WNS (Holdings) Ltd (WNS) 2015 Q1 法說會逐字稿

Good morning and welcome to the WNS Holdings First Quarter FY15 conference call. (Operator Instructions)

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

Thank you and welcome to our 2015 first quarter earnings call. With me today on the call I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our 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 first quarter ended June 30, 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 2014. This document is also available on the Company website.

During the 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. From both a financial and operational perspective, we are pleased with our start to the fiscal year. As we discussed last quarter, headwinds from the ramp-down of a large online travel client and a proposed five-plus year contract extension with a major client significantly reduced our first quarter revenue.

Despite these short-term revenue headwinds, WNS' underlying business momentum remains solid. First quarter net revenue was $122.1 million, up 7.3% year-over-year, and down 0.5% versus the previous quarter. For both reference periods, revenue was helped by appreciation in the British pound against the US dollar.

Excluding the impact of exchange rate movements, our constant currency revenue grew 3.4% versus the first quarter of last year, and reduced 2.8% sequentially. Excluding the favorable currency impacts and the negative impact of the two headwinds previously mentioned, our first quarter net revenue actually increased around 10% year-over-year.

I would now like to provide you with a quick update on the headwinds which are impacting our business this year. With respect to the large online travel client, who is moving process work from WNS to another online travel partner, the transition is progressing rapidly and we continue to expect a 4% year-over-year revenue impact. The good news is that we are excited by the progress made so far in developing our relationship with the new OTA client, and we are seeing early signs of traction in this account. The WNS team is working hard to showcase our domain knowledge and value-added capabilities with the goal of expanding our portfolio and significantly increasing wallet share over the next few years.

With respect to the contract extension with an existing major client, we currently have agreement on all the commercial elements of the new contract and have a signed Letter of Intent in place. Drafting of the final contract is in progress, and we expect this document to be signed in the fiscal second quarter. As a reminder, the agreement will extend our existing contract for five-plus years through March of 2022, provide WNS with exclusivity on all existing processes and geographies, and give us preferred supplier status for new areas.

In exchange, the client will receive a price discount along with productivity improvements linked to the movement of processes to non-FTE based pricing models. This extension is expected to create a 2% revenue headwind in FY15, and the impact has been included in our Q1 revenue and margin performance, as well as our full-year guidance. We believe that this agreement creates a win-win for WNS and the client, and is in the best long-term interests of WNS and our shareholders.

As mentioned earlier, we feel positive about the underlying momentum in our business. This is in part due to solid sales traction, which is helping us build the pipeline and close new business. Today, we have in place a strong overall pipeline with a healthy mixture of hunting, as well as farming opportunities. These include several large deal opportunities, which are currently in play.

During the first quarter, we added six new clients, expanded 10 existing relationships and renewed 11 contracts. We were successful in signing two large deals with new logos in Q1, adding an Australian utilities company and a US insurer to our client roster. Based on first quarter signings and the current new business pipeline, we continue to target closure of at least six large deals for FY15.

We are also pleased to report that our first quarter margin and profitability performance was solid. Adjusted operating margins and adjusted net income percentage both expanded approximately 400 basis points year-over-year with adjusted earnings per share increasing by 40%.

At the end of fiscal Q1, WNS has $156 million in cash and investments, and $83 million in total debt. We also expect, based on our current year guidance, to generate significant free cash flow again in FY15. This strong financial position enables us to evaluate and consider alternative uses of cash, including tuck-in acquisitions, as well as share repurchases. Tuck-in acquisitions to enhance vertical expertise, horizontal capability and technology enablement remain a key part of our long-term growth strategy. That being said, we believe WNS must remain selective and rigorous in evaluating these transactions. This is especially true, given current valuation multiples for BPM assets and our own organic growth opportunities.

While we are actively looking for tuck-in acquisitions to augment our service portfolio, we have continued to organically invest in building differentiated capabilities in order to meet the needs of an evolving BPM marketplace. We believe that clients and prospects are increasingly recognizing the value WNS delivers, which is demonstrated by new client wins and the expansion of our existing relationships. We are also seeing increased validation of our capabilities from the analyst and the advisory community.

