WNS (Holdings) Ltd (WNS) 2014 Q1 法說會逐字稿

Good morning and welcome to the WNS Holdings first-quarter fiscal 2014 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 questions will follow at that time.

Now I would like to turn the call over to Mr. David Mackey, WNS's Corporate Senior Vice President of Finance and Head of Investor Relations. Go ahead, David, please.

Thank you and welcome to our 2014 first-quarter earnings call. With me today I have WNS's CEO, Keshav Murugesh, and WNS's CFO, Deepak Sogani.

A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.WNS.com.

Today's remarks will focus on the results for the fiscal first quarter ended June 30, 2013. Some of the matters that will be discussed on today's call are forward-looking. Please 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 the Company's Form 20-F which was filed with the SEC in May of 2013. This document is also available on the Company website.

During this call management will reference certain non-GAAP financial measures which we believe provide useful information for investors. Reconciliations of these non-GAAP financial measures to GAAP results can be found in the press release issued earlier today.

Some of the non-GAAP financial measures management will discuss are defined as follows. Net revenue is defined as revenue less repair payments. Adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets and share-based compensation. These terms will be used throughout the call.

I would now like to turn the call over to Keshav to begin. Keshav?

Thank you, David. Good morning, everyone. We are pleased with our first-quarter financial and operational performance with top line expanding based on sales progress and solid profitability.

Our Q1 net revenue came in at $113.8 million, which represents a 10.9% increase versus the same quarter of last year and a 0.9% increase sequentially. The British pound continued to weaken against the US dollar in Q1 depreciating 3% year-over-year and 1.2% from last quarter.

Excluding the impact of exchange rates, our first-quarter constant currency revenue grew 12.6% year-over-year and 1.6% sequentially. Revenue growth remains broad-based across the Company and is consistent with what we are seeing in the sales pipeline.

With respect to the sales engine, we continue to fine tune the team composition and to proactively manage performance. Overall, the sales team is maturing and progressing well. The pipeline is expanding across all stages of the sales process from initial contact through contract negotiation and is highlighted by larger, more complex strategic engagements.

We are also excited to see our pipeline in the US improving as this has been an area of investment and focus for all of us. Sales support activities across the organization are high, including client visits to India, analyst and advisor interactions, and cross-functional solutioning. I am personally spending more of my time engaged in [CXO]-level client discussions around strategic and transformational relationship opportunities.

During the first quarter, our sales team was able to add six new logos, expand 14 existing relationships, and renew 12 contracts. Highlights include the award of our second large deal of the year, which expands our contract with an existing insurance client into a new line of business. We continue to target five to six of these large deals in fiscal 2014.

The Company also issued press releases during the quarter announcing the extension of our relationships with GlaxoSmithKline, British Airways, and Scandinavian Airlines. Of particular note is the GSK relationship where WNS manages an offshore knowledge center for the client responsible for delivering high-end research and analytics services.

With respect to margins and profitability, our Q1 adjusted operating margin was 13.9% and adjusted net income was 12.7%. Adjusted net income was $14.4 million, up 20% from the first quarter of last year. The first quarter for WNS has historically been the annual low watermark from a margin perspective, largely the result of seasonality associated with our annual wage increases.

Deepak will discuss the quarterly financials in more detail in his prepared remarks.

From a global delivery perspective, I am excited to report that during Q1 WNS added our first company-owned delivery center in China as part of a contract expansion with an existing client. WNS now provides industry-specific BPO and finance and accounting solutions from Guangzhou, China, for one of the world's largest shipping and global logistics companies.

This center, which was central to our client's strategy to outsource globally with a single vendor, will enable WNS to leverage both domain expertise and delivery location. This is a trend we are continuing to see in the BPO industry that clients are increasingly looking for a partner that can service the requirements from across the globe.

For WNS, we have been quite successful in adding capability for existing clients in locations such as South Africa and Poland, and the cross-selling these locations to other clients and prospects. These centers are also allowing us to participate in larger more strategic deals which require global sourcing.

WNS will continue to selectively invest in expanding our geographic footprint, although we anticipate that the pace of adding new locations should reduce. As a result, we would expect our seat utilization to improve as the fiscal year progresses.

I'm also happy to report that our capability creation group has been developing new offerings across both horizontals and verticals and working on increasing the use of technology in our solutions. From my perspective, the charter of this group is simple -- to innovate and automate. By providing our clients with top leadership and transformational solutions WNS will continue to differentiate ourselves in the marketplace, drive higher revenue, and improve our operating efficiency.

In the last quarter, our capability creation group has launched a new industry-specific version of risk and compliance offerings, identified a partner for data virtualization, and established a lab for moving clients from expensive licensed analytics platforms to open-source solutions. We are also currently incubating several exciting new concepts, including a platform for enhancing social media and website analytics.

In addition, WNS continues to opportunistically look for niche tuck-in acquisitions to augment our internally-developed capabilities. Focus areas for the Company include unique domain expertise and technology tools and platforms.

Today WNS's differentiated positioning is resonating well with not only clients and prospects, but with key industry stakeholders as well. During the first quarter, WNS was named the 2013 winner of the prestigious Golden Peacock Award for global business excellence. In addition, we were named a leader in finance and accounting for the third consecutive year in Gartner's most recent Magic Quadrant study.

From a company recognition standpoint, I am also pleased to report that I have now joined NASSCOM's Executive Council and have also been appointed Chairman of NASSCOM's Business Process Management, or BPM, Council. Clearly, WNS's market visibility and brand awareness is improving. We believe that this is helping the Company participate in more opportunities and is also having a positive impact on global recruiting and retention.

