WNS (Holdings) Ltd (WNS) 2014 Q4 法說會逐字稿

Good morning and welcome to the WNS (Holdings) Fourth Quarter and Full Year 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 on how to ask a question will follow at that time. As a reminder, this call is being recorded for replay purposes. And I'd now like to turn the call over to David Mackey, WNS' Corporate Senior Vice President of Finance and Head of Investor Relations. Please proceed, sir.

Thank you and welcome to our 2014 fourth quarter and full year earnings call. With me today on the call I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our COO, Ron Gillette. 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 fourth quarter and full year ended March 31, 2014. 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 that 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. We are pleased to report that during the fourth quarter, WNS was able to grow our top line, expand our margins and generate solid cash flow. Q4 net revenue came in at $122.7 million, which represents an 8.9% increase versus the same quarter of last year and a 2.6% increase sequentially. Excluding the impact of exchange rate movements, our fourth quarter constant currency revenue grew 7.8% year over year and 1.8% sequentially. This is despite headwinds associated with the transition of a large online travel client which was discussed last quarter. During the fourth quarter, WNS added five new logos, expanded six existing relationships and renewed 13 contracts. We also signed the fifth large deal of the fiscal year, adding a large US based healthcare client to our portfolio.

I would now like to take a few minutes to review the Company's 2014 accomplishments before we turn our attention to the upcoming year. Both financially and operationally, fiscal 2014 was a good year for WNS. Our net revenue came in at $471.5 million, which represented 8.1% year-over-year growth or 8.5% on a constant currency basis. This top line improvement coupled with operating and profit margin expansion helped increase our adjusted net income to $72.4 million or $1.37 per diluted share, up 34% from $1.03 in fiscal 2013. In addition, the Company generated $81.4 million in cash from operations and $61.8 million in free cash during fiscal 2014. Year-over-year, these represent increases of 26% and 42% respectively.

Operationally, the Company also made significant progress during the year. Our sales force productivity is gradually improving as evidenced by our five large deal signings, 21 new client additions and 37 expanded relationships. In 2014, WNS continued to invest in several key areas, including new horizontal and vertical service offerings, expanded delivery footprint, strengthened domain expertise and enhanced technology enablement. The success of these initiatives was validated by direct feedback from our clients and by the analyst and advisor community. In the past year, these key influencers have recognized WNS' capabilities in the areas of insurance, utilities, finance and accounting, social media business analytics, and corporate social responsibility with awards for leadership and performance.

We are also pleased with the Company's progress from an HR and resource productivity perspective. Our HR team received prestigious awards from TISS and CUBIC during the year, recognizing the Company's innovative efforts in the areas of training and talent management. These initiatives are helping drive our attrition rates lower and enabling WNS to improve delivery productivity. In 2014, our full year attrition rate reduced for the third consecutive year, coming in at 33%. This compares to a 43% attrition rate reported in fiscal 2011.

As we look forward into fiscal 2015, the demand environment for BPM remains stable and healthy. Sales cycles and project ramps for larger engagements continue to be slow and cautious, but these opportunities are moving through the pipeline and decisions are being taken. While WNS' underlying business momentum remains healthy, the Company will have some short-term revenue pressure in 2015. In a typical year, WNS expects to face up to a 5% revenue headwind from reductions in our clients' business volumes, committed productivity improvements and changes in clients' strategic plans.

For fiscal 2015, WNS enters the year with an expected revenue headwind of 11%. In addition to the usual volume and productivity reductions, there are two incremental challenges facing the Company this year. First, as was discussed last quarter, we have a large online travel client who is transitioning work from WNS to another OTA partner. As a reminder, our client is moving processes from their technology platform to leverage another OTA's superior technology platform under a marketing arrangement. And this is a technology platform decision and has nothing to do with WNS' performance. We now have full visibility to the transition plan which we will proceed on an expedited timetable. It is now estimated that most of the customer care and sales work currently performed by WNS will transition away by the end of July, creating a 4% year-over-year revenue headwind for the Company. Our visibility at the midpoint of guidance includes this reduction, but does not include the potential revenue from winning more business with the new OTA provider. We are working closely with this client, reiterating our resources on their technology platform and competing with incumbent vendors to increase our wallet share. We believe that this new relationship has the opportunity for significant expansion over the next few years.

In addition to the OTA transition, WNS has also entered into a tentative agreement with an existing major client for a five-plus year extension to our existing contract. This would take the contract expiration to March of 2022. Under the proposed terms, WNS would maintain exclusivity on all existing processes and geographies and be regarded as a preferred supplier for new areas. The client will receive a price discount along with productivity improvements linked to the movement of processes to non-FTE-based pricing models. While this extension is expected to create a 2% revenue headwind in fiscal 2015, we firmly believe that this agreement creates a win-win for WNS and the client and is in the long term best interest of WNS and our shareholders. Final terms and conditions are subject to the execution of the formal agreement.

Despite these challenges, the Company still expects revenue to grow between 4% and 10% for the year, and we currently have 90% visibility to the midpoint of our guidance range. We enter 2015 with a healthy new business pipeline and several large deals in play for the first half of this year. The Company is targeting a minimum of six large deals for fiscal 2015 although, as we have discussed, the timing of formal contract signature and the ramps of process hand-offs remains somewhat unpredictable. The entire WNS team continues to focus on improving sales productivity and we believe there is significant capacity for the team to increase closure rates for both hunting and farming opportunities. Demand in 2015 is expected to be driven by higher value, higher margin services including industry specific BPM, finance and accounting and analytics.