In the past few months, WNS has been named a leader in finance and accounting BPO by Gartner, cited as a major player in both business analytics BPO and human resources outsourcing by IDC, and named a leader by NelsonHall in three categories; social media BPO, property and casualty BPO, and insurance, life, annuity and pension BPO.

As key advisers to clients looking for assistance with their BPM initiatives, visibility with the recognition from these organizations is critical to participating in many BPM opportunities. Today, the demand environment for BPM remains stable and healthy. Sales cycles and project ramps continue to be a function of engagement size, process complexity, and the client's level of BPM maturity.

Larger, more mission-critical initiatives with new clients progress slowly, but opportunities are moving along and decisions are being taken. These dynamics remains unchanged from previous quarters. We are currently seeing many first-time clients focusing their initial outsourcing efforts on less disruptive services, including finance and accounting customer care, and bolt-on analytics. The majority of these initiatives begin with FTE or headcount-based engagement models.

Expansion programs with existing clients often include higher value solutions, such as core operations, industry-specific processes, global delivery diversification, high-end analytics and automation. The maturing of a client's outsourcing programs will frequently include a shift into transaction and outcome-based models.

Looking at our full-year guidance, our net revenue is now expected to grow between 6% and 12%. Backing out the impact of exchange favorability, this translates to constant currency revenue growth of 2% to 7%. Excluding the 6% headwind from the OTA transition and major client contract renegotiation, our full-year constant currency growth at the midpoint of the range exceeds 10%. We currently have 95% visibility to the midpoint of our guidance range.

With respect to profitability, ANI guidance of $81 million to $87 million assumes that both adjusted operating margins and adjusted profit margins will expand year-over-year. The adjusted net income projections excludes the potential impact of additional taxes relating to the recent India budget proposal. Sanjay will elaborate upon this topic in his prepared remarks.

In summary, we believe that WNS is well positioned for success in the BPM industry. While our business is performing well, there is still room for improvement. We remain focused on helping our clients better compete in a dynamic environment and to growing our revenue and maintaining profit margins at or about 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 first quarter numbers, net revenue increased to $122.1 million from $113.8 million in the same quarter last year, growing 7.3%. On a constant currency basis, year-over-year net revenue grew 3.4% 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 decreased by $0.7 million or 0.5% with revenue aided by appreciation in the British pound against the US dollar.

On a constant currency basis, first quarter revenue decreased 2.8% sequentially. As Keshav mentioned, quarter one revenues were adversely impacted by the transition ramp-down of our OTA client and the proposed five-plus year contract extension with a major client. Year-over-year, quarter one revenue growth was led by the shipping and logistics, consulting and professional services, utilities, insurance and auto claims vertical, which all grew over 10%. From a service offering perspective, revenue growth versus the prior year was paced by finance and accounting, which grew at 32%, and research and analytics which grew at 18%.

Adjusted operating margin was 17.9% in quarter one as compared to 13.9% reported in the same quarter of FY14, and 19.1% last quarter. On a year-over-year basis, adjusted operating margin improved 390 basis points as a result of currency favorability, increased operating leverage on higher volumes and improved productivity. These benefits more than offset the impact of our annual wage increases, pricing and productivity associated with the proposed contract extension with a major client, and investments in global infrastructure. The sequential adjusted operating margin reduction of 130 basis points was largely the result of our annual wage increases and the major client contract extension, which were partially offset by currency favorability, better productivity and a slight improvement in seat utilization.

Interest expense this quarter was $0.5 million, down from the $0.8 million reported in quarter one of last year and down from $0.7 million last quarter. The Company's other income was $3.1 million in the first quarter, up from $2.2 million reported in the same quarter last year and consistent with $3.1 million last quarter. The year-over-year increase in other income is the result of higher cash balance.

WNS' effective tax rate in the first quarter was 16.5%, consistent with the 16.3% reported last year and down from 19.1% in the previous quarter. The Company's adjusted net income for quarter one was $20.4 million compared with $14.4 million in the same quarter of FY14, and $20.9 million last quarter. This represented growth of 41% year-over-year, but a 3% reduction sequentially. Adjusted diluted earnings were $0.39 per share in quarter one, up from $0.28 reported in the first quarter of last year and down from $0.40 in the prior quarter.