At a macro level, demand for BPO services remain stable and healthy. While industry momentum remains strong, final decisions on large, transformational deals continue to progress slowly. WNS remains well-positioned for several of these large engagements and we currently feel that for a few of these deals the question is when and not if we will be awarded a contract.

In summary, we believe that WNS is on track towards our long-term goals of growing at or above industry rates and improving both margins and profitability. While ongoing investments are necessary to ensure differentiated positioning in the marketplace, we believe that WNS has operating margin leverage opportunities in 2014 and beyond. The Company remains focused on continuing to create increased business value for all of our key stakeholders including clients, employees, shareholders, and the communities in which we live and work.

Let me now hand the call over to Deepak Sogani, WNS's CFO, to walk through the financials. Deepak?

Thank you, Keshav. With respect to the first-quarter numbers, net revenue increased $213.8 million from $102.6 million in the same quarter last year growing 10.9%. On a constant currency basis, year-over-year net revenue grew 12.6% when accounting for a 3% depreciation in the British pound. Sequentially, net revenue increased by $1 million, or 0.9%, despite 1.2% depreciation in the pound.

On a constant currency basis, first-quarter revenue grew 1.6% sequentially. Year-over-year revenue growth was led by our utilities, banking and financial services, and retail and CPG verticals which all grew over 20%. Growth rates in our more mature verticals of insurance and travel also expanded at 7% and 6%, respectively.

Operating margin, excluding share-based compensation and amortization of intangibles, was 13.9% in Q1 as compared to 13.2% reported in the same quarter of fiscal 2013 and 15.8% last quarter. On a year-over-year basis operating margin improved 75 basis points as depreciation in Indian rupee and increased operating leverage on higher volumes more than offset our investments in the global infrastructure and the impact of our annual rate increases.

The sequential operating margin reduction of 190 basis points is largely seasonal in nature, driven by the timing of our annual wage increases. Interest expense this quarter was $0.8 million, down slightly from the $1 million reported in Q1 of last year and $0.9 million in the previous quarter. The Company's other income was $2.2 million in the first quarter, up from $1 million reported in the same quarter last year and $1.6 million reported in the last quarter.

The year-over-year and sequential increases in other income are a result of higher cash balances and improved returns on our India-based investments.

WNS's effective tax rate in the first quarter was 16.3%, down from 17.7% last year and up from 14.9% in the previous quarter. Reductions in the Company's effective tax rate this year from increased utilization of our tax exempted facilities in India will be tempered by a 10% tax surcharge imposed in the March 2013 India budget. Our estimate for the full-year tax rate remains unchanged at 15.5% to 16.5%.

The Company's ANI for Q1 was $14.4 million compared with $11.1 million in the same quarter of fiscal 2013 and $15.8 million in the last quarter. This represented growth in adjusted net income of 30% year-over-year. Adjusted diluted earnings were $0.28 per share in Q1, up from $0.22 reported in the first quarter of last year and down from $0.30 in the previous quarter.

As of June 30, 2013, WNS's balances in cash and investments totaled $102.5 million. The gross debt position was $94.2 million with the Company reporting a net cash position of $8.3 million at the end of Q1. The Company generated $8.1 million of cash from operating activities this quarter and free cash flow of $2.6 million.

DSO in the first quarter came down to 31 days, down from 33 days reported in Q1 of last year and in the last quarter. Our CapEx for the quarter was $5.5 million with the majority of this spent in support of ongoing infrastructure expansion.

With respect to other key operating metrics, our total headcount at the end of the quarter was 26,178. The attrition rate in Q1 was 35%, down from 36% in the same quarter of last year and 36% reported in Q4.

[Filled] seat capacity was 22,616 at the end of the quarter, which represented a net increase of 641 seats sequentially. The average paid seat utilization in Q1 was 1.16 as compared to 1.27 reported in the same quarter of last year and 1.18 in the previous quarter.

While we continue to add seats in some locations to support specific client requirements, we remain focused on driving our seat utilization rates up over the next couple of years as the Company grows. This will enable us to leverage our investments in both new geographies and tax-exempt facilities, driving both operating margin expansion and a lower effective tax rate.

In our press release issued earlier today, WNS provided an update to our fiscal 2014 guidance. Based on the Company's current visibility levels we expect net revenue to be in the range of $462 million to $478 million, representing year-over-year revenue growth of 6% to 10%.

Revenue guidance assumes an average British pound to US dollar exchange rate of 1.50 for the remainder of the year or an average full-year exchange rate of 1.51. The year-over-year depreciation in the pound of 4.5% will impact approximately half of the Company's revenue.

Excluding the exchange rate impact, on a constant currency basis the revenue guidance represents growth of 8.4% to 12%. We currently have 95% visibility to the midpoint of the revenue range, consistent with July guidance in previous years.

Adjusted net income is expected to be in the range of $66 million to $70 million for 2014 based on INR60 to US dollar exchange rate for the remainder of the year, or an average full-year exchange rate of INR59.0. This implies adjusted EPS of $1.26 to $1.33 on a diluted share count of approximately 52.5 million shares. At the midpoint of our guidance adjusted net income is growing 28% on constant currency revenue growth of 10%.

In terms of hedging, WNS is approximately 90% hedged for the fiscal 2014 using a combination of options and forward contracts. For fiscal 2014 the volatility in the Indian rupee has provided us with the opportunity to convert some of our options which were out of the money to forwards, locking in the current spot rates. This will provide us with increased margin certainty in the current fiscal year.

