentially?

Sequentially.

Okay. So sequentially flat. And I guess the -- I wanted to ask just a broader question about M&A given Genpact's acquisition of Headstrong. I'm curious if that changes your thinking on potentially getting bigger, doing deals on the domain expertise side, or even on the IT services side.

From our perspective we are, I would say, focused on organic growth at this point in time. We are not closing the door on any acquisitions. But they would probably be smaller tuck-in acquisitions and not large sized deals -- $550 million.

Yes, I would say that we are -- like as I mentioned over the last few quarters we're building strong capability inside the Company not just on platforms that impact each one of our verticals and relationships there. But also in terms of the technology or the technology capability that sits on top of process.

So there's a lot happening inside the Company, including a strong hiring program that brings these kind of people, that enable us to have high-quality conversations with clients, not just on the process side but also on the key areas of technology that impact processes. So that is where we are.

And as Alok mentioned, our focus is completely on organic growth for now. We want our team to settle down. We want our team to deliver on three or four key initiatives.

And having said that, all of us have signed up for long-term growth. And therefore we will be opportunistic in terms of anything that is a tuck-in acquisition that can help us in terms of some of the things I just said.

Great. Thanks for the answer. That's all I have. Appreciate it.

Robert Riggs, William Blair.

I just have a couple of quick questions on -- around the productivity of the sales force. Over the last several quarters you made changes in terms of the hunters, farmers approaching the verticals and then also trying to sell more transformation services.

I would assume that there is a bit of a learning curve or a ramp time, if you will, associated with your sales force before they are hitting kind of a more full run rate on productivity. For the existing sales force, how far along do you think you are in kind of that cycle?

Actually that's a great question. And that is really one of the biggest challenges for me and as well as for our global sales head in terms of how quickly we make these guys productive. So, all I can say at this stage is the quicker they are producing, the ability to get to the higher end of the range is actually faster.

The good thing we have done is actually hired some very smart people in who have signed up based on the new story from WNS. People who really understand the business domains well, have strong relationships and are quickly settling down. So we actually run an interesting sales focused kind of induction program as well and we're doing this in batches.

So actually hiring people even now. Between now and May we will be bringing in quite a few people. And the entire focus is on bringing them in in batches and doing a complete induction program and getting them on the street faster.

Having said that, the challenge is how quickly they will be productive. And I would say that for the people who came in over the last six months, I think there settling in period is now over. They're far more comfortable. They understand the Company. They're actually leading from the front.

For the newer guys, they will go through that cycle as well. So I think longer-term we're setting up this Company for huge progress in the following year definitely.

Great. And then one quick follow-up. Any tweaks or changes you have made to the compensation structure for the sales force recently?

Well, as I have mentioned in the previous calls, our compensation philosophy now at the Company, across leadership as well as in our sales or operations, is a fixed and variable compensation package. And therefore we want to make sure that we're taking care of the basic hygiene factors for our people.

But at the same time, we also enable them to see that if they deliver or over-deliver on their numbers, their ability to earn high multipliers on their variable is very, very solid. I think that culturally that has been accepted. That has been focused on strongly with the leadership team at WNS and I think we're not going to change that in a hurry.

And as I also mentioned earlier, in terms of stock-based compensation again, that is actually issued to very few people across the Company. And again it is time and performance linked.

Thank you.

Bryan Keane, Credit Suisse.

This is Ashish Sabadra calling on behalf of Bryan Keane. I had quick question regarding -- Keshav you mentioned that the BPO market was changing and you were seeing a lot more transformation services.

So do these [upfront] transformation services for the BPO, do those provide any lift in revenues? And do they come at better margins than the rest of the business? If you could comment on that as well as the IT enabled services, so if you could comment on both of them.

To answer your question on transformation, yes, absolutely. With the help of our transformation offerings we're able to actually give them faster, quicker and higher impact. Then our ability to actually price in a different format is much higher.

That allows us to really push margins away from the traditional BPO margins to much higher levels. And that is really where we're focusing a lot of our offerings program at this stage. So to answer the first question, yes. As we get more successful there, the ability to lift margins is higher.

Dan your second question was specifically on IT enabled. Again, as you bring in more analytic, you bring in more data warehousing, you bring in more business intelligence into some of those processes, again, clients are really focused not on inputs but on outcomes.

And as we sit down with them and focus them away from inputs to much more outcome-based kind of pricing, again, our ability to really move up the value curve and move away from linear models is much higher. And again, that is really the focus of all of my key leaders at the Company. While we are giving the -- we're ensuring we're providing the regular bread and butter kind of services, we are focusing on bringing a much more IT platforms there, bringing much more IT capability, much more transformation capability and then taking them up the verticals.

The other thing we'll add is that the platform-based work has extremely high operating leverage. And we talked about that for the Verifare platform and we've also talked about it about the auto claims business in the past. So that should help with margins in the future as well.

Okay. Quick question on -- I believe Alok mentioned there are no big contracts up for pricing in this fiscal year. I was just wondering are there any pressures on restructuring especially as you add new scope or expand scope at existing client, are there any pressure on restructuring existing contracts?

Restructuring existing contracts? I couldn't quite get the question.

Are they asking for pricing discounts on existing contracts as you add new scope or -- (multiple speakers)

No, no, no.

None of that?

None of that.

On the client ramp up, one final question on the client ramp up. The sales cycles remain extended. But once the plant actually signs the safe contract--

Then all hell breaks loose.

Okay. So the ramp up is pretty fast. There are no (multiple speakers)

Yes. See, once the client takes a decision, then they want everything yesterday. That's a given. That is the nature of the beast that we deal with.

So that is why we say, remember in our prepared remarks also we said that we have to be ready with the resourcing; we have to be ready with infrastructure. Because once the decision is taken, the ramp up time that we have is extremely fast.

So just on the contract that we added this last quarter, we signed the contract in the end of March. By middle of -- we had already started recruiting people in February. So that is why I mentioned there was a small decrease in operating leverage, sorry a decrease in productivity this last quarter because we had already recruited people. But they weren't earning revenue because the contract had not been signed.

Vincent Lin, Goldman Sachs.

Thanks for taking my questions. Just to (inaudible) follow-up on the focus on driving higher revenues from platform-based kind of IT-based [single] solution, transaction-based pricing kind of models, can you give a sense where you are today in terms of how much of your business is actually coming from (multiple speakers)

Even today we are the highest in the industry. I've given this number out before. About 32% to 33% of our revenues come out of non-FTE-based [models].

Okay, great. Just secondly, if I look at the -- looks like the number of total clients at the end of fiscal year actually declined modestly year-over-year; it looks like mostly on the lower end of the clients. I'm just curious what actually drove the decline (multiple speakers)

There are some very small clients on the auto claims business that kind of -- where we wound up work with them. Some of them had financial challenges and stuff. But they were the kind who would give us maybe $50,000 to $100,000 of revenue in a year.

And I think our focus is now more focused on the 70-odd clients that we have which are or have the potential to be more than $1 million.

That is a good observation from you, because I think what I have asked all my business unit leaders to focus on is to actually bring in the right kind of clients who are capable of growing over the longer period for WNS. So in that journey sometimes we have to jettison some clients who won't make it. I think that disciplined way of operating is now is part of the journey at the Company.

Got it. That makes sense. That's all for me. Thanks.

At this time there are no further questions.

We kept this call somewhat brief today. During tomorrow's Investor Day we will get into greater detail on the business environment, our current pipeline and the areas where we see the most opportunity in the BPO market. We look forward to speaking with all of you then. Thank you.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.