As of June 30, 2014, WNS' balances in cash and investments totaled $156.4 million, the gross debt position was $83 million, with the Company reporting a net cash position of $73.4 million at the end of quarter one.

WNS generated $13.2 million of cash from operating activities this quarter and free cash flow of $9.3 million after accounting for $3.9 million in capital expenditures. DSO in the first quarter came in at 32 days, up from 31 days reported in quarter one of last year and 30 days reported last quarter.

With respect to other key operating metrics, our total headcount at the end of the quarter was 27,760. Our attrition rate in quarter one was 36%, up from 35% in the same quarter of last year and 31% in quarter four. While the attrition rate can vary quarter-to-quarter, we are encouraged by the overall trend the past few years. Built seat capacity was 23,923 seats at the end of the quarter, up 420 seats versus quarter four.

Average built seat utilization in quarter one was 1.16 as compared to 1.16 reported in the same quarter of last year and 1.14 in the previous quarter. We are pleased that this key metric improved quarter-over-quarter, especially in light of the process ramp-downs with our OTA client. The Company remains focused on improving this key operating metric over the next few years, while ensuring that we have sufficient capacity and reach to service our clients' global requirements.

In our press release issued earlier today, WNS provided our updated guidance for FY15. Based on the Company's current visibility levels, we expect net revenue to be in the range of $501 million to $528 million, representing year-over-year revenue growth of 6% to 12%. Revenue guidance assumes an average British pound to US dollar exchange rate of 1.70 for the remainder of the fiscal year. Excluding the projected year-over-year exchange rate impacts, our constant currency revenue guidance represents growth of 2% to 7%. We currently have 95% visibility to the midpoint of the revenue range, consistent with July guidance in prior year. This guidance includes a 6% revenue headwind associated with the OTA transition and contract extension with a major client, in addition to a normal business volume and productivity reductions.

Our 2015 guidance reflects year-over-year expansion in our adjusted operating margins and that adjusted net income will grow faster than revenue. We currently expect adjusted net income to be in the range of $81 million to $87 million, based on a INR60 to US dollar exchange rate for the balance of the fiscal year. This implies adjusted EPS of $1.52 to $1.63 based on a diluted share count of approximately 53.3 million shares.

ANI guidance excludes the potential impact from a change in taxability of our fixed maturity planned investments proposed by the Finance Minister in last week's India budget. If passed by both houses of Parliament in its current form, the India budget proposal would result in WNS incurring incremental taxes of approximately $3 million in FY15.

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

(Operator Instructions) Anil Doradla.

Congrats, Keshav, on a great quarter. Couple of questions I had. You talked about a 2% headwind on one of your clients, now -- and you talked about an outcome-based approach to the contract. Are there some financial incentives in place that can potentially offset that 2% headwinds in 2015?

Yes. So let me clarify. The overall impact of 2% is across the year, it's a long-term contract. So, it's something that will run into 2000 -- all the way to 2022. So, I think at this point in time, what is extremely positive is the fact that we continue to have exclusivity on all our existing processes and geographies. We are the preferred supplier in new areas. But more importantly, I think what has been recognized is, by providing this kind of a model -- win-win kind of a frame between both client and us, our ability to work with the client to move the model into some of these new kind of thinking that you spoke about is really a long-term approach that we will take. It's not something that will happen overnight. But I think the client recognizes that this is the way to go, and WNS and the client are working closely to drive this model.

So I'm confident that over a period of time this will help recover some of the margin that we may have given up in the short term.

And can you talk about the TCV of these two new deals that you signed, the Australia and US?

We typically don't provide either ACV or TCV numbers, but the way we do define a large deal for our Company reporting is that, it has to have a minimum of $5 million of annual contract value to be considered a large deal. So these are by both the WNS definition and an industry definition, deals that do have the potential to not only short-term, but long-term drive significant revenue for the Company.

Can I assume the duration of these deals are somewhere in the -- at least five to seven years or -- I mean do you put any time frame to that when you define a large deal or it's just the contract's value?