The Company expects CapEx levels to be in the range of $20 million to $22 million in fiscal 2014.

We will now open up the call for questions.

(Operator Instructions) Joseph Foresi, Janney Montgomery Scott.

I guess my first question here is on the pipeline. Where do we stand with the large deals? I think you talked about five to six deals and I think we have seen two announced.

You made some commentary in your opening remarks about any slowdowns and I'm wondering have you seen any slowdowns from what we thought last quarter? So I little bit of color on the pipeline would be helpful.

Sure, I will start and have Dave give a little more color. Yes, actually from a large deals point of view actually we are very excited with the kind of traction that we are seeing. We have already signed two that we have spoken about. And, interestingly, both of them are in the high-value finance and accounting areas and both with very large global companies, so very excited about the potential and prospect from those deals.

At the same time, we are playing in a number of other deals as well which are in different stages of progress. At this point in time I can tell you that we are well positioned in quite a few of them. And as I mentioned, my comment really was that it was now a question of when and not if, because we are extremely confident about how we are tracking in a number of those deals.

Again, it comes down to the fact that our investments are working. Our vertical and domain strategy is resonating well. Our client partners and our salespeople are impacting the marketplace extremely well. And, frankly, clients are now looking for a global partner as opposed to local vendors and I think WNS very beautifully fits a gap that exists.

I think the one thing that I will add to Keshav's comment, Joe, from a pace standpoint is that I don't think we are seeing any overall change in terms of the pace of how deals are moving through the pipeline or the pace of client decision making. I think it is just when we get into some of these larger and more complex deals it is difficult to tell how long it is going to take to get certain things over the goal line.

We certainly try and help the clients through that decision process and try and move things along as quickly as possible, but at the end of the day, when you are talking about solutions that tend to be not only transformational but also highly disruptive to clients, these things take time at the end. So we wait for them to close, but very excited about where we sit right now and the number of opportunities that we are well positioned in.

Okay. On the margin front, the 75 basis point improvement, what portion of that was depreciation versus efficiencies? Then how do you expect the margin profile to progress throughout the year? If you could just give us some idea of how you expect that utilization to come through and impact margins throughout the year as well.

Joe, this is Deepak. I will take this question. So implied in the annual guidance that we have provided to you we are expecting at the midpoint of YOY growth in our ANI of about 28%, which is 230 basis points improvement against last year's annual ANI. So that is one data point. And as we have been saying, our endeavor is to focus on improving our ANI margins at a rate higher than the revenue growth rate.

And, Joe, you were referring to the 75 basis points on a year-over-year basis for the first quarter?

Yes. I just want to get a feel of how you break out the operational efficiencies versus currency [on the margin front].

On a net basis, when you look at the impact of where we were on the pound and the dollar, we came out a little bit favorable this quarter year-over-year from a currency perspective. We did have a pretty significant move in the gains and losses on our hedge positions year-over-year, which you guys will see when you look at the detailed P&L.

With respect to the operating issues, we have got the year-over-year impact of seat utilization which is pretty significant. We have got the year-over-year impact from our wage increases, which is significant, and those are really being offset by higher volumes and productivity and operating efficiency.

So on a net-net basis what we have been able to do is take some currency favorability, use it to fund the year-over-year impact of our seat utilization, and we have been able to offset the impact of wages through operating efficiencies.

With one quarter through and the level of visibility you have for the midpoint, I was wondering what are the gating factors to get you to that upper end of the guidance range for the year. Maybe you could just talk about some factors that you need to follow on one way or another as we head through the rest of the year?

I think when you look at the high end of the guidance the real trick to getting there has obviously somewhat to do with our ability to continue to work on some of the key operating metrics in the business. But the reality is the driver for getting to the high end is going to be getting these large deals signed, getting them signed as quickly as possible, maintaining the volumes on our existing book of business, and continuing to have success farming with our existing clients.

If all three of these things click on all cylinders, we have the opportunity to get to or above the high end of guidance. If anyone of those pieces does not work in an efficient manner, then obviously it is going to create some pressure on our ability to get there. But the ANI pull-through at the high end of guidance is really nothing more than at this point in time a function of higher revenue and the operating leverage associated with that.

Obviously, it allows us to leverage our infrastructure in India to reduce our tax rate. It allows us to leverage the existing investments we have made in seat utilization. And we should be able to see higher margins and higher pull-through at the high end of guidance.

Let me add, on the revenue side the fact that we have 95% visibility now to the midpoint of the range actually gives us a lot more confidence in terms of how our business is tracking.

And as Dave mentioned, I think it is just a question of timing. You can do that much in terms of making the effort, creating the pipeline, solutioning, and all of that. But, finally, clients' decisions and the timing of those decisions lie only with them.

Whereas at this point in time we are extremely confident that our teams are doing all the right things to get there and, therefore, take us towards the higher end of that guidance range, time will tell and we will keep you updated.

Thank you.

Rahul Bhangare, William Blair.

Thanks for taking my questions. You won a handful of large deals last year. Could you comment on how those deals have been ramping and what we can expect from those deals this year?

Let me take a stab at that. Each of those deals that we won last year are ramping nicely, and at this point in time, baked into this guidance is those ramps really. I think what is also coming in is a positive impact of some unplanned ramps from some of those transactions where we are seeing, because of the geographical nature of some of those deals and the client now getting comfortable with phase one of what WNS has done for them, they are starting to accelerate some of the other transactions and deals across geographies.

