WNS (Holdings) Ltd (WNS) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your WNS Holdings third quarter fiscal 2014 conference call. (Operator Instructions) Now, I would like to turn the call over to David Mackey, WNS' Corporate Senior Vice President in Finance and Head of Investor Relations. David?

Thank you and welcome to our 2014 third quarter earnings call. With me today on the call, I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our new Chief Operating Officer, Ron Gillette. 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 third quarter ended December 31, 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 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 operating margin and adjusted net income or ANI are defined as operating margin and 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 WNS' CEO, Keshav Murugesh. Keshav?

Thank you, David, and good morning, everyone. Our third quarter financial performance was largely in line with Company expectations. Third quarter net revenue came in at $119.6 million, which represents a 5.4% increase versus the same quarter of last year and a 3.7% increase sequentially. Excluding the impact of exchange rate movements, our third quarter constant currency revenue grew 6% year-over-year and 1.1% sequentially. Margins and profits also expanded both sequentially and year-over-year and the Company produced solid cash flow. During the third quarter; WNS added four new logos, expanded eight existing relationships, and renewed four contracts.

This quarter we signed our fourth large deal of the fiscal year with a brand name US-based insurance company. This five-year agreement will begin with finance and accounting and actuarial services and has a significant opportunity to expand into larger operational process areas as the relationship progresses. We believe this client has potential over the next few years to become a top-10 contributor. WNS continues to target five to six large deals this fiscal year although as we have discussed, the timing of formal contract signature and ramp of process handoffs remain somewhat unpredictable. The new deal pipeline remains robust and we are comfortable with the progress our sales team is making in growing the overall size of the pipeline and moving opportunities along.

At the end of Q3, we had 81 sales resources across the globe with the team composition skewed slightly towards hunting profiles. As we have discussed on previous calls, our revenue momentum is driven by three key elements. One, the addition of new logos or new clients; two, our ability to sell new services to existing clients; and three, business volumes on processes we already manage. Year-to-date, we are pleased with our addition of 16 new logos including three, which qualified as large deals. While new logos typically do not have a major impact on current year revenue, these relationships are critical to driving growth in the medium to long term. Conversely, cross selling services to existing clients has the potential to impact revenue in the short to medium term.

Our ability to expand existing relationships is a function of our organizational capabilities, sales productivity, and client penetration levels. While we continue to have some mature and sizable relationships that moderate the overall Company growth rate, we have made good progress in ramping and expanding several key clients, which have been added over the past two to three years. As a result, our customer concentration is steadily reducing and our overall ability to form existing relationships is improving. Our top client for example has contributed 16% of revenue in fiscal 2014 whereas this same client represented almost 21% of the revenue two years ago.

Finally, the third component of revenue momentum is client transaction volumes on processes we already manage. This area is driven by the clients' business health and is largely beyond our control. Overall, we are pleased with our progress around the controllable elements of our business year-to-date. However, we must continue to drive improved sales productivity for both new client additions and existing client expansions to ensure revenue acceleration going forward. In the third quarter, our attrition rate reached its lowest level in several years coming in at 30%. In fact, WNS has recently received two awards validating the improved strength of our organization in the area of people management.

WNS won the Gold Award as the Global Learning and Development Team of the year at the 5th Chief Learning Officer Awards. This award recognizes WNS as one of the premier learning and development organizations in India. In addition, the WNS Learning Academy received a Corporate University Best-in-Class or CUBIC Award at the 15th annual Corporate Learning Week in the category of Best New Corporate University and Internal Training Organization. The CUBIC Awards recognize learning and training organizations that set the standards of excellence in the industry. We are also thrilled to announce that for the second consecutive year, WNS has won the prestigious Golden Peacock Global Award for Corporate Social Responsibility. This award underscores our commitment to educate, empower, and enrich underprivileged children and to help make a positive impact in the communities in which in we live and work.

With respect to new services, WNS has been quite active over the past few quarters in rolling out new offerings to address the BPM market. Through a combination of strategic partnerships and internal R&D efforts, our Capability Creation Group has helped WNS enhance our capabilities in several key areas. Last month, WNS announced a new strategic partnership with Ramco Systems to provide business process as a service in FAO and HRO. Leveraging Ramco's cloud-based enterprise software platform and WNS' people management process services, this joint offering will initially target customers in North America and Europe. Additionally, WNS has recently partnered with Denodo to create a new service delivery framework for Managed Analytics. This offering helps bring together multiple fragmented data sources across internal and external data sets creating a unified virtual data layer.