The large deal definition is based on annual contract value, not based on total contract value. But, again, when you're talking about significant BPM initiatives upside, they are typically longer-term engagements.

And finally, Keshav, big picture, there is this significant talk about BPO as a service, analytics and some of these trends. Can you talk about WNS' positioning in the larger context of evolving towards these new paradigms, and how would you rate yourself with respect to competition?

That's a great question. So, I will say that I feel extremely confident that some of the changes that the industry is seeing in terms moving from the traditional lift and shift models, driven by wage arbitrage kind of thinking, to models which are driven by people providing business insight to clients is being driven by companies like WNS. So I would actually take great pride in saying that my team is actually driving that thinking. We believe that we have worked very hard in terms of redefining the model moving away from the traditional horizontal-led approach to much more a vertical approach, where domain, technology, process is all coming together with a significant focus on higher value services.

So, if you look at how WNS has got positioned, the big growth areas really are coming from the pure domain processes, as well as finance and accounting, research and analytics, and I must also mention that I think the most exciting investments we're making inside the Company are around how we are beginning to think about our clients, digital enterprise -- their digital thinking, what we're doing around business process as a service, how we are starting to embrace the cloud, what we're doing with social media and analytics, and I think we're extremely well positioned to drive these trends in the future.

I just want to remind you at this point in time that WNS has close to 2,600 people inside this Company doing just research and analytics. And if you just look at what kind of powerful number that is, the impact that those people can have in the long-term opportunity with WNS is huge and clients are recognizing that as a company we are driving this end-to-end approach, we are leading in terms of driving their thinking itself, but I must also remind you that some of these models and some of these thinking is still nascent, right, the market is still under-penetrated, clients are still dipping their toes in the models. So, the whole model of providing low cost and cost saving is still very much in vogue, but at the same time the more mature clients love what we're doing in these new areas.

Ed Caso, Wells Fargo.

Congrats on a strong quarter. Could you describe the difference in the marketplace in the US versus Europe, please, particularly the Continent?

Yes, great question. I think interestingly for us, we have traditionally been strong in the UK markets, Ed, as you are aware. And we continue to make good progress in terms of our sales pipeline there and we are also seeing good kind of impact in terms of how deals are moving through the pipeline there. But I think both Ron and I are quite excited about the opportunities we have been seeing over the past few quarters emerging from specific targeted kind of markets in Europe as well and as a result of it some of the new deals we are seeing and some of the new expansions we are seeing with some of our global clients are being driven by their European strategy. So positive out there.

And at this point in time, we are also looking at how do we actually expand our sales footprint, so to speak, in some of these geographies, particularly the Continent. So that's as far as Europe is concerned. At the same time, I think WNS has done over the past two or three years is invested very strongly in the US markets and I think that is extremely exciting for us, the kind of deals that have been delivered by our sales leadership in the US, the kind of wins we have started generating over the last one, one and a half years, the kind of pipeline that is being driven at this point in time is extremely exciting.

But having said that I do not want to discount or dilute the impact that our sales leadership has made in the Asia-Pac markets as well, particularly in Australia, as well as the Middle East. We just spoke about this large win of a utilities company coming out of Australia. And again, I think that's very exciting for WNS, the fact that a lot of the focus that we've brought in in new markets for WNS is starting to pay off and we are actually continuing to see CEOs of client companies continue to focus on two or three things. One is cost saving being a huge initiative still. The second is working with strategic partners like us who understand their business domain and who look at their business the same way they look at it, and third and most exciting, companies like us that are investing in analytics and some of the future services, which are helping them be much more smart and intelligent in the marketplace. So all of this is working well for us.

Do you have to sell differently than in the past? I mean do you sort of -- for example, do you have to sort of give away analytics capabilities to win deals, or do you need something like an analytics capability or special vertical knowledge to win in the current market?

Hi, this is Ron Gillette. No, we're not seeing the need to give that away. As matter of fact, our clients that are -- in particular around analytics, are buying that as a direct service, because they see the quality and value of what we're able to deliver and the impact that has on their business.