So very happy with the progress we are making in each one of them. And as you know, culturally we are the kind of company where we build a relationship which is an inch wide and a mile deep. We really like to have a solid, long-term relationship with a client, so I am delighted with the kind of progress our client partners are making with each of those clients.

Okay. Keshav, you mentioned that the US pipeline is pretty strong. Could you give us a little more color on how that is tracking by vertical?

Sure. Actually, I am extremely positive about, first and foremost, the number of deals that we have in the pipeline, the scope, the scale, the complexity, and the size of some of those deals that we have, and the fact that they are broad-based across verticals.

So it is not that one particular vertical is driving everything. It is coming across every one of our core ones, whether it is insurance, healthcare, retail, travel, shipping and logistics. And a lot of it is being driven by the higher value finance and accounting and analytics kind of offerings.

So I would just say that at this point in time we are very happy with the impact that the sales force in North America has created. Again, in some of the large deals that we spoke about in the early part of my prepared comments some of these deals actually are based out of North America and are lying in the discussions that I spoke about just now. So very happy with the impact there.

Is the sales productivity where you want it to be according to your plan, or is there still some improvement that you are trying to get to?

Great question. Whereas I am happy with the kind of impact that my salespeople are now creating in the marketplace, obviously from my perspective each of them has a quota and I would like every one of my salespeople to deliver on those quotas. So I would like to say that at this point in time, whereas I'm happy with the progress being made, there is always potential for a better performance.

Thanks. Good quarter, guys.

Paul Thomas, Goldman Sachs.

Thanks for taking my question. You talked about being well-positioned in more large deals and you spoke of it as being a matter of when, rather than if.

What is that confidence coming from? Have you had Board-level conversations? Or can you just help us understand what stage they are in that is making you think that it's just a matter of time to win those deals?

Yes, great question. In each one of those deals I think the way we have moved through the stages in terms of -- as you are aware, each of these deals normally there is an advisor involved, there is tremendous kind of ownership from the top of the house on the prospect's side, and most often the deal starts with 10 to 12 players actually being named in the first shortlist.

So I'm happy to say that when we are talking about progress it means that WNS has actually gone through the stages of being qualified in that first top 10 or 12. Then moved, based on customer visits, looking at our experience, case studies, and most importantly, meeting our people and our management team, moving that down to the top five or four or whatever. And then based on the next level of studies actually being down-selected to probably one of two players.

So at this point in time I would say that the fact that in every one of these deals not only is senior-level engagement seen, but I am personally interacting with the decision makers on the other side. And all of them, at this point in time, are just going through the hoops of getting internal final approvals to put things in writing. But, generally, the body language, as well as the confidence, coming back from the other side is verbally okay to WNS and contract needs to be done.

I think Keshav is being a little bit conservative in some of these instances. For us to feel that confident about a deal we have been down-selected at a minimum to the final two.

But the reality with a number of these opportunities, and some of them, to be very fair, Paul, we have gotten into a little bit of trouble and a little bit ahead of ourselves discussing before they reached finalization. They are situations where we have gone through the process and the client has notified WNS that we are their preferred partner, but there are still things for them to do internally before we can proceed. So it becomes a question of whether they are going to do it with WNS or they are not going to do it at all, and that is what gives us a lot of confidence.

All right, that is very helpful. Thanks, guys.

Then your comments on FX benefits to margins, it sounds like there wasn't much of a benefit net-net in margins to the quarter and the improvement we are seeing is mostly operational. Is that the right way to think about this quarter?

I guess it depends on whether you are looking at quarter to quarter or year over year, so let's clarify that a little bit.

Year over year.

On a year-over-year basis, the reality is if you look at what happened we did have some favorability from a margin perspective, but part of that was eaten up by the changes in our hedge position.

So what you have got to look at is both pieces to that. Not only what is going on with the British pound in terms of depreciation, which is hurting us; the Indian rupee which is depreciating, which is helping us; but also the relative contribution or challenge, if you will, from the gains or losses on hedging period over period, which may or may not be moving directly in concert with how those currencies fluctuate.

Okay. Then how do we think about that with changing the guidance for the year? Also, along those same lines, how much of the change in ANI is just foreign exchange changes versus operational improvements?

I think at the end of the day the majority of the changes that have been put through in this quarter, both from a top-line perspective and from a bottom-line perspective, relate to improvements in currency on a net basis. The one exception to that I will tell you is the fact that the low-end of our guidance has been improved despite currency headwinds.

So at the low end we have improved both revenue and profitability on an operational basis. At the midpoint and the high end really, if you look at what has gone on with the guidance, we have rolled through the impact of currency.

Got it. Thanks a lot, guys.

Edward Caso, Wells Fargo Securities.

Thank you for taking my question. I was sort of curious, these new clients that you are talking with that are throughout your pipeline, are they new to outsourcing, new to offshoring? Are they existing outsourcers that are looking at different functions? Sort of, what kind of missionary work is involved here?

Great question, Ed. I would say it's a combination of all of it. In some cases, it is actually a first-time kind of offshorer really looking to be educated about the process and, therefore, it has taken enough time. That is where advisors come in, get involved, bring a number of players in, and then we have gone through the stages and now we have reached final stage.

Quite often, even there they would probably start with one large global process. So what we are also seeing is, as opposed to just a process delivered out of one country, they want an end-to-end global process essentially taken out and delivered by a global partner like us.