We have also struck partnerships with IRIS for XBRL solutions, Denali for strategic sourcing & procurement, and coAction for order to cash. Internally, we continue to invest in WNS owned IP in the areas of technology enablement and platform-based solutions. These include announcements to existing platforms such as VERIFARE, our airline revenue auditing service; JADE, our passenger revenue accounting platform; and custom solutions for SAP and Oracle around accounts payable work bench, vendor portals, and e-invoicing. We have also created a new solution for addressing the issues faced by companies using procurement cards or fee cards and rolled out a new offering called [CashWiz], which is a cloud-based cash application platform designed to match invoices to payments leveraging fuzzy logics.

WNS provided an update for our full-year fiscal [2004] guidance in a press release issued earlier this morning. Sanjay will speak in his prepared remarks about the full-year numbers, but I wanted to provide you with some color around fiscal Q4 revenue. Our implied revenue guidance for the last quarter of the year is $121 million to $123 million, which represents accelerated growth versus Q3. In the fourth quarter, we will see revenue ramping for at least three of the large deals signed earlier this year. Partially offsetting this acceleration is an anticipated ramp down with one of our large online travel clients. The client has notified us that in Q4 they will begin moving some of their customer care and sales processes currently managed by WNS to a branded technology platform, which is being managed by another online travel company.

This transition is being driven by a strategic marketing agreement, which was signed between the two OTAs in August of 2013. While the magnitude and timing of the transition is yet to be determined, WNS has now been approved as a strategic partner to both companies and we are in the process of retaining resources on the new technology platform. Our ability to quickly acquire knowledge of the new platform along with leveraging our expertise in the online travel industry and value-added service approach will be critical in helping WNS compete with incumbent vendors for a larger overall scope of business. The good news is that we have already received our first commitment for providing similar services to the new OTA and as we move forward, we hope to secure similar if not increased volumes over time.

We do expect, however, that there will be gaps in the transition, which will impact Q4 of 2014 and could potentially create a headwind in 2015. That being said, as we move into the final quarter of 2014, the macro-demand environment for BPM remains stable and healthy. Sales cycles and project ramps for large engagements continue to be slow and cautious, but these opportunities are moving through the pipeline and decisions are being taken. We see solid demand for higher value services; including industry specific BPM, finance and accounting, and research and analytics; and feel WNS is well positioned to capitalize on these market opportunities. We remain committed to our long-term goals of growing at or above industry rates and improving margins and profitability and believe we are making solid progress towards these goals.

As you may be aware, WNS issued a press release in November announcing that we have hired a new Chief Operating Officer, Ron Gillette. Ron joins us with a proven track record of leadership and expertise in the offshore BPM industry. Ron will manage the sales, operations, and capability creation groups for the Company. He will also be responsible for delivering on our strategic initiatives and driving operational excellence and profitability across the organization. From my perspective, Ron's addition increases the strength and depth of the management team and will allow me to focus more of my time on strategy, client facing activities, and brand building.

At this time, I would like to introduce WNS' new Chief Operating Officer, Ron Gillette. Ron?

Thank you, Keshav. I'm thrilled to join WNS and look forward to working closely with the entire team to help improve our differentiated positioning and accelerate business momentum. My first few months at WNS have me very excited about the opportunities for this Company going forward. We have a great team in place, deep domain and process expertise, and a blue chip roster of clients. Three key areas of focus for me both short term and long term will be increasing the depth and breadth of our service offerings, driving increased sales productivity, and improving profit margins. I expect to work closely with our business unit heads and Capability Creation Group to expand our vertical and horizontal services and to increase the use of technology in delivering solutions.

On the sales front while the team is clearly headed in the right direction, there is still significant opportunity for improvement. We'll continue to fine-tune the size and skill sets of the team and to increase the process rigor in managing the pipeline with the goal of improving closure rates and revenue visibility. With respect to the Company margins, there are several key levers which will be actively monitored and managed including global seat utilization and revenue and profit per employee. We will update you on the progress towards these initiatives in the coming quarters. And I look forward to interacting with the analysts and investor community in the near future.

I'll now turn the call over to Sanjay Puria, WNS' CFO, to provide the financial update. Sanjay?

Thank you, Ron. With respect to the third quarter numbers, net revenue increased to $119.6 million from $113.5 million in the same quarter last year growing 5.4%. On a constant currency basis, year-over-year net revenue grew 6% when accounting for depreciation in the Australian dollar and South African rand against the US dollar. Sequentially, net revenue increased by $4.3 million or 3.7% with revenue aided by 4.4% appreciation in the British pound against the US dollar. On a constant currency basis, third quarter revenue grew 1.1% sequentially. Year-over-year revenue growth was led by the Banking & Financial Services, Utilities, and Shipping & Logistics verticals; which all grew over 20%.