Are you seeing the -- what we call the Tier 1 TCS, Cognizant, Infosys, et cetera, are you seeing them getting some penetration and having success coming in with their existing Rolodex against your offerings?

Well, actually, no change in our position from what I've been talking about over the past few quarters. I think some of the large IT players continue to be selective, if you ask me. They are focused on their existing relationships, really focused on the low-hanging fruit and being defensive, if you ask me, in terms of not allowing some of us into their existing clients. And in those cases, they may be a little aggressive, but our ability to go in with a needlepoint strategy into new areas, they're using some of the services that you just discussed is also very, very high.

And separately I must also mention that pricing also has been quite stable, except for maybe a few kind of exceptions. So, overall, I would say, no major changes and we continue to drive a good healthy pipeline.

And I think, Ed, with respect to analytics and how it kind of fits into the bigger picture, we have to understand that analytics is, in and of itself, a service that provides a lot of value to clients, but whether it's leading to technology outsourcing on the back end or process outsourcing on the back end, it's a way to get in front of a client and show that you can add value. But I think the longer-term sales process, the longer-term success rate is really more a function of what the client is trying to do and accomplish over time.

So, if the scope is purely analytics, then it's going to be a competitive environment. And the IT services guys, especially the larger ones, are going to have a good chance competing for that work. If the scope is analytics, with an eye towards moving to core operational outsourcing down the road, then I believe that they are somewhat disadvantaged in those types of opportunities, because the capabilities aren't there.

Last question, on the two big wins, were they greenfields, were they takeaways, how important was pricing and how intense was the competitive pressure on those awards?

Sure, I'll take that, Ed. One of the opportunities was a greenfield opportunity and I think our knowledge of the geography, knowledge of the space was critical in winning it. The other was a competitive bid situation where I believe our knowledge of the domain was absolutely critical in WNS becoming successful.

Joe Foresi, Janney Capital Market.

Just kind of building on the two large deal wins, will they help you in 2014, and which one was greenfield and which one was a competitive bid, it sounded like a takeaway?

I'll answer that. So, yes, absolutely it will. Both these deals will help us in terms of the guidance that we provided out there already. The large utilities deal that we spoke about was greenfield and the other one was the -- of the other category.

And then could we just get some color on the four that are remaining? I assume those are two of the six. How close are we to signing those? Maybe we could break up down by vertical or geography, and also I'd be curious whether there were takeaways or existing clients or new wins.

I think, Joe, with respect to the remaining four deals that we're targeting for the balance of the year, the pipeline to support those four deal signings is far beyond four. So, it's not like we have a total of six large deals that we're chasing today. If we expect to sign six this year, we need to be targeting and actively involved in a significant number of deals beyond that. So feel good about that, we can do better than six, obviously we could do less than six. The one thing that remains consistent is our visibility to client plans in terms of timing, in terms of ramp, is highly uncertain as we said. When you get to these larger deals, we really can't predict what's going to happen and when.

The pipeline that we have today for large deals is extremely diverse. We've got three or four good opportunities in the travel side. We've got two or three opportunities in the insurance side. We're looking at some specifics in retail and CPG as well. So, I think both from a vertical perspective, from a geographic perspective and from a timing perspective, we feel good about where we sit today in our ability to try and close the gap between the two that we've signed so far, and the six that we hope to sign by the end of the year.

And then just lastly from me, we talked about some headwinds heading into this year, and is it fair to say that the travel issue is largely behind you, in the sense that I think the first quarter was when you were going to get the biggest hit. And how should we think about revenue growth over the remaining three quarters of the calendar year?

Yes, this is Sanjay here. As we mentioned that major of the transition of the OTA client will get completed by quarter one and that has -- majority is behind us, maybe some few processes here and there we [anticipate] maybe in quarter two. And as we said, we also had a win of another OTA client, and the transition has gone smoothly over there and we are making some good progress, and accordingly for the balance of the year, specifically in travel vertical, we are making a good progress and we'll be able to offset some of this ramp-downs what we had of the -- due to this OTA client during the balance of the year, and as well as we have baked some of the progress in the guidance what we have a visibility today.