But as the discussions progress they are already discussing with us the second and the third and the fourth expansion that may go beyond the first area of horizontal, maybe into a domain or operations area as well. So I would say that in this mix are clearly first-time offshorers.

There are people who are quite familiar with the model, who already have somebody else servicing them on a particular area. But because they went with a partner in the good old times without thinking through the entire end-to-end game strategically they are now finding the WNS value proposition far more compelling. And in some of these cases, we have actually replaced -- like we mentioned earlier, in one of the large deals we have replaced a large, global player who were there partners for five or six years.

Again, it is the differentiation that is working well and the fact that our global footprint and that experience that we are able to showcase is again helping us. So I would say it is all of it. It's a combination of all of this.

It's good selling, it's good positioning of the differentiators, and it's a lot to do also with the cultural alignment that we bring to the table. Because, particularly with the first-time outsourcers or somebody who has burnt their fingers, there is a lot of focus on the reference calls, interaction with our existing clients. They feel extremely comfortable when they understand how we have built relationships with them and, therefore, they are looking forward to having the similar kind of relationship with WNS.

My next question is around competition and the intensity of the competition, both from sort of the Tier 1 IT offshore providers as they try to leverage their IT relationships into your BPO world, as well as the Accenture IBM global players may be coming down market into some of your size deals. Are you seeing any change in the sort of competitive intensity and success of those moves?

You know, I would say that we have not seen any significant change. It is, to some extent, business as usual. It could be essentially our people may be performing a little better based on the investments we have made, as well as the energy that our people bring to the table.

But I can assure you that with the large IT players we are not seeing that impact. In fact, at the most it would be aggressive on the BPO side within their existing clients on a few select opportunities. Different mechanism, but the decision makers are still very different for both IT and business process management. This provides a completely different -- and serious people who want partners who look at their operations business the way they look at it will sign up with WNS.

While saying that I would also say that we do run into the usual suspects in every one of these deals. Particularly on the higher end areas which are more horizontal flavored, we would see some of the other large companies that you spoke about. But, again, we have been competing very imminently and very well against them and winning business.

We think the market is there. The market is strong and I think WNS's message is resonating well.

Last question. Part of the reason your utilization is weak is that your incremental work seems to be coming in places outside of India -- Poland, South Africa, China. Is there a change in client mindset against India or is it just sort of the way the deals fell?

Again, great question and I did cover this at a high level in my comments earlier. The reality is these deals are getting more global in nature from a WNS perspective, because I think our message is resonating well. Clients trust us and, therefore, clients want to start by handing over these processes globally.

So we may, therefore, start a finance and accounting kind of operation maybe for Europe in two of our centers. Something delivered out of a center close to the US or whatever; build the comfort with them to take that work outside. But it is not replacing India, because in the long term the heavy lifting will get done in India.

So we have to assume that the buildout of this infrastructure will be limited in nature in some of these locations. Whereas in the beginning, even from a margin point of view, it may be lower than the usual blended margin we get, we are extremely confident that longer term, as the deals increase in size and scope, a lot of it will get delivered from offshore locations like India.

Thank you.

Kunal Tayal, Bank of America.

Thanks. My first question, Keshav, just continuing on the competitive dynamics, wanted to check if the dynamics has changed in any manner over the past one quarter because of the overhang of the immigration bill that some of the vendors in the market might be facing.

We actually haven't seen any difference. As I talk to my clients and prospects, one thing that they clearly come back with is a message that, look, we understand value very well. We are not going to be -- we clearly understand who understands business process well, who understands operations well, who understands our end customers well.

And, therefore, I think the ability to use a particular situation in the market and go into a different segment of business is severely limited. Because let me assure you, a few clients difficult for that in the past and then found that some of these companies really use the BPM sell to essentially try and grow the IT footprint later and didn't give them the attention that they needed.

And I must mention that some of the new clients that we have acquired in the last two years actually came from some of these large IT players as well. We are not seeing any significant change or impact, frankly, from a client behavior point of view.

One of the interesting things I think we have to watch for, depending on obviously what happens with immigration reform, is, to the extent that immigration reform creates challenges for the IT services players to be able to provide services or creates a situation where end pricing goes up to clients as a result of increased costs and scarcity of resource, the reality may be very well that clients who had been using offshore IT services to drive cost reduction and operational efficiency have to get more aggressive about things like BPO and BPM to be able to achieve their cost objectives.

So certainly one of the things we want to watch over the next six months to a year or so is to see if there are changes in client behavior as a result of immigration reform that actually looks to increase the adoption rate for BPO.

So this improvement in US pipeline, would you call it entirely a function of WNS's own participation rates? Or would you also say that the macro backdrop is now trending to become a little more favorable than what it was earlier?

I would, first of all, give full credit to my sales team. And I think the fact that these guys are really making tremendous effort, have understood the marketplace well, have built relationships with the analysts and the advisory firms, have mapped accounts and prospects well, including clients, prospects who already have global vendors entrants there and introduce a needle strategy to create a deal for themselves, is the first area that I would want to focus on.

Having said that I also believe that more clients are starting to up the ante in terms of wanting to save money, wanting to become more operations efficient, and really wanting to steal a place against their competition by working with a global player like WNS, like I said, that really looks at their business the same way they look at it. So a lot of it has to do with our going in and actually carving out a deal. Some of it would be because of enhanced activity.

Okay. My last question is how are you thinking about rupee depreciation in terms of opportunity for either increased investments or its impact on pricing?