From a service offering perspective, revenue growth was paced by finance and accounting and research and analytics, which grew 22% and 9% respectively when compared to last year. Sequentially, revenue growth was broad based across verticals and service offerings. Manufacturing, Retail, CPG grew 11% quarter-over-quarter with Insurance and Utilities each posting more than 8% sequential improvement. The travel vertical was impacted by the seasonal reduction in calendar quarter four bookings and associated transaction volumes and as a result dropped 4%. Adjusted operating margin was 18.4% in quarter three as compared to 13.9% reported in the same quarter of fiscal 2013 and 16.2% last quarter.

On a year-over-year basis, adjusted operating margin improved 450 basis points as a result of depreciation in the Indian rupee, increased operating leverage on higher volumes, and improved productivity. This benefit more than offset our investments in global infrastructure and the impact of our annual wage increases. The sequential adjusted operating margin improvement of 215 basis points is largely the result of depreciation in the rupee, which mitigated the impacts of reduced productivity and seat utilization. Interest expense this quarter was $0.7 million, down slightly from the $0.9 million reported in quarter three of last year and the $0.8 million reported in the previous quarter.

The Company's other income was $2.5 million in the third quarter, up from $1.3 million reported in the same quarter last year and $1.8 million last quarter. The year-over-year increase in other income is the result of higher cash balances and improved returns on our India based investments. Sequentially, other income was up by $0.6 million as a result of timing on the recognition of investment income. WNS effective rate in the third quarter was 16.4%, up from 13.5% last year and 13.3% in the previous quarter. We currently estimate that our full-year tax rate will be in the range of 15.5% to 16%. The Company's adjusted net income for quarter three was $19.8 million compared with $14 million in the same quarter of fiscal 2013 and $17.2 million last quarter. This represented growth of 42% year-over-year and 15% sequentially.

Adjusted diluted earnings were $0.38 per share in quarter three, up from $0.27 reported in the third quarter of last year and $0.33 in the prior quarter. As of December 31, 2013, WNS' balances in cash and investments totaled $122.5 million, the gross debt position was $87.6 million, with the Company reporting a net cash position of $34.9 million at the end of quarter three. WNS generated $22.6 million of cash from operating activities this quarter and free cash flow of $16.9 million after accounting for $5.7 million in capital expenditures. DSO in the third quarter came in at 31 days, down from the 32 days reported in quarter three of last year and up from 30 days reported last quarter. With respect to other key operating metrics, our total headcount at the end of the quarter was 26,578.

As Keshav mentioned, our attrition rate in quarter three was lowest it has been in several years coming in at 30%. This is down from 33% in the same quarter of last year and 35% in quarter two. While the attrition rate can vary quarter-to-quarter, we are pleased with the overall trend over the past few years. Billed seat capacity was 23,342 at the end of the quarter, up 721 seats or 3%. The Company added additional capacity in both Sri Lanka and the Philippines to support firm demand. Average billed seat utilization in quarter three was 1.16% as compared to 1.20% reported in the same quarter of last year and 1.17% in the previous quarter. As Ron mentioned, the Company is focused on driving improvement in seat utilization over the next couple of years while continuing to ensure that we have sufficient capacity to service our clients globally requirements.

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 $470 million to $472 million representing year-over-year revenue growth of 8%. Revenue guidance assumes an average British pound to US dollar exchange rate of $1.63 for the fourth quarter of this fiscal year or an average full-year exchange rate of $1.58. Excluding the impacts of projected year-over-year currency headwinds, including depreciation in the Australian dollar and South African rand, our constant currency revenue guidance represents growth of 8% to 9%.

We currently have over 99% visibility to the midpoint of the revenue range, consistent with January guidance in prior years. Adjusted net income is expected to be in the range of $70 million to $72 million for fiscal 2014 based on INR62 to US dollar exchange rate for the fourth quarter or an average full-year exchange rate of INR60.4. This adjusted net income implies adjusted EPS of $1.33 to $1.37 on a diluted share count of approximately 52.5 million shares. At the midpoint of our guidance, adjusted net income is growing 34% on revenue growth of 8%. The Company expects CapEx level to be in the range of $20 million to $22 million in fiscal 2014.

We'll now open up the call for questions. Operator?

Thank you, sir. (Operator Instructions) Joseph Foresi, Janney Montgomery Scott.

My first question here is just on the large deal signings, I think you were targeting five to six for next year. How do we think about the four that have been signed? And I think you've also discussed in the past targeting better than industry growth rates and seeing the acceleration next year. Do we have enough deals signed and how should we think about that versus kind of the earlier commentary versus the industry growth rate?

Joe, so I'll take that. So when we spoke about four deal signings and five to six, for this -- we refer to this year and not the next year. So at this point time we have four already executed and we're still targeting one to two more during this year. From an overall growth point of view and going into 2015, obviously it's very early for us as we continue to do our planning process and we'll probably be in a better position to provide an update sometime in April in terms of our numbers and what the likely growth is going to be. But at this point in time, I would like to say that WNS continues to be extremely focused on driving at or higher industry growth rates from an overall performance point of view.