With respect to profitability, our ANI guidance of $77 million to $83 million assumes that both operating margins and profit margins will expand year over year. Similar to last year, key focus areas for 2015 includes sales force productivity, breadth and depth of services, domain expertise, technology enablement and operational excellence. We believe our investment philosophy and go-to-market approach is resonating well with clients and prospects helping create differentiation and positioning WNS for success in the BPM industry. We remain committed to our long-term goals of growing revenue and maintaining profits at or above industry rates.

I would now like to turn the call over to Sanjay Puria, our CFO, to discuss further our financials. Sanjay?

Thank you, Keshav. With respect to the fourth-quarter numbers, net revenue increased to $122.7 million from $112.8 million in the same quarter last year, growing 8.9%. On a constant currency basis, year-over-year net revenue grew 7.8% with appreciation in the British pound against the US dollar more than offsetting depreciation in the Australian dollar and South African rand against the US dollar.

Sequentially, net revenue increased by $3.1 million or 2.6% with revenue aided by appreciation in the British pound against the US dollar. On a constant currency basis, fourth quarter revenue grew 1.8% sequentially. Year-over-year, quarter four revenue growth was led by the shipping and logistics, auto claims, utilities, insurance and banking and financial services verticals which all grew over 15%. From a service offering perspective, revenue growth was paced by auto claims, finance and accounting and research and analytics, which grew 23%, 20% and 13% respectively when compared to last year. Sequentially, revenue growth was broad based across verticals and service offerings.

Adjusted operating margin was 19.1% in quarter four as compared to 15.8% reported in the same quarter of fiscal 2013 and 18.4% last quarter. On a year-over-year basis, adjusted operating margin improved 330 basis points as a result of depreciation in the Indian rupee, increased operating leverage on higher volumes and improved productivity. These benefits more than offset our investments in global infrastructure and the impact of our annual wage increases. The sequential adjusted operating margin improvement of 75 basis points is largely the result of currency favorability and increased volume, which more than offset the impact of lower seat utilization.

Interest expense this quarter was $0.7 million, down slightly from the $0.9 million dollars reported in quarter four of last year and consistent with last quarter. The Company's other income was $3.1 million in the fourth quarter, up from $1.6 million reported in the same quarter last year and $2.5 million last quarter. The year-over-year and sequential increases in other income are the result of higher cash balances and improved returns on our India based investments. WNS' effective tax rate in the fourth quarter was 19.1%, up from 14.9% last year and 16.4% in the previous quarter. The increased tax rate this quarter was the result of taxable exchange rate gains and geographic mix of profits.

The Company's adjusted net income for quarter four was $20.9 million compared with $15.8 million in the same quarter of fiscal 2013 and $19.8 million last quarter. This represented growth of 33% year over year and 6% sequentially. Adjusted diluted earnings were $0.40 per share in quarter four, up from $0.30 reported in the fourth quarter of last year and $0.38 in the prior quarter.

As of March 31, 2014, WNS' balances in cash and investments totaled $146.2 million. The gross debt position was $84.7 million, with the Company reporting a net cash position of $61.5 million at the end of quarter four.

WNS generated $25.4 million of cash from operating activities during this quarter and free cash flow of $22 million after accounting for $3.3 million in capital expenditures. DSO in the fourth quarter came in at 30 days, down from the 33 days reported in quarter four of last year and up from 31 days reported last quarter.

With respect to other key operating metrics, our total headcount at the end of the quarter was 27,020. Our attrition rate in quarter four was 31%, down from 36% in the same quarter of last year and up slightly from 30% in quarter three. While the attrition rate can vary quarter to quarter, we are pleased with the overall trend over the past few years.

Built seat capacity was 23,503 at the end of the quarter, up 162 seats or less than 1%. Average built seat realization in quarter four was 1.14 as compared to 1.18 reported in the same quarter of last year and 1.16 in the previous quarter. We recognize that seat utilization is an area where the Company fell short of our goals this year and we are focused on improving this key operating metrics over the next few years. That being said, we must continue to ensure that we have sufficient capacity and reach to service our clients' global requirements.

I would now like to provide you with a brief financial summary for fiscal 2014 before we turn our attention to the coming year. As Keshav mentioned, our net revenue for the year came in at $471.5 million, growing 8.1% on a reported basis and 8.5% on a constant currency basis. The Company's full year adjusted operating margins expanded 280 basis points to 17% driven by depreciation in the Indian rupee, improved productivity and higher business volumes. Interest income increased $4.8 million based on higher cash balances and investment returns while interest expense reduced $0.7 million on lower debt levels. As a result, adjusted net income increased from $53.1 million in fiscal 2013 to $72.4 million in fiscal 2014, growing 36.3%. From a balance sheet perspective, the Company's cash balances grew $28.6 million, while total debt reduced by $11.6 million.