So I think -- first of all, let me just address the impact of the depreciation on our reported financials and then I can move over to the question that you are specifically talking about the impact on our investments and on our clients.

Embedded in the -- when I gave my prepared remarks I did speak about the fact that we have partly converted our options into almost at the current spot levels. What that does is really protects us to some extent against any adverse movement in the spot rate from the current levels. So we should be able to protect the guided ANI levels to some extent, even if there is an adverse movement now.

But, obviously, if there is a movement which further depreciates the rupee, we will obviously have some impact. That is one aspect of the question that you asked.

Let me take the rest of it. The reality is for us it is business as usual. Embedded in our guidance is specific rupee and dollar and pound sterling guidance that we have provided at this point in time. We believe that this is not the time to underinvest in marketing, in capability, in sales.

And in respect to where currency moves, that is irrelevant to our story and the investments we are making. So we will continue to probably do that $20 million, $22 million of CapEx investment, we will continue to make the same effort that we are making on sales, and we will continue to build out whatever we need to do in terms of capability creation irrespective of where currency is.

I think you have seen that in the guidance. Effectively, what we have done, as we mentioned a little bit earlier with respect to the new ANI guidance, is rolled through the favorability of currency. We don't intend to change our philosophy on investment and we don't intend to change our philosophy on pricing as a result of currency volatility.

Right. Thanks.

Bryan Keane, Deutsche Bank.

This is actually (inaudible) calling on behalf of Bryan Keane. Most of my questions have been answered but I had quick couple of follow-ups.

You have highlighted a pretty strong US pipeline. I was just wondering if you could give some color around the demand environment outside the US; what you are seeing in UK, Europe, or other places that you have presence in.

Sure. Let me -- maybe I have ignored the other markets and let me talk a little bit about that. I must, first of all, tell you the first two large deals that we announced actually came from Europe, and that should give you comfort of about the impact our European salesforce are having in that market.

We continue to make good progress there. We are seeing enhanced traction in the AsiaPac markets, and we are also seeing some kind of limited impact in the areas that we want to focus on in India as well. So, overall, quite happy with the overall progress.

I would say Europe, Continental Europe -- Europe is obviously very proud, but Continental Europe would probably be more temperate than the others. But the UK and other parts of Europe is resonating well for us.

Okay, thanks for that color. A case of yours highlighted fine tuning of salesforce; I was wondering if there is any fallout there or is it just business as normal?

No, it is business as normal. It is the usual things that we need to do to keep -- to raise the bar and make sure that we have performance, managing the folks well. Anyone who is not hitting the bar is an ex-employee of WNS, one.

Other than that just making sure that we are fine-tuning bringing the right skills and managing attrition, because you do have an attrition as well. The reality is our sales force has started performing well and are probably in demand across the market as well, so we need to make sure that we are managing attrition.

So what was 81 people last quarter was 72 at the end of this quarter. But we have continued to replace, hire, do whatever we need to to manage both these impacts that I spoke about.

Just a quick one on manufacturing retail and consumer products. If I'm looking at it right, the revenues grew year on year significantly but were down quarter on quarter. I was wondering was there any call out in terms of the volume productions that you were expecting, or is it just some seasonality there?

No, we did have -- one of the headwinds that we spoke about last quarter walking into the year was in the manufacturing retail CPG vertical. So the sequential softness was not unexpected in that vertical.

Okay. Just in terms for -- without going into quarterly guidance, how are you positioned for activation going into second and third quarter? Should we see some good acceleration or it will be a smooth -- in terms of increasing revenue should we see some good acceleration starting Q2 or do we still have to wait until we see that kind of revenue improvement, growth improvement?

Good question. I do think we will see revenue growth again here in the fiscal second quarter, somewhat muted as it was in Q1 by some of the headwinds that we spoke about walking into the year. As we discussed, those were ramp downs that were expected to take place in Q1 and Q2 as a result of volumes with some of our existing clients, as well as M&A-related activities. So these are the things that we had visibility to.

We are pleased with how we have been progressing on the new deal front and on the farming front. But, again, as we look into the second quarter the visibility to the headwinds are greater than the visibilities to the ramp ups.

One of the things Keshav didn't mention is that the two large deals that we have already signed had very little contribution at all in the fiscal first quarter. So these are the kinds of things that as we go through second quarter should start to ramp, but we really believe that the benefit from these two large deals that we have signed, as well as the things that are close to closure, will be more back half related for us.

Thanks for that color. One final question; on the last call there was some discussion around the nearshore versus offshore mix and that having some impact on margins. I was wondering if you have seen any change on that front, or should we see that mix change as we proceed?

As well as the utilization. Keshav highlighted that seat utilizations will progress throughout the year, but just a follow-up on that would be when should we expect the seat utilization coming to more normalized level of 1.3, 1.4? Would it be by the end of this year, or would it take a couple more years to come to that normalized level? Thanks.

That is an interesting question and it addresses a lot of things, but I will try and take a stab at it quickly. One of the things that we are seeing, based on our value proposition and the investments we have made, is that our clients and prospects are extremely comfortable with us now in terms of really handing over the global process for us.

And as I explained earlier, therefore, it means in many cases starting off in some of these locations nearshore, building the comfort. And there may be margin dilutive in the beginning, but in the longer term, as we start ramping and moving some of those processes into India at a larger scale, the margin also comes back.

So one is the transition impact. The second is the fact that margins, when you look at it as a stand-alone basis in a nearshore center, will be lower. But on an overall, long-term basis the margin will actually be positive, so we are actually seeing some of that impact in the margins that we have been announcing. That is one.