And to just add a little bit of color to that, Joe, I think as Keshav mentioned, we are tracking in terms of the number of large deals that we've signed. I think the dispersion of those deal signings across the year have been pretty even so we're pleased with that as well. It wasn't completely back-end loaded. The deal ramps have probably been a little bit slower than we would have liked overall although we did see some good acceleration here in Q3 and do expect to see some good acceleration in Q4 in terms of how these deals are going to ramp up. So we feel good about the progress we've made on large deal signings and how that positions us as we exit the year.

So I guess without getting too specific, the four deals obviously would lead you to believe that an acceleration per year, what you just said, the momentum in the business should continue heading into next year, is that fair?

Yes, I think that is fair. Right.

Okay. The second question here is just on the large deals, we've seen them kind of caught up in the pipeline for some of your competitors. How are those progressing at this point? And would it be fair to say that we should see an improvement or a pick up in the decision making as the macro begins to improve?

Well, from our perspective, as Dave mentioned earlier, the pipeline continues to look healthy. It does have few large deals in it and the fact that they've been in the pipeline for a while means they are all moving towards the stage where decisions are likely or imminent sometime soon. So from our perspective, we believe that the whole messaging around BPM and the advantage that this model offers is already received and it is less to do with how the business environment is, but it is much more to do with how boards and key decision makers inside companies perceive risk and also perceive a disruptive model within the company. So as long as you're able to take them through that whole journey successfully irrespective of how the business kind of environment is, we believe we will be successful in terms of these conversions.

Okay. And then the last question from me. We didn't see the headcount move too much when you signed these large deals. How should we think about the relationship between headcount, large deals, and then some of the commentary that we've talked about regarding margin expansion? How should we think about that going forward?

Sure. I'll take that, Joe. And obviously, there's a number of moving parts embedded in that question. The reality is one of the things that we are focused on as an organization is continuing to look at ways to improve productivity, to introduce technology into our services. And as a result, one of the key objectives in terms of our ability to improve margins going forward will be increasing revenue and increasing profit per employee, and Ron spoke a little bit about that in his prepared remarks today. What we want to do over time as the industry evolves and moves more and more towards transaction-based services and ultimately towards business process as a service is get to model the [delink] revenue growth from headcount growth and we've made a little bit of progress in terms of doing that.

Obviously when you look at new deals and how they typically start especially with clients that are new to Business Process Management, most of these deals tend to start on an FTE basis. So, we've kind of got this balancing act where we're bringing in new clients that are typically starting on an FTE basis. However, as some of our more mature clients move through the process, we move to higher value models, more variable models and as a result, have the opportunities to improve productivity. So, kind of a number of moving parts embedded in there, but I think the metrics you want to watch going forward with respect to how margins are going to behave would really be looking at both revenue per employee and profit per employee.

Great. Thank you.

Paul Thomas, Goldman Sachs.

Just starting off to understanding the travel transition going on. Were you already working with the other party or the agreement you mentioned, is that the first work you've done with the company that's taken over that business?

Right, yes. So the other company with whom our existing client signed this marketing arrangement is also a company that we recently signed as a client. And the good news, as we mentioned, is that we recently started work on a new transition with this larger OPA so to speak so this is an existing client of ours that came in recently. It's a much larger kind of OTA in terms of its global operations and scale and volume. And yes, we are happy to say that we've already started transitioning new work with them.

I think, Paul, the other way to answer your question is we did win some small piece of the business with this client a couple of quarters back. They were in a completely different area of the business and they were based on some of the proactive sales efforts that we had within this client. I think the good news is as a result of being on that preferred vendor list, what it's allowed us to do is as this transition starts to take place is to work aggressively and try and get up to speed to try and win this work on the back end, if you will. But the good news is we've won some work with them in terms of areas that were out of scope with our existing client. We've also won, as Keshav mentioned, the first piece of work to pick up some of the business that has transitioned over.

Okay. I guess so how much visibility do you have at this point? Should we be thinking about your existing client being half the size it is next year as it is this year or is it too early to kind of make that kind of judgment?

So Paul, it's too early for us to actually guide in that format or to provide significant color on this particular transaction because this is something, as we mentioned earlier, which was not really in scope when the marketing agreement was announced in August between the two companies. And WNS just became aware of this just before the holidays and I think all we want to do is put it out there and help you understand that we've been told about it. The company gives us quarterly projections. At this point in time, they've given us a projection for the fourth quarter and therefore the fourth quarter numbers that you see out there assumes actually a reduction in the run rate from this particular client based on this transition that is taking place. But as they update us in the normal format, which they do once a quarter, we will be in a better position to provide an update in terms of how this will play out.