In our press release issued earlier today, WNS provided our initial guidance for fiscal 2015. Based on the Company's current visibility levels, we expect net revenue to be in the range of $490 million to $520 million, representing year-over-year revenue growth of 4% to 10%. Revenue guidance assumes an average British pound to US dollar exchange rates of 1.66 for the full year. Excluding the projected year-over-year exchange rate impacts, our constant currency revenue guidance represents growth of 1% to 7%. We currently have 90% visibility to the midpoint of the revenue range consistent with April guidance in prior years. As Keshav mentioned, this guidance includes an 11% revenue headwind associated with the OTA transition, contract extension with our largest client and normal business volume productivity reductions.

The majority of the impact from the contract extension and OTA ramp-down are expected in the fiscal first quarter of 2015. As a result, we currently anticipate a sequential revenue reduction from quarter four to quarter one in the range of 3% to 4%. Despite some of the revenue pressures we have discussed, WNS is pleased to highlight that our 2015 guidance reflects year-over-year expansion in our adjusted operating margins and that once again our adjusted net income will grow faster than revenue.

Adjusted net income for fiscal 2015 is expected to be in the range of $77 million to $83 million based on our INR60 to US dollar exchange rates for the full year. This implies adjusted EPS of $1.44 to $1.56 on a diluted share count of approximately 53.3 million shares. The Company expects CapEx level to be in the range of $25 million to $30 million in fiscal 2015.

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

(Operator Instructions) Joseph Foresi, Janney Capital Markets.

My first question is on the guidance. I think typically what you've done is given a conservative guide to begin the year and then walked up the guidance as you've gone through the year. Has the methodology towards guidance changed at all? And what is the swing factor that puts you at the lower or the upper end? Obviously, you talked about the headwind, but I'm just wondering what, is that ramping of new contracts, how should we think about that?

Let me take the first stab at it and we will have Dave and the others talk a little more about it. But, Joe, you're right. Absolutely, first and foremost, I must tell you that the philosophy is consistent with whatever we have done across the previous years. So we have a 90% visibility today at the midpoint of the range. We know exactly what our booked commitments are at this point in time. And we also have entered the year with some solid potential deals for which we expect to see signings happen over the next two quarters, the first two quarters of this year.

So we have discussed the headwinds and we've baked all of that into our guidance, but what we expect will drive revenue higher in the range really is ramp from existing deals that we have already won as well as quicker conversion of some of the new deals, including some of the large deals that we expect to win at this point in time.

Then just kind of moving out to my second question, on the margin expansion front, can you give us a rough idea of minus of what the total potential margin expansion is and then give us some idea of what we can expect over, not just this year, but next year and how should we gauge that going forward?

Let me take a crack at that, Joe. I think when you look at the margin opportunities going forward for WNS, there are several levers that we have to pull here and certainly I think Ron will chime in here a little bit later about some of the things that we're doing to work on some of these productivity improvement initiatives. But the largest margin lever that we've talked about and Sanjay mentioned in his prepared remarks is the seat utilization. We are currently at an all-time low in terms of our average seat utilization. We've made significant investments into our infrastructure, and if you look at the lever that we have to pull over time there, if we can get from our seat utilization of 1.14 back to a seat utilization over the next couple of years of 1.25 for example, we're looking at north of 250 basis points of margin expansion opportunity. So this is clearly one of the big levers that we have going forward to continue to improve our operating margins. We also think there are some innate opportunities in the nature of the business and some of the things that we're doing in terms of leveraging investments on the SG&A side with accelerated revenue growth as well as opportunities over time as the industry moves towards higher value services and higher value models. So we directionally believe that long-term margins will continue to move forward. Obviously in a given year, anything can happen, but at this point in time we're excited not only about the growth opportunities for the Company, but the margin expansion opportunities over the next couple of years.

Okay. And then the last question from me, I think you said you're working on six large deals and if I remember last year it was about five and it seems to be growing. Is it fair to characterize the pipeline is potentially getting better and the sizes of the deals are getting larger? And how do you think about the pipeline this year versus prior years?

Joe, I think you're right there and I feel far more comfortable entering this year about first of all the overall pipeline and how well it is distributed both across verticals, horizontals as well as geographies, as well as the size and scale of some of these deals that we are playing in. And I must give full credits to our teams running our businesses as well as our sales force that have really positioned WNS extremely well with prospects, with clients, with the advisors, with the analyst community as a result of which we are being invited to many more deals than we were invited earlier.

And again, my confidence at this point in time is that we expect that we will sign six large deals, key six large deals during this year. So right now, our target is six large deals. But going into the year, we already have solid visibility to potentially each one of them already. And again, our focus is how do we ensure that these deals are actually executed on and signed off between Q1 and Q2 to allow the Company enough time to bring margins, to bring revenue and obviously margins in and also to recoup some of the impact of the speed bump that we faced with the large OTA, right.

And again, in terms of how this pipeline and the sales momentum compares with previous years, I would say significantly better and it's essentially because we are invited to every deal at this point in time and productivity of the sales force is a huge focus area and it is continuously going up. And I'm sure some of these things Ron would want to talk about further in terms of the steps he is taking to step it up even further. But we feel very, very confident about how we are positioned at the start of the year.

Rahul Bhangare, William Blair.

Thanks for taking my question. The large client that was renewed until 2020, I believe that that agreement was valid until about 2017. So I was just curious why renew the deal so early on. Was there some type of competitive threat at the account that drove that decision?