The second question really -- and, again, I must tell you we are extremely comfortable with every one of the clients, prospects, and large deals that ultimately a large part of delivery will take place from the traditional offshore locations. So quite confident about the longer-term margin traction.

In terms of seat utilization, you must rest assured that we are completely focused on improving the seat utilization while we continue to add some seats to support the global clients that I spoke about, but at a decelerating rate. So we will grow seats on shore but at a decelerating rate, and our guidance actually assumes seat utilization improvement by the end of the year itself.

Now, whether seat utilization will go back to the historical levels of 1.4 and 1.35 that you spoke about, I think we have addressed over a few calls recently. We may not see those levels of seat utilization because of the shared global nature of the business and the kind of processes now being delivered. But I think the ability to move it back to where it was recently a few quarters ago, slightly lower than that is eminently possible.

Okay. Thanks for the color.

Ashwin Shirvaikar, Citibank.

Thank you. Good quarter here. So your last comment on seat utilization actually good segue into my first question. Can you remind us what the relationship is between seat utilization improvement and margins, all else being equal?

In terms of timeframe, say I was to assume you are going to get to 1.28 or 1.3, what timeframe should I assume? Is that 12 months or 18 months or 24 months goal? Can you talk about that?

Sure. Let me take that, Ashwin. As we have said in the past, a 1% move in our seat utilization affects our operating margins by about 25 basis points. So we do have -- by getting back to a 1.3 type of seat utilization level we do have the opportunity to generate, over time, about 250 basis points of operating margin leverage.

In terms of when, I think it is a function of two things. One, obviously it is something we are focused on, we understand, and we are pushing towards. The reality is the ability to get that seat utilization up to the levels that we want to -- 1.28, 1.3 -- is a function as much of how we grow as the magnitude of growth.

So in order for us to properly leverage our infrastructure investments we have talked a lot about the global expansion that we have done. The reality is the biggest seat utilization drag we have in the Company today comes from the special economic zone investments that we have made in India to drive down our long-term tax rate.

If our growth isn't India-centric and driven by new clients or new processes, it is going to be difficult to leverage that seat utilization. That being said, we feel very good about the investments that we have made about the deals in the pipeline and about the on-site-centric work that we have done to leverage that to move that work to those centers over time.

So when you look at what we expect this year, we do expect, as Deepak mentioned, seat utilization to improve by the end of the year. We are not going to reach our targeted levels by the end of this fiscal year, but I think if things work well over the next 18 to 24 months the opportunity exists to get back to 1.3 type of levels with respect to seat utilization.

Understood. Then on the 95% visibility to the midpoint of the range, last quarter that was 90%. If I just do a straight delta it's about $23 million, $25 million higher visibility. Is that based on what you have signed, or was there previously some uncertainty with ramps that is no longer there?

Eventually what I am trying to get to is what is contained in your guidance in terms of new work and trying to get a handle on potential upside here.

The change in the visibility, Ashwin, is a function of how we define visibility which is committed work. So it is a combination of new deals that we have signed, it is a combination of forecasts or re-forecasts for existing book of business, and it is also a function of how we have been doing in terms of farming our existing relationships and adding new processes.

So the $23 million, $24 million, $25 million of additional business that is committed at the midpoint of our guidance is really the success that we have had in converting things over the last three months from possible to committed.

I guess to Keshav's point, when he said on some of these new contracts it's a matter of when and not if. So if I were to kind of turn that and say if you signed those contracts in the coming one to two quarters, what would that do to your guidance?

Right. And to our point, with 95% visibility anything we sign from this point forward helps close the gap on the 5% to the midpoint and helps us get at or above the high end of our guidance. So if these things happen sooner and they happen at a higher magnitude, then we have an opportunity to meet or beat the top end of guidance.

If things get delayed and existing volumes turn south, then we have some challenges, but we feel very good about where we are. We like having this level of visibility to how we have guided. It is consistent with what we have done in the past, and if things materialize well and efficiently then we have some positive updates that we can provide you in later quarters.

Great. Last couple of years you guys have done a tremendous job here fixing up the balance sheet.

Is there any thought, maybe if the appropriate opportunity came along, would you be willing to retrace and take on debt? And to what level of debt would you be willing to take on if there were opportunities? Because my understanding is that there are some opportunities out there.

So clearly our balance sheet, as you rightly said, is fairly healthy. We are net cash positive; have $100 million cash on the balance sheet at this point of time. We believe that we have headroom to further leverage if really required by maybe $100 million to $150 million on top of the current level in the balance sheet.

I think, as we mentioned in our prepared remarks as well, we are obviously looking at augmenting our capabilities in the different verticals and proactively looking at opportunities. Let's see how they play out [throughout the year].

I think, Ashwin, the reality is at this point in time the Company's focus is doing tuck-in acquisitions, so we are not looking for big bang approaches. And, obviously, to do multiple small acquisitions in a very short time frame puts a lot of stress on the system, especially when we believe there are a large number of organic opportunities sitting in front of us.

So want to be somewhat sensitive to, as you rightly said, taking advantage of opportunities that are out there in the marketplace, but also want to make sure that they are a fit for the Company, that they are integratable, and that they don't detract the management attention from what we have at hand today which is a really good opportunity.

I think that is how I look at it as well. We definitely understand that the balance sheet is strengthening. It is strong, getting even stronger.