And I think when you look across the balance of the three quarters, at least today, Joe, to get to the low end, the midpoint, the high end of our guidance, we wouldn't expect to see significant headwinds impact customer here forward. So all else being equal, we should be looking at a pretty linear acceleration across the balance three quarters.

So even growth rate across the next three, is that fair?

At this point in time that's probably what's our best visibility, would say yes.

Bryan Keane, Deutsche Bank.

Just thinking about the headwinds, obviously, there were two headwinds that you call out that are impacting FY15. Are there any known impacts for FY16 for headwinds that we should be thinking about?

At this point in time, Bryan, we have no specifics that we're aware of. That being said, we've talked about the 6% unique headwinds that we're dealing with this year. We actually have a headwind to our business for FY15 of 11% in total and 5% relates to the types of things that we need to expect every year, whether that's pricing, whether that's productivity, whether that's business volumes with existing clients.

So, we would expect at this point in time, with no specific knowledge, to have at least a 5% headwind walking into next year, which is consistent with the same type of a headwind we saw in FY14 and FY13. So that should be recurring, but nothing unique, nothing unusual at this point in time in terms of visibility to headwinds.

And the two large deal wins, just curious on how those deals look, are there a lot of other subcontractors that will be working through you guys and you'll be the lead, just maybe just trying to understand exactly how those deals are structured?

I'll take that. No, actually, in the case of both, we are the key prime kind of strategic partner to both these clients. So there is no one else working through us, nor are we working through somebody else. We directly interact with the clients. It is a CXO-sponsored relationship on the other side and from this side, we are providing services across the first phase of processes or areas that have been agreed on and we expect to get deeper into some of the other areas over a period of time.

And just finally, just a big picture question. I know you talked about the pipeline. There is definitely more than a total of six large deals going into the year and then obviously you've won two. Just the health of the business right now, how do you think decision making is going in WNS, win rate and maybe could you just talk about the big picture and the transition that you guys have made?

Yes, sure. So I think the opportunity in the marketplace, I would now say is starting to become exciting. So, I would say demand trends continue to be stable and healthy, but opportunity is now becoming exciting, because we are seeing a number of prospects in particular start to tighten the belt again and start to focus on cost savings again, right? And with the others, as they look at new areas to grow and [add] business decision support systems, again, WNS is at the leading edge from that point of view.

So, I would say that our investments in terms of sales, in terms of vertical, in terms of the global delivery footprint, as well as the investments we have made in the whole capability area are bearing fruit, working extremely well and we believe that we have made all the right investments in our business and the macro demand trends will actually favor us in the medium to the long term, based on some of the things I spoke about just now.

Okay, congrats on a solid quarter.

Puneet Jain, JPMorgan.

So we hear a lot that clients are trying to cut their core and maintenance spending. So, talk about like if that trend helps you in any way, maybe, as they try to cut costs they outsource more or does it hurt you as [it reduces] the overall spending and maybe clients pursue more automation?

I will take that Puneet. I think there's two ways to look at that. One is understanding where a particular client may be in their outsourcing journey. So, clearly for customers who have not done anything in BPO or BPM, regardless of where they may be in their IT journey, the focus is going to be on finding processes to outsource and saving 30%, 40%, 50% from what is costing them internally. So, when you look at that decision for a client, it's a high level CXO strategic decision. It's not a decision that's taken based on a budget like IT; it's not a decision that's taken based on an immediate need. It's a longer-term strategic decision based on the direction of the company and that's why these services are so disruptive, that's why these sales cycles are so long.

So, I don't think anything that's going on relative to pricing pressure or IT pressure is going to affect that decision one way or another. That decision is going to be made based on company's strategy and based on the decisions of senior executives about the long-term health and direction of their business.

With respect to existing clients, the focus is always on improving productivity, driving down total cost of ownership and that's why we talk about a 5% headwind in our business every year. Our clients expect us as the experts in this space to do things better, faster, cheaper, every year and whether that's taking bodies out of a process that we manage on an FTE basis, moving work to outcome or transaction-based models, and introducing automation, they are relying on us to do those things. So, for us automation is not something that drives lower revenue per se, automation is something that actually enables us to remain in increased profitability based on the demands of our clients that exist today. So, it's less incumbent on us to be automated, because what clients want is more incumbent on us to be automated because of what we need to do to support and run our business. So, I think two different dynamics there in terms of what drives customer behavior.