That's a great question and as you are aware this is a large client of WNS also a very valued kind of relationship. And as you are aware, we have a great relationship with this client and have constant dialog on various aspects of our relationship all through the year.

Somewhere recently, we got comfortable with the possibility of a win-win kind of opportunity which we have executed on over the past week or so. And therefore, in terms of timing, it has happened very recently, but it is something that has emerged from a very strong relationship with the client, understanding the clients' need, working on a win-win kind of a model and doing something, agreeably earlier than the time frame that was already contracted, but I think more focused on the long-term impact to WNS' shareholders.

And the reality is by doing this -- so there was no imminent threat of a competitor's kind of a bid in my view. But I think what we've effectively done is ensure that that is now -- that threat is taken away for a long period of time. We have positioned the contract in such a way that it's a win-win so not only is the client benefited but we are also benefited in terms of many areas, some of which we highlighted in the prepared remarks. The fact that we have exclusivity in all the existing processes, we have the right of first refusal on new processes, we are very, very focused jointly on moving more and more of this contract into a transaction price kind of a model which means over a period of time the ability for WNS to also expand margins. Most importantly, I will say that the way this contract has been re-written, it gives the client huge leverage to drive further savings inside their organization as a result of which we believe WNS will also benefit from revenue uptick.

And then the second question is around operating margin. I was just curious what operating margin assumption is baked into the guidance and you had mentioned that you are expecting improvement year-over-year? I was just wondering, how do you split that between FX and operating leverage?

Let me comment that, Rahul. I think that the Company does not provide specific operating margin guidance in terms of the target number. We have given you an ANI number and we've told you that we do expect some increased other income as a result of having higher cash balances.

The tax rate for next year is expected to be in the same range as it was this year. So it's pretty easy to back into what the range of adjusted operating margin looks like and once you see them, both the low and the high end, it does represent an improvement in net adjusted operating margin figure on a year-over-year basis.

Obviously, we do have baked into our numbers for fiscal 2015 some currency benefit as a result of not only how the currency has moved over the last six months, but also our long term hedging policy, which allows us to protect our cost structure going forward. I think we're looking at a balanced approach between currency and operating leverage in terms of the contribution for next year, understanding the fact that we do add some margin headwinds associated with the ramp-down of the OTA and the contract extension that we're discussing. So these are clearly not only revenue headwinds but also present some pressures from a margin perspective. Despite the fact that we've got both of those issues, we were able to deliver revenue growth and margin expansion this year and we're pretty excited about that.

Bryan Keane, Deutsche Bank.

Just wanted to ask about the five large deals won. Have all those deals -- or maybe you can give us an update on how many of those deals have already started to ramp up and then what is the target date to have all five deals starting to ramp?

Sure. I will take that, Bryan. Of the five deals, we currently have four of them that are in ramp-up mode. The one that we've signed most recently still has some work to do to be able to get that to ramp. We have not seen a steady state, I would say, on any of these opportunities at this point in time. So not only do we still have some opportunity in terms of growth to continue the ramp going forward on these deals that we've already signed, but we also believe that each of these relationships has significant expansion opportunity beyond the committed volumes that we've received so far. So really excited about what these are going to contribute next year, but also excited about the opportunity to continue to grow these relationships going forward.

And I just want to underline that last statement that Dave made because in every one of these deals we came in with a particular area as a starting point, but I am delighted to see that our BPM message where we are offering this end to end kind of strategic partnership model to each of these clients is resonating very well and we are seeing solid conversations taking place with each of these clients on processes beyond the original scope of work.

I'd like to also get just some thoughts on kind of two industry concerns. One obviously is close rate. It doesn't seem like close rates have been too much of a problem. It seems a pretty normal pattern stuff, but maybe you could talk a little bit about close rates on large deals since we've heard in the industry or some other competitors have talked about having a tough time closing some of these large deals and sales cycles getting extended. That's one.

And then two, pricing, there's been a lot of comments in the industry recently, especially by some of the multinationals talking about some weakness in pricing. Obviously a different type of area and the area that you guys are focused on but I would like to hear your thoughts there as well?

Maybe I'll take a stab at it first, but in terms of timing, there is some uncertainty. So for example, deals have been extended. The sales cycle has been extended, but we have not seen a significant change in terms of the timing and the tenure of these deals. So we've traditionally felt that large deals take about nine months or so to reach a decision stage. We continue to see that kind of a time frame. We haven't seen any significant change there.

Secondly, in terms of the scope of these deals, we at WNS are actually being invited to more of these deals now. Whereas from an industry point of view, we've heard a few people give out slightly different impressions in terms of the kind of deals they are seeing. I am happy to report that we are actually seeing more deal flow and more impact. All of us are flying around much more than we ever flow around before. We are sitting in much more -- many more client kind of meetings. We're actually seeing a lot of client visits into each of our delivery locations. So that's very positive from our point of view.

Now coming to pricing, I think WNS over the last few years has focused very strongly on a highly differentiated model as a result of which our ability to really strongly position the domain solutions, our horizontal higher end value kind of solutions and present it as a unique kind of a model to our clients has worked quite well. So we have actually not seen any pricing pressure. And as you've heard earlier, our confidence about actually building operating margins in spite of what everyone else is saying on pricing is high. So we've delivered last year, we expect to continue to deliver next year and that's a big, big focus area of this Company, just making sure that we do not dilute pricing power from our side and operationally we keep performing.