But at the same time, I think one of the messages I like to leave with my clients is sleep well at night because you are working well. You are working with a partner that has cash on the balance sheet, has a healthy balance sheet, and will not only service you well but will not have any of the risks that some other players had in the past.

At the right time, we will use that cash to do whatever we need to do to enhance our business and our profitability even further.

Understood. That all makes good sense. Congratulations, guys.

Dave Koning, Robert W. Baird.

Long call. Thanks for waiting for me. I have just got a couple of quick ones.

The first one you said there is -- so you mentioned some of the mild headwinds heading into Q1 and maybe a little residual impact into Q2. At the same time, you are starting to really nicely ramp some clients as well.

Does this mean that as we get into late this year and really into next year you start to get pretty meaningful growth acceleration just as those headwinds are gone, the ramps come through? Are we nicely into the double digits by the time we get into next year?

I think, Dave, that certainly is where we would love to be and if things materialize the way we would like to see them materialize this year that opportunity exists. The one caveat I will give to that is the fact that these headwinds and whether they are volume related, whether they are M&A related, seem to crop up every year.

So while we have spoken a lot about them, what we tend to do is see the headwind visibility before we see the committed revenue visibility. And depending on what happens as we exit this fiscal year that could very well be the possibility. If these headwinds abate as we walk into next year and we don't have volume challenges with two or three large clients, for example, then the opportunity to further accelerate growth is clearly there.

But obviously want to wait and see how the year progresses, want to see what the business environment looks like walking into next year, and more specifically want to see how our clients are performing before we give that kind of color and confidence around hypergrowth, if you will. But if things materialize well and we have a nice, healthy trajectory exiting Q4, barring headwinds walking into the year, yes, the opportunity is there to accelerate.

I think the clear intent from my team and I is to grow at or about industry growth rates, as I'm all of the time talking about. Again, based on the traction we have seen and based on how the pipeline is looking, we think we can set up 2015 very well.

Great. Then just my second one, just tax rate. You mentioned this year 15.5% to 16.5%, but that it could be biased lower as you get into some of the newer SEC facilities. Is there any sort of target to where that could eventually go over the next few years? Is it 12%, 13%, or something like that?

It doesn't look that it will go to 12%, 13% based on where we are at this point in time. Certainly there are opportunities to leverage the Indian debt position to some extent. As you are aware that we have had some regional taxes also coming into the current year in India which are offsetting some of the benefits that we were planning in the current year.

Maybe on a long-term basis for the next maybe couple of years. Meaning I would think that the effective tax rate would be around the same 15% benchmark rate. Maybe a little bit here and there, but it doesn't look like going to 12%, 13%.

No, I think 12%, 13% is probably more than optimistic. Again, remembering that we have got to watch the mix of work between onshore, nearshore, and offshore, and also the mix of work within our offshore portfolio between tax-exempt facilities and non-tax-exempt facilities.

So if you have look at what has happened to the tax rate in 2012 when the old tax holidays expired, our effective tax rate was running 19% to 20%. Last year in fiscal 2013 the tax rate ran at about 15.5% and it's similar to where we have guided this year. The reality is under the covers this year you have got an operational reduction in the tax rate as a result of leveraging these special economic zones, but you have got a tax rate increase in India based on the 10% surcharge that we have incurred.

So this year the improvement in the tax rate has taken a little bit of a hiatus, if you will, because of the change in the tax rate. But to look at 100 basis points the next couple of years I don't think is out of the realm of possibility.

Great. Thanks, nice job.

(inaudible), JPMorgan.

Thanks for squeezing me in. So could you also talk about the trends you are seeing on clients' business volume? Given that 25% of revenue is transaction-based, how does that transaction-based volume impact that revenue that you have already signed this year?

I think it's client specific. I think when we walked into the year obviously we had a couple of large clients where the feedback we had received from them was that there were going to be best case stable volumes, worst case some slight reductions and same process volumes. And that is what we had baked into our guidance.

I think to this point we are seeing that largely play out, so I don't think this guidance reflects a change in feedback from customers about their existing business volumes.

All right. Aviva, your largest customer, was down again this year while [rest of the] insurance was up. Can you share the outlook of the Aviva account?

Sure. I think it's certainly one of the accounts where there have been volume pressures, both from the standpoint of their overall business, as well as improving productivity and delivering continued benefit to them.

The other reality to that relationship is it has probably never been healthier. We feel very good about how we are positioned at Aviva and the value that we are bringing to the table. There are a large number of new opportunities that we are looking to expand into with this client and feel very, very good about how the relationship and how the accounts are positioned for WNS over the next couple of years.

So I will add -- so Dave is absolutely accurate. I think the relationship has never been better. There is a new team the other side and we are engaging extremely closely with all the leaders there in the transformation of leadership on the Aviva side.

I think what is also happening as we see those volumes change is systems thinking and automation actually replacing some of the old traditional jobs and roles, and WNS now replacing them with higher quality, higher value, higher impact roles that will stay with us for the longer term. So I am actually very positive about how that relationship is playing out now.

Thank you.

Thank you for your questions. That does complete your question-and-answer session. I would now like to turn the call over to Keshav Murugesh for the closing remarks. Please go ahead, Keshav.

In closing, we believe that the Company continues to make solid progress towards our key financial and operational goals. WNS must continue to execute on our business plans and to work closely with our clients to provide them with the operational efficiencies, unique business insights, and transformational solutions required to help them compete.

Thank you for joining us today and we look forward to speaking with you again soon.

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect. Have a good day. Thank you.