And I just want to add that the excitement for us is around the fact that over the past two years in particular a lot of our client base, or rather the client base is shifting in such a way that a lot of these clients are brand new clients who came in the last 18 months or so. So the opportunity for us to grow with these clients significantly is huge. These are all clients who are in the early part of their journey and as their decision makers look to save more costs, become more efficient and embrace a strategic partner who goes beyond cost to many other areas, our ability to penetrate and radiate is actually increasing, if you ask me, and I think that's the most exciting part of this discussion.

And I think, Puneet, to just add on to what Keshav said, when you look at the fact that we are adding new clients and these clients are just beginning in their outsourcing journey. It really makes us feel optimistic about our ability to effectively farm these organizations over the next three to five years, as opposed to having a very mature customer base, where there is constant pressure on the topline. And you've actually seen that in our revenue mix over the last three or four years. As we've done a better job of adding new logos, as we've done a better job of introducing new large deals, the percentage of our revenue coming from FTE-based models has actually gone up. And while optically that may not seem like the right thing to happen, if you are actually growing your business and adding new clients and making your customer base younger, you would expect to see FTE as a percentage of revenue going up, because that's how most new clients begin their engagements.

So, long-term, absolutely migrating towards transaction-based and outcome-based models, but newer customers, the comfort level and the knowledge level is typically FTE-based on the front end.

Understood. And 2,600 employees in research and analytics practice, quick math indicates that's 20,000 to 25,000 in annual revenue per employee. Is that right? And if it is, it appears like a little lower than what we had expected. Could you comment on that?

I will take that Puneet. You can't take the revenue that we report in research and analytics and extrapolate based on the FTEs, because we do have FTEs in research and analytics that are actually working in our industry BPO as well. So because industry BPO cuts across multiple horizontals, you can directly link the number of people that we have just to the R&A line.

Dave Koning, Robert W. Baird & Co.

I guess, first of all, great job, especially on the margin front. And I guess on that topic, guidance basically -- you can hit guidance if you just keep margins stable with Q1 for the whole year. You pretty easily hit guidance. I guess I'm just wondering historically margins have gone up through the years, Q1 is usually the low point and they kind of steadily ramp through the year. Is there something different about this year? I mean you're basically guiding the whole margins stable. I am just wondering kind of what's a little different this year?

Yes, you're right that typically the quarter one margin is the lowest, specifically because of our annual wage increase. But based on the current visibility of the guidance, on the profitability side, we have also baked in certain of the investments what may be required, not only for the year -- FY15, but also to be prepared ourselves for into the longer duration and we have baked in certain of the investments in the infrastructure side, on the sales side, as well as on the capability where we have to keep on adding new capabilities, technologies and other stuff. So those are baked in and accordingly, based on the visibility, we believe that we are pretty confident of the range of the guidance what we have provided.

Couple of things to also remember, Dave, as we move through the quarters here, as Sanjay mentioned, we would expect gross margins to expand. We do see the investment side ticking up a little bit and that will probably manifests itself on the SG&A line. But the other thing to remember is as we try and accelerate growth here in the back half of the year and get to the midpoint or the high end of our guidance, you're going to see increased revenues coming from transitions as we add new clients. So with that increased transition, tends to be a little bit of a drag on the margin front. So just something to watch for is, as we do accelerate growth there can be a little bit of that drag.

And then the tax situation you talked about, you mentioned potentially $3 million higher taxes than you're currently guiding if that all comes through. What's the impact on future years, like would it be $3 million higher kind of in perpetuity or it may be what rate would be kind of normal going forward? Maybe you can just talk about kind of long-term impact.