And maybe just to add to that, some of these large deals as well as they are complex deals because of the multi-towers so sometime contracting takes a little bit more time and the clients want to be really comfortable and accordingly the ramps goes a little bit slower than expected because they want to do in a phase-wise manner and be comfortable with that.

I think one of the things that's also important, Bryan, to differentiate is whether or not there's been a change in terms of the sales cycles to large deals versus whether or not there's been a change in the pipeline between the mix of large deals and small deals. And I think when you look at WNS, clearly the shift to selling large, multi-tower, complex deals with something that was impacting us two or three years ago and you saw it in the lack of revenue growth, you saw it in our conversations and our discussions around the pipeline and the fact that things were taking longer. But once you got a mature pipeline with large deals moving through all phases, it shouldn't impact the timing of deal signing. Certainly, it can be erratic quarter to quarter, but the reality is you need to have large deals at all phases of the pipeline, not just early on, to avoid having a gap in your revenue acceleration. And we feel very comfortable that we've not only been successful in signing more large deals each of the last few years, but we've also been successful in moving large deals through the various phases of our pipeline to where what we've now got comfort with several large deals that are coming out of the tail end that give us comfort and confidence about the six plus large deals that Keshav has talked about.

So you need to make sure that that flow is continuing to move and we believe we're there right now. But certainly if you're transitioning your business from farming activities with existing clients that can be fairly quick and not go through formal processes and involve a lot of pain and suffering, that transition to trying to sell large deals to new clients in a competitive environment can create some pain and some pause in your business.

Last question, a clarification from me, the OTA that's causing the headwinds this year, will it be a one-year phenomenon or will it lead also into next fiscal year as well? Thanks so much.

The OTA deal, right now we just got visibility from a transition perspective, but as Keshav also mentioned that we have enough opportunity and we have already entered into an existing relationship with the other OTA client and we have started some commitment with that and with that we feel there's enough opportunity for us in the long term from a growth perspective. So currently, the 4% headwind has been baked in our guidance and we are over that.

I think, the short answer to the question, Bryan, is when you look at the OTA transition, we expect that revenue to kind of go from where it is today down to its minimum level between now and July. So I would say 75% to 80% of the impact from the OTA transition will be felt this year. There may be some lingering year-over-year issue in fiscal Q1 of next year versus fiscal Q1 of this year, but the vast majority of this impact will be 2015.

Edward Caso, Wells Fargo Securities.

I guess my question is around the source of your pipeline and opportunities. Are these Greenfield opportunities presumably a little bit longer to bring over the fence or are they sort of takeaways or maybe the breakup of former mega deals?

Interesting question again. It's a combination of a number of things, I would say. And again, I want to really give my sales teams credit for positioning WNS in every one of the different kind of sources of these deals. I'll say first and foremost, it comes from Greenfield activity where we have chosen specific kind of names that we must target and we must own and we get after them and some of that may also include a faster decision taking place because of a breakup of a large deal somewhere else, right. But the credit for that really goes to superior sales by our sales folks. That's the first thing .

The second I would say is based on how we have really positioned our sales teams across geographies and across verticals which means we're actually positioned with completely new geographies where we traditionally did not (technical difficulty) as a credible player and we're starting to see good pipeline and good sales activity and closures out there.

And finally, I'll say that in a number of our verticals where traditionally we're extremely strong in Europe, particularly UK, we are now a very, very relevant and strong player both in North America as well as the Asia-Pac market. So I think it's very broad based, it's across verticals, it is across horizontals, across [space] and it's a combination of all of these including [our pickups].

And I think the other thing just to add a little bit of color to this, the other thing that's really exciting for us is when you look at some of the large deal opportunities that we've got in the pipeline today, we've been actually in a position to help lead the client in terms of developing how and why they should be moving towards the business process management. And several of the deals that we're talking about that are large in scope are situations where we've been able to highlight the existing relationships with clients that we have today and point out to customers why this is what they should be doing. So whether it's in the travel space, whether it's in the insurance space, whether it's in the utility space, what we're able to do is hold out an end to end deep relationship that we have and say this is the right way to approach it. And as a result, what's happening is some of these deals are actually getting structured [and our teams] feel really good about our ability to hold out some of our existing customers and existing relationships and use that to help us [in different areas].

My other question is on the other side of the equation. Are you seeing a movement to replace used technology rather than people to drive activity? In other words, are we starting to de-link the body count and revenues and is the client through their contracting process allowing you to do this and how big of an investment and how big of a cultural change might that be?

So let me introduce myself. This is Ron Gillette. I'll answer your question. Definitely, we are seeing that as a trend. As I've settled into the Company over the past few months, I had a chance to go across the organization. We have lots of initiatives in each of the verticals across the Company that are doing exactly that that are taking the existing processes and automating them or creating new solutions. So this will definitely have a positive impact on our productivity. And there is a de-linking that will go on.

With our existing clients, we're able to bring new ideas and solutions to them where we have some FTE-based contracts. We're able to move those to transaction based pricing and implement technology solutions in there to give us greater productivity. Hopefully that helps to give you (multiple speakers).