Okay. Thanks for that. Maybe switching over to margins. Could you talk a little more about the potential for further margin expansion? How should we think about the sustainability of the current margins given mostly FX benefit in the quarter? Looking ahead into next year with wage increases and eventually higher utilization rates, should we be looking at this margin level as being something we should think about for next year?

I think, Paul, it's a good place to start. I mean clearly I think when we look at our business going forward, we've had a benefit this year from currency. We've given back some of that benefit however through losses on our hedge positions. We have layered on hedges for next fiscal year, which do give us a healthy level of protection in terms of currency around the margin profile for fiscal 2015. And as we talked quite a bit about, we think we've still got a pretty significant opportunity to leverage the investments we've made in the sales force and leverage the investments we've made in the infrastructure. Now, we obviously have to watch and see kind of what happens with our business volumes and where the growth is coming from versus where potentially some of the pressures are and have to take a look at how that will impact our seat utilization going forward. But clearly, managing some of those key levers as we move forward and trying to protect or improve the margin profile into 2015 is something that we're pretty focused on.

All right. Thanks a lot, guys.

Manish Hemrajani, Oppenheimer.

I was wondering if you could discuss a little bit about the competitive situation out there particularly as last year's multinational companies have increased their visibility in the BPO market. How has that impacted the deal win rates and sales cycles? We've had some of your peers talk about larger deal sizes and elongation of sale cycles. Can you comment if you're seeing something similar out there?

Well, in terms of what we have experienced, we're not seeing any significant change from what we have guided you towards over the past few quarters. We continue to see sales cycles longish, we continue to see a lot of interest and activity from the risk managers or the risk heads within the clients' environment, sometimes Boards getting very involved in the decision making cycle, we continue to see a number of visits from prospects into our facilities as they look at an end-to-end kind of a model with us. So, we've not seen any great change in that thinking. But having said that, after winning a deal as we have mentioned earlier, sometimes we do see delays in ramps which sometimes catch us off-guard. But on an overall basis, I haven't seen any significantly different behavior from what we guided you towards a few quarters ago.

Got it. Seat utilization ticked down again a tad this quarter. What kind of progress do you expect to see on that front as we go through this year and what's the key factor holding it back from getting to the levels of the past?

Let me first address a part of that question and have Dave, Ron, and Sanjay talk about the rest. But seat utilization really is an important lever for us and we keep a close watch on it. But one of the things that has happened and which we have guided you towards in the last few quarters also is that as we win some of these new clients and expand some of the new programs with existing clients, we're actually seeing that some of the new growth has actually come from locations outside of India where we already have the capacity ready. So, it's quite interesting because the kind of business and the mix of business and the geography delivery location has changed.

So if you look at our CapEx and you look at where we have created seats in the last one year, the bulk of it really has happened in locations outside of India; South Africa, the Philippines, Sri Lanka, China, some of those locations; and we've actually had to add capacity to service some of these clients. So for the time being, that has actually ensured that we have not been able to take seat utilization up. But we think it's a great investment for the long term because what's actually going to happen with a number of these new clients and these new processes in particular is after the first wave is completed, the heavy lifting will again be done from some of the offshore locations where the seats will then get utilized. And maybe you guys want to add more color to that?

And maybe just to add to that, as Keshav mentioned that, some of these locations where we have added the capacity which is not India, and specifically in the last quarter where in my remarks which I mentioned that we have added in Philippines and Sri Lanka based on those large deals what we have won and the global nature of the opportunities whatever is there. But having said that, as the investment has already being done in India, there is an opportunity to leverage those investments. And as Ron mentioned, the focus will be there to improve some of those seat utilization number, but we'll have to continuously invest as and when the opportunity comes and where the client demands.

I think the other thing that's important to understand is that as we get more productive on some of these things and we talked a little bit about the fact that revenue per employee is moving up and profit per employee has been moving up. As we focus on reducing the number of headcount we need to deliver the same services especially where we've got, as Keshav mentioned, heavy lifting; one of the things we want to be conscious of the fact is that we want to try and use fewer and fewer heads to deliver the same services. So while the long-term growth projections are clearly for India, what we see though is with some of our more mature processes that we manage as we continue to get more productive on some of those processes, we require less and less headcount. So, that's also one of the counterbalancing areas that we've seen that's affected the seat utilization, especially in India, which drives by and large the overall corporate seat utilization.

So then coming back to my question, what kind of progress do you expect to see on that metric as we progress through the year?

I think there's two answers that question, Manish. One is we expect to see progress made over the next couple of years and we are focused on making sure that we do see that improvement. The reality, however, is the fact that a lot of it has to do with what we sign and when we sign it. So if, for example, we see that the pipeline becomes heavily stuffed with large deals that require resources in Poland or Romania or South Africa or the Philippines; our ability to drive up our seat utilization will be difficult. But we don't believe, as Keshav mentioned, that long term that's going to be what the business model is. That's not what clients are looking for. So, we've kind of seen a little bit of shift in the last couple of years to where if you went back three or four years ago, about 80% of our work was delivered out of India. If you look at the most recent quarter, only about 70% of our work was delivered out of India. So there has been a fundamental shift, it's put some pressure on the seat utilization and the investments that we've made. But long term we feel that we've made investments in the right place and as those investments will allow us to improve margins over the next couple of years and also to drive down our effective tax rate.