I'll just add a little bit there. I think all of that is very accurate but I will say that the focus really from a client's point of view is really to interact with companies like us and focus us on business outcomes, not really on inputs and that train left long ago.

So if you ask me, we have been providing these solutions for the past two or three years now. It's not new from a WNS point of view. We are extremely focused on using technology to drive productivity in the processes, right and whereas a number of deals come to us today with both a technology layer as well as a process layer. At this moment in time, we've actually been able to win many of these deals which have a traditional IT kind of component as well with the help of some very solid partnerships that we have forged, some of the investments we have made within the Company as well and really focusing the client away from independent business process and technology areas that really getting them to focus much more on business kind of solutions.

And in terms of the contract extension we spoke about, I think one of the most exciting things that happened there is the fact that we moved the contract in such a fashion, just as Ron explained, into one that moves away from the traditional old models that you spoke about to much more transaction pricing oriented models or outcome based models which will help us drive margins and help the client save more money, become more efficient and become much more impactful with their clients.

And I think too, Ed, some of the evolution over time towards more technology-enabled services and solutions will also be a function of clients' maturity levels and clients' comfort with their provider. So today, one of the big things that you see is people that are very new to business process management outsourcing are looking for a way to quantify and measure the savings to the organization. That's difficult to do if you're trying to do this in two steps.

So what we typically see is that most relationships, both from a client perspective as well as from a provider perspective, are better suited towards starting in an FTE-based model. It allows them to do a direct comparison from what it costs them now to what it's going to cost them in the future. It also allows us to come in and establish baselines and understand what the true cost of delivering service are. As that relationship matures, as the comfort matures, the need and demand for productivity improves. It's the perfect time to transition towards higher value models where you trust your provider implicitly, you don't want to count the number of heads working on it and you can drive them to improve productivity. At the same point in time, it's the perfect point for us to introduce components of technology and platforms to make these processes more efficient and to allow some of those benefits to accrue to us as opposed to accruing directly to the client.

Manish Hemrajani, Oppenheimer.

Again the six large deals for fiscal 2015, can you talk about timeline first half, second half of the year and also can you talk about regionally where are you seeing these deals coming from? Is it still the US and the UK as has been the case in the past or has that changed?

So let me start by saying that in terms of where they're coming from, they are coming from all key regions where we have a good sales team. So it's coming from North America, from UK, Europe, as well as from the Asia-Pac markets, that's one.

In terms of timing of deals, at this point in time we have said six large deals across the year. But the focus at the Company at this point in time is really to pull them in as quickly as is possible across the first two quarters, as many as is possible across the first two quarters to give us an opportunity to drive revenue from this year itself.

We'd love to get those six large deals signed in the first half of the year. Talk about how that helps us get at or above the midpoint of our guidance for this year and how those deals plus anything we sign in the back half of the year sets us up extremely well for fiscal 2016. But it's that we've also mentioned, Manish, that the ability to project exactly when these things are going to close and exactly how they're going to ramp is extremely difficult based on the size and complexity of these deals. So we feel very good about the number of deals that we have right now in the kill zone as we walk into the year as Keshav said.

I think we're in much better shape than we were last year and definitely much better shape than we were two years ago at the same point. If we can close some of these deals here in the first half and get four or five done in the first half of the year, we'll be in real good shape. But as we said, the timing is something we don't have a lot of control over.

Can you share the average deal size for these six large deals?

We define a large deal as having a minimum of $5 million of annual contract value. So everything that we're looking at right now in terms of possible large deal closures has at least that $5 million value and obviously given an average number, it's more than that.

Your headcount grew the fastest in South Africa. Can you talk about the work you're doing there and what's the strategy going forward for that region?

South Africa, we have two components from a growth perspective; one, South Africa as a market itself as well as some of the work we have won from the UK market. And primarily right now the work we are doing is more towards the customer service in the South Africa market, but we strongly believe that there is a good potential to really add some of the insurance work in that market because that's where we found strategically that location to be very good when we did that acquisition. And we are very aggressively and strongly pursuing some of that opportunity in that market.

That's right. So I would say that -- Sanjay actually hit all the key points, but I'll just underline again that South Africa is extremely strategic for WNS from a global account point of view, managing services for some of our global accounts, particularly around the customer interaction areas and the actuarial space and insurance actuarial, and independently a very exciting market for us as a local market as well. So we are actually seeing a very solid kind of pipeline emerging there as well.

I think the other thing that's important, Manish, to remember is that the growth in headcount that we've seen in South Africa has been to firm demand. So this is not a case we've gone ahead and hired a bunch of people and hope we can sell business. But this is to firm demand from clients looking to leverage this geography, as Sanjay mentioned, either from a local market perspective or from a near shore delivery center for either the UK or potentially areas like Australia. I think they present huge opportunity.

So very excited about South Africa as a delivery destination for WNS, very excited about the health and success of that acquisition that we did two years ago and again, taking the right philosophy towards how we approach that geography as well as some of our other strategic geographies.

[I'll just say, in] South Africa, the clients show a lot of interest in that and it's rewarding the decision to increase our network of delivery centers there. I believe that we've made the right investments in delivery centers around the world to meet our clients' needs for now and the future. So, again, South Africa, adding to the comments of the rest of the team, a very good location for a strong client interest and it's a key part of our future.

If I look at your revenue for used seat, I think it's at all time highs I believe. How much of that do you attribute to productivity gains and how much to a geographic mix shift?

Our revenue per used seat has been going up and I think a lot of this has to do with -- it's actually a combination, right. If you look at our delivery metrics, clearly the percentage of work that we deliver out of lower-cost geographies in the past two years, specifically India, has come down. So as South Africa has expended, as Poland has expanded, as the US or Romania has expanded, our revenue per employee has gone up.

I think the other thing we've been able to do is through some of the things that Ron touched on whether it's technology based or headcount based, we've been able to get more efficient on the processes that we manage for these customers. So most of them are leading to improved utilization, improved productivity on a used seat basis which we're excited about, but it's still for us the work in progress. We think there is still room for opportunity, we think there's still room to do better than what we're doing now both from a used -- from a revenue per utilized seat as well as from an overall seat utilization perspective. So these are clearly two metrics that we're focused on.

When you look at the Company's revenue per employee, we've been steadily improving that metric over the last couple of years and that's something that we are keenly aware of and focused on going forward because at the end of the day this is what's going to allow us to expand margins.

Ashwin Shirvaikar, Citi.

So good quarter, good EPS guidance. I guess, my first question is how are you thinking of the INR impact likely given the Indian elections coming up and say the rate went to INR55 from INR60 what would be the impact?

So let me first of all take a stab at this question and then Sanjay will add on. Our guidance assumes and makes an assumption on the INR against the pounds -- against the dollar. On the revenue side there is an assumption on the pound sterling against the dollar.

And from an operating point of view, I think we are just focused on running the Company, driving value for our clients as well as for our shareholders. We have a robust hedging program in place which we believe is extremely well positioned from an overall point of view to take different kind of risks on the ForEx side.

Again, I am very clear that we are not here to speculate on where currency will move, but we believe we are extremely well positioned and protected based on a long term philosophy that we've taken around our business.

And just to add to that, there may be certainly the fluctuation based on the election result but we really don't speculate it to protect the organization. We have over hedging program in place and right now the ANI, the guidance what we've provided is based on the assumption of INR60 to $1 and as and when things move, we believe that the hedging program will protect that and we'll update the guidance as the things -- we get more visibility of foreign exchange rate.

I think similar to prior years though, Ashwin, when you look at, as Keshav mentioned, the hedging policy that we have in place the combination of forwards and options, we walk into a year typically 90% hedged to the downside and giving us an opportunity to write some of the upside the way we combine forwards and options.

So even if the rupee does go to INR55, the impact to ANI would be far, far less than obviously the [RON] move from INR60 to INR55. The impact for us at this point in time would be more about the hedges that we layer on fiscal 2016. So we feel pretty good about the level of protection we have on our margins and our profitability for this fiscal year but certainly don't want to see the rupee appreciate in value to where it impacts our ability to continue that level of protection moving going forward.

And just to little bit add on that, specifically not only the rupee but the other currencies are also there which keeps on moving maybe on the different directions and accordingly we really need to look in totality that what the currency's impact is going to be there. And right now, we have baked in some of those assumptions while providing the guidance.

That's a very, very valid point because we do have exposure to the Australian dollar, the ZAR all of those as well, which are also becoming relevant.

The second question is the situation with Travelocity, you have explained a couple of times last quarter and this quarter, my understanding being based on my checks is that you are already ramping the other OTA clients, that's going well based on my checks. So the impact on revenues, is that mostly a timing issue with regards to the relative de-ramps and ramps? And if I was to fast forward three to six months, the situation might look a lot better from a growth perspective?

I think, Ashwin, when we talk about our guidance and talk about our visibility, we have 90% visibility to the midpoint, which reflects what we have committed at this point in time. We feel, I think as Keshav said in his prepared remarks, extremely excited about the long-term opportunity with our [OTA partner].

The reality of that situation, however, is that we have complete visibility to the ramp-down with our existing clients and we have a significant opportunity with the new customer. So we've got to go compete, we have to go win that business, but we like the capability we bring to the table, we like the opportunity both in terms of size, scale and positioning for the Company and we've got to go win that business. So it's like any other deal, but we do believe that this creates a full year fiscal 2015 headwind for us. It would be very, if not impossible, for us to replace the revenue we're going to lose from our existing OTA. That being said, over the next couple of years we believe this has significant potential for a sizable growth and could be a good driver for the Company.

And I must also add that you should also know that this new OTA, the second OTA is obviously a leader in the marketplace, has had multiple vendors servicing them and over the past few quarters have actually started consolidating these vendors, so it's now down from 15 to 6. And we are one of those six valued vendors in there, also presenting a case for a very different format that they're used to which is actually very, very exciting for them as well.

So while we are confident about our capability and the way we have positioned ourselves, as Dave said, we have to earn every dollar and we will report and keep you updated as we do that.

I'll definitely fix that up in my checks as well which is why I had asked the timing question. So thanks for the insight on that. My last question is going back to (inaudible) that seems to be the client that keeps on giving. So can you explain -- can you go from a FTE basis to a different basis using more automation or other factors? What is the cash flow impact on the business?