One last one from me. On the large deal win with the US-based insurance company, who do you go up against and can you highlight some of the factors which contributed to you winning the deal?

Sure. So I can talk about what I think the client would be comfortable with. But essentially, I can mention to you that we did run up against some of the usual suspects from the pure play side who are experts on the insurance domain. We probably had one or two of the IT players in there as well. And the reason we won is because we were the most relevant, probably had the best experience, and the best company as a partner for this client.

Okay, got it. That's all I had. Thanks.

Rahul Bhangare, William Blair.

Keshav, can you comment on just the pace of pipeline growth and how it's trended over the past few quarters?

Sure. I have been extremely positive about how the sales force has actually developed the pipeline over the past few quarters. I continue to be very positive about how that pipeline continues to increase and how deals are flowing through that pipeline and again more importantly; it is broad based, it is across industry verticals as well as horizontals. For example on the horizontal side, Finance & Accounting and the analytic area is showing huge kind of impact in terms of the deals that we are in play with. And what is very exciting for us is the fact that the US pipeline has also increased dramatically and particularly in our Insurance portfolio.

So overall I would say that pipeline continues to look strong, deals continue to flow through the pipeline, and in terms of size, scope, and scale; deals which are bigger than what we have traditionally seen in the past. Having said that, I want to also mention that decision taking continues to take a long time. We continue to work closely with clients and help them move through the process. We do have situations where after spending many months with a client, a deal may get called off because the Board is still not comfortable with going through this disruptive model. But I think we have enough deals in the pipeline to counterbalance even that impact.

Would you say that an improving economic environment is helping or hurting cycle times?

Well, actually from our perspective as I mentioned earlier, I think the relevance of our thinkings and our solutions to our clients is probably far more relevant. So intuitively if it was just a case of companies wanting to reduce cost, a moderate or a bad economic climate should have actually meant that they would take decisions faster. I think it's a lot to do with the appetite of the client, where the decision is being driven from, and how the client or the prospect is partnering with a strategic partner that is actually going to make the difference as opposed to a changing economic kind of environment.

Okay, thanks. And then just two more quick ones. One, this may have been answered already, but have we quantified the headwind from the lower volumes from the travel client in Q4? And also if the rupee stays at INR62, should we continue to see the FX loss decrease sequentially?

Sure. This is Dave. In terms of the impact in Q4 from the ramp down in the travel client, we're looking at about $2 million in terms of the impact. So versus our previous guidance, that would be what has dropped off at the high-end of guidance, if you will. With respect to the rupee being at INR62; yes, clearly what's happened throughout the past 18 to 24 months as we've rolled down our hedging coverage, we rolled it down progressively at a depreciated rupee to dollar rate and as a result, we would expect to see the FX losses reducing in the fourth quarter. Also we should expect to see as we move into fiscal 2015 that those FX losses continue to reduce if the rupee stays where it is as well.

Great. Thanks, guys.

Puneet Jain, J.P. Morgan.

So Keshav, why is there increased focus on governance and Board's interest in these large deals over last one year? Would you attribute it to WNS going after larger deals than before or due to some structural reasons such as say regulations or something else?

No. I think the key reason would probably be because quite a few of these companies are first-time outsourcers or at least doing first-time outsourcing on the business process side. We saw that last year or a year-and-a-half ago with our large Australian win where, as I mentioned a number of times on the previous calls, we actually had the entire Board of that company actually come in twice to interact with us as they went through wave one and then went through wave two. We've had a lot of interactions with the risk head at that company. And we're seeing that with any large company that is looking at doing something that is transformational in nature. See, the nature of the business also has changed quite a bit.

Today what is being won by companies like WNS is an end-to-end kind of a process or a service and as a result of that, a lot of comfort is needed to be built with some of these companies in terms of just a disruptive kind of new business model. Sometimes it's also education of some of their Boards in terms of how this will get done from five or six different locations as opposed to one location that they were used to getting it done from. So I think it's just a little more governance. But actually when we see that level of commitment, we are actually extremely confident that no one is going to spend that much of time, money, and effort if they are not going to dramatically step on the accelerator and grow the relationship with a partner like us. So, we actually believe it's a good sign for WNS when that happens.

Understood. And just to be clear, you are seeing improvement in ramp rates on such deals on sequential basis and could that trend help year-on-year growth next year given it was such a big headwind in fiscal 2014.