So a couple of things over there. When you move from FTE to non-FTE based, it's just not like a pricing discount, but we have to also deliver the productivity to some of the automations and the initiatives what we will be driving. And accordingly, it leaves us an opportunity from a margin expansion perspective, sometimes not maybe very quickly, but in the long term definitely yes. And accordingly, it definitely -- it helps us to keep on improving the margin as well as the cash flow.

I think again to your question, Ashwin, about fiscal 2015 impact, we've baked in the revenue headwind as a result of this. We've also baked in a pretty healthy margin headwind as a result of this. We know it's going to take some time to get this back, but we feel it's absolutely the right thing to do for our business long term, it's the right thing to do for our client, and in this should allow us to actually protect margins in the long run much better than a pure FTE-based model.

And I think again your question, Ashwin, about fiscal 2015 impact, we baked in the revenue headwind as a result of this, we've also baked in a pretty healthy margin as a result. We know it's going to take some time to get this back, but we feel it's absolutely the right thing to do for our business long term, it's the right thing to do for our client and in this should allow us to actually protect margins in the long run much better that a pure FTE-based model.

I have got it. I understand. It's a good 12 to 18 month outlook it seems like. Thank you, guys.

Thanks, Ashwin.

[Adam Dams, RW Walls]

Most of my questions have been answered, but I was just kind of curious about the transition you had talked about two transactions and some of the outcome-based revenue models. If I look at the numbers, it looks like it's been declining in the last three quarters. Is that the result of some of the ramp-downs we've been talking about or we just not seeing some of those transitions yet? Just trying to figure out how to look at this kind of going forward.

I think your understanding is correct. Some of this is impacting because of that ramp-downs, specifically what we mentioned about the OTA as well as during the year, earlier we did mention about the M&A activity with some of our clients and those ramp-downs were specifically in the transition-based pricing which has related to that.

But having said that, the large extension we spoke about, some of these clients will give us an opportunity to really improve some of those metrics when we move from a FTE to a transaction-based pricing going forward.

So remember, we discussed a little bit earlier, Adam, when you look at the maturity level of a client, when you have a large customer like our OTA client that's ramping down, these are mature processes, these are already moved to transaction-based or outcome-based models. When those types of activities ramp down, it's going to affect those types of services.

The flip side is, when you look at the new clients that we've added in the ramp-up from those customers, those are largely being done on an FTE-basis. So the combination of what's been falling off and what's been coming on is really what's driving the fact that it's a percentage of work in transaction based or outcome based models going down for the Company.

That's right. And I'll just say that the focus at the Company is to really drive the latter model, much more transaction price, much more non-linear models, much more technology enabled models and those are the key areas that Ron is really driving at the Company to help us in terms of, first of all, stickiness of the revenue model as well as ensuring that margin predictability and growth is possible.

In the short term, however, the exciting phase of winning all these new clients and starting them off maybe on FTE basis, but then moving them to other models is something that we also have to go through. But I think all of it is really positive for the long-term health of our Company.

And I think to that point, Adam, we haven't talked a lot about it, but our operating margin and our ANI performance has been good and it's been good in spite of some of the things that we've been doing to invest in the long-term health of our business. So we've talked a lot about over the last couple of years, seat utilization and the investment that we've made in infrastructure and how that's created a drag on our margins.

One of the other things that's happened in our business kind of under the covers, if you will, is as we've moved work from a delivery perspective away from India and towards South Africa, towards Poland, towards Romania, because some of our existing clients like these geographies as an alternate solution or because some of our newer customers like this as an entry point, what's happened is, this has actually created a little bit of pressure on our margin.

So the mix of services in terms of geographies has created some margin pressure for us. The mix of services in terms of what the FTE-based versus outcome based has created a little bit of pressure. We think this is a temporary issue and the good news is we've been able to grow revenue, expand margins despite some of these pressures. So if these things abate and as our delivery mix normalizes and our customer base matures, we think these present long-term opportunities for margin expansion.

Great. That makes perfect sense, guys. Thanks. And if I could one more quick one on delivery centers, I think you guys had previously talked about looking at some of the special economic zones in India, any update there on the move there and maybe how we should look at the tax rate for the next year and the benefits you might see there?

We are leveraging all the capacity what we've created in a special economic zone specifically for all the new business and the business expansion for the year. Having said that, we will be in the tax rate of 16% to 17% which is going to be similar what we delivered during this year. But as Dave mentioned that along with the special economic zone, the tax benefit, what we will have the mix of the geographies changing and accordingly there may be a profitability mix change due to the geography mix change. And some of the tax benefit in the special economic zone may get offset by some of this geography mix as well as some of the additional interest income and the exchange, again profitability what we will have.

I think, Adam, the Company's philosophy is these are short-term issues for us. So when you look at what the long-term opportunity is in our business, it's still going to be leveraging offshore centers or customer solutions. At the end of the day, this is going to go to lower-cost geographies and automation. And the reality is, we've made an investment into the special economic zones in India that as we grow in India, we're able to leverage those centers, we're able to improve our delivery mix, we're able to improve our seat utilization and long term able to drive down our effective tax rate. So this is the investment that we've made and we think this will bear fruit over the next two to three years.

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