I think overall, Puneet, what we're saying is that we're seeing some of the larger deals that we signed this year ramping at a healthy clip and we saw some of that have a positive impact on Q3. And obviously given some of the headwinds that we've talked about with the large travel client, we have good visibility to how some of those deals will continue to ramp as we move into Q4. So, we feel good about how some of the large deals that we've signed this year are ramping. I don't think they are ramping at an accelerated pace or a decelerated pace versus what the others were. I think it's just a question of each specific opportunity and how quickly the clients want to move. But at a macro level, I don't think there's been a change in pace in terms of either deal signings or deal ramps.

Thank you.

Dave Koning, Baird.

I guess my first question is just we added up that the transaction based revenue, the outcome based on the fixed price and it looks like those three in aggregate are down about 12% year-over-year and we actually took the dollars generated by those three and they're actually below Q3 of 2011 so below the three-year ago dollar number. I know that's kind of one of the keys to just improving margins in utilization everything over time. I'm just wondering why those are down year-over-year and just from three years ago.

I think the simple answer, Dave, is you need to understand the mix of clients that drive each of those specific buckets. And obviously when you talk about things like transaction-based or outcome-based service models, we're usually talking about more mature customers. So for example when we have challenges within a given quarter like we did this quarter with the travel vertical in terms of how that moves sequentially, that creates pressure on our transaction-based revenues. When we have some of our larger clients that have not grown or have actually shrunk a little bit over the last couple of years, that tends to put pressure on the transaction-based and the outcome-based models. So, I think it's more a function of the mix of clients than it is any kind of overall type of trend we're seeing in our business or what customers are looking for. What we are very optimistic about now is some of these large relationships, as Keshav mentioned, that have started to accelerate over the last two to three years, some of the larger deals that we've signed.

As they move into kind of more mature states and the client gets more comfortable with Business Process Management and specifically more comfortable with WNS, that we will start to see some of those large business models move into transaction-based and outcome-based models. So you kind of have that shift, I think as Keshav alluded to, between what you sign on the front end, which is FTE-based; how it moves through a maturity curve into transaction and outcome-based models; and then when a client gets very mature and the opportunities for growth start to slowdown, how you see productivity start to impact the overall percentage of revenue there. So I think it's just kind of a natural evolution and I think it moves a little bit over time, but we're actually pretty comfortable with our mix of services and feel very good about our ability to move some of our larger clients along down that path.

Okay. That sounds good. And then the South African based revenues were down looked like 25%, 30% sequentially. Is that a seasonal impact of the call center down there or did some of that volume move or something?

I don't think you would have seen a significant decrease. You might want to take a look at those numbers, that doesn't make sense.

Okay. There was something in the supplement, it looked like the percent of revs went from 4.5% last quarter down to 3% this quarter in South African based currency revenue, something like that. I'll double check though just to make sure.

Yes, take a look. I don't think we should have that kind of an impact. But we can take that offline.

Yes, that's fine. And then the final question. You mentioned a few puts and takes as we look into next year; the large travel client might have a little negative impact next year, the new signings should have a positive impact, I'm guessing that Sun Life the acceleration we saw from that kind of this year and a little bit last year, hard to keep that acceleration up. So net, it kind of feels like next year the growth rate shouldn't be that dramatically different than this year just given kind of the puts and takes we know about as of today. Is that right barring any changes that kind of come up over the next few months?

I think a lot of it has to do with, Dave, not only what happens with the volumes on the processes we already manage, as Keshav mentioned, but a lot of it has to do with how quickly some of these large deals continue to ramp. I think your comment about our large insurance client that was signed a few years ago not having the capacity to continue to grow at a healthy clip is not correct. I also think there is significant opportunity for us to grow and expand several of the larger clients that we've added over the last two years. So we actually feel good about the expansion opportunities that we have with what we've signed and their ability to generate accelerating growth for the Company. The real wild card comes from what happens with our existing customer base.

Got you. Okay. No, that's great. It's been a good year. Thanks.

Edward Caso, Wells Fargo.

It's Rick Eskelsen on for Ed. Just two quick ones for you. One, you mentioned the strength in the F&A this quarter on a year-over-year basis. Can you just remind us what's driving that growth and then more broadly what are you seeing in the F&A horizontal in general?

Sure. I'll take that, Rick. I think relative to F&A, what we see is kind of similar to how deals often start with FTE-based models. I think for a lot of clients the fact that F&A tends to be a little bit more back office, a little bit less core to operations, it tends to be an easier place for clients that are new to Business Process Management, it's an easier place for them to start. So when new engagements, new relationships kick in; it's very easy to start with accounts payable, accounts receivable, and move up the value chain into higher value services like general ledger and treasury and tax management. So to me, it's kind of part of the natural evolution of the relationship and what we want to do is over time take those F&A relationships and make them more about industry specific [BTO], which is where you really see the heavy lifting, the core operational processing that comes with understanding the client's environment and is a logical extension of doing some of the F&A work. So it's not surprising to see F&A growing, it's not surprising that it's one of the easiest areas in what's a difficult business to transition.

Okay. And then just I guess building on that, just to clarify on the large deals. I believe you said that the one this quarter was a new logo. Can you remind us how many of the four that you've signed this year are new logos? And any sense for how much that contributes maybe to the choppiness of the ramp up cycles that you might have seen so far?

Yes. I think it definitely contribute a little bit to the choppiness especially when you look at the fact that three of the four large deals that have been signed so far are new logos. So the visibility is clearly less, the timing tends to be a little bit less predictable, they tend to move a little bit slower versus ramping a new large deal or a new process with an existing client where there's a relationship, there's a comfort level, and there's probably a lot less administrative requirements to move these things forward. So, not surprising to see that.

Great. Thanks a lot.

Kunal Tayal, Bank of America.

My first question is actually on the margin side. Over the last year or so we've seen a nice expansion in margins. So I want to understand is the thinking that WNS wants to operate at as high a profitability level as possible or is there a certain target range that you have in mind beyond which every lever will be reinvested for growth?

Yes. I think, Kunal, at a macro level what we want to do is make sure we're properly balancing having competitive to industry leading margins with making sure that we're not missing out on opportunities to accelerate the Company's growth and it's always a balancing act. We don't have a specific margin target that we're shooting for us as a Company because I think that tends to lead to some interesting behaviors. If you target a specific number and say we're going to do X and as a result, you have better margins than that, what you end up doing in some cases is spending money that you don't need to spend. The flip side is if you target a number and you're below it for whatever reason, especially when you have currency that can dramatically impact margins; you may end up in a situation where because you're trying to hit a certain margin number, you end not investing in things that you should to drive growth.

So I think it's about making the right decisions for the business both short term and long term, balancing those things out with a goal of as we continue to look forward improving the quality of our service, improving the productivity on that service, and continuing to try and nurture margins forward. But we want to be competitive. Similar to where we are on revenue, ideally we'd like to be industry-leading; but we want to be industry-leading because of the value of our services and the value the clients place on those services not necessarily because we've cut costs or missed out on long-term growth.

I'll just add something there and that is that we are extremely focused on making sure that we continue to invest in all the right areas as David mentioned. But at the same time, as Ron mentioned earlier, we continue to believe that there are enough levers of margin expansion that we can use and we don't take our eyes off it. So as David mentioned, it's a balancing act; we keep focusing on it, but we don't shoot for a specific kind of a margin that's a base kind of a margin that we want. We continue to focus on growing both revenue and margin overall.

Right, understood. Keshav, second question with respect to the sales cycles both for WNS as well as industry as a whole. If there's this one parameter we have to watch out for that could bring down the sales cycle across the industry, would you think that would be generally because the environment is improving or would it be maturity offerings and the industry or could it be to do with the mix of the number of new clients versus old adopters of BPM that you have in the pipeline?

Look, if the decision maker on the other side just had a budget to deliver to or deliver against, then that would be a different discussion, which normally a CIO has on an IT services kind of a decision area. In our case, unfortunately quite often we are carving out a deal where there is none or a client actually generally has a high level idea of what kind of areas they want help with in terms of a strategic partner coming in. But then thereafter, there's a lot of selling to be done to various internal stakeholders as well, which is where this whole decision cycle gets expanded. But if you ask me, there is no magic bullet so to speak in terms of which specific area should change for them to take decisions faster. It's just a case of working better with them, working closer with them, and nudging them along to move to the decision process faster. And again, there are some clients that take decisions much faster as we have also experienced. Some deals that we expected to close later, actually closed earlier and some that we thought would close earlier, actually went out later.

I think, Kunal, it's actually fairly simple. It's a question of organizational focus and organizational commitment. And if the clients are strategically focused on running their core business and outsourcing things that are not core; once they've made those decisions, if those decisions are driven across the organization, they're going to take place regardless of the environment. What tends to happen though is that it's distractions within the organization that kind of move these things along in terms of delaying or accelerating the cycle. So it may not just necessarily be that an environment gets better and that causes clients to have less focus on this. It could be a situation where things get extremely bad and as a result, clients don't focus on it. So it really becomes a question of prioritization and if these initiatives because they are strategic, because they are disruptive, if they don't have senior level sponsorship and it goes CEO, COO, all the way into the Board levels; if it doesn't have executive level sponsorship, these things just aren't going to happen. They're going to start and they're going to stall. So, it's basically simply nothing more than organizational commitment and organizational focus.

Got it. Thank you.

Thank you. At this time, we have no further questions in the queue. This concludes today's conference call. Thank you for your participation. You may now disconnect.