The recent proposal on the India budget, specifically on the taxation side, first, it's still not passed in the houses of the Parliament and there had been lot of pushback from the industry and we will have to wait and watch regarding the outcome, because finance ministry is seriously considering some of the feedback what is going back from the industry. Having said that, right now, based on the -- in the current form, the $3 million impact for the current financial year is specifically one for the previous year, where the income and the maturity has come during this financial year on the fixed maturity plan investment, as well as on the fixed maturity plan investment what we have done for this fiscal year. So it's a two-year impact, because the way it has been proposed, it seems to be like a retrospective taxation right now. So we'll have to wait and watch what the end outcome comes once it is passed, and accordingly we will be able to assess the situation going forward.

And Dave, I'd just add on here that this $3 million relates to this year and this budget, but I think your question was more around future. And the Company will re-assess its position around how we make our investments, and I would not expect that the tax rate would go up as a result. If this thing sustains, maybe our other income may come down a little bit based on the kind of yields we can generate in the marketplace, but it is not something that would impact taxes in my view.

And then I guess -- finally just a short one, just the [US insure] that you signed, was that Travelers kind of with EXL losing the Travelers business?

So actually, first and foremost, I really wouldn't -- I don't think we should be commenting on speculation at this point in time. So, you are well aware that WNS does not disclose client-specific information without consent anywhere. I think I would basically say that we feel extremely strongly about our BPM market leadership position, particularly in the insurance vertical.

Okay, now that's great. Appreciate it. Great job.

Ashwin Shirvaikar, Citi. Looks like we lost him. Manish Hemrajani, Oppenheimer & Co.

Good quarter guys. Maybe standing on that contract type mix, but then shifting more towards FTE from transaction over time, and an even lower fixed price component, where do you think is your steady state in terms of mix and how should we look at these mix shifts in the context of margins?

I think, Manish, we have seen a pretty substantial move in this business over the last three, four years. So, as we've accelerated our sales traction, our FTE revenues have gone from about 60% in FY12 to just over 70% posted here in the first quarter of FY15. So, we have seen a pretty significant shift, almost 10% of revenue. I think it will be a function of growing accounts versus new accounts. So, actually I would tell you that if barring a given quarter, is a trend if you see FTE as a percentage of revenue starting to dip over a two, three, four-year period. It probably tells you that opportunities for growth are starting to shrink.

So we believe that we should see FTE as a percentage of revenue in the 70% plus range for at least the next two to three years and feel pretty good about that. So, the focus over time is to migrate those clients, but we want to see more and more customers coming in. It's taken years and years to move some of our long-standing customers to these higher value models. And as a matter of fact, we're talking about this long-term contract extension with a major customer having to use pricing and productivity improvements as a kick starter to get them to move to some of these models.

So, it kind of tells you how difficult it is organizationally for some customers to digest moving this way. And if you think longer-term about how disruptive a move towards things like business process as a service, pure technology platform work would be for a customer. It tells you how far off we are in this business. And I think it does give you a good snapshot about the relative immaturity of BPM.

Can you point out some of the steps you are taking to improve seat utilization? Is this the turn in seat utilization that we've been looking for, and how rapidly should we expect to see improvement there?

So, seat utilization, as you can tell from the statements earlier, improved this quarter. There will be some fluctuation of seat utilization from quarter to quarter. The general trend, I think, for us is going to continue to be a positive increase in utilization. But we still will have to make investments in capacity in different parts of our geographical operations, based upon responding to the market. But our general trend is positive and will continue to stay that way.

Just to add to that, we are happy about the progress we have made in quarter one on the seat utilization improvement and just to remind that that improvement is after factoring the OTA client ramp-down and as Ron mentioned that we have to continuously keep on investing this on the demands and the client requirements and accordingly there may be a volatility quarter-over-quarter, but we expect our seat utilization to improve by the year end.

And just to add a little bit of color to that, I think when we do add capacity it's typically done in a step function. So in any given quarter, as both Sanjay and Ron mentioned, you may not necessarily see that this improvement is linear, but over the next two, three or four years, we should see directionally see utilization continuing to improve. And I think the short answer to your question, Manish, is aside from a bad quarter here or there, for example, we do believe that we've probably gotten to the bottom of our seat utilization and the direction going forward here should be positive.

And then your attrition picked up again slightly. Can you throw some color on that? And then as we start to see recovery in employment in India, how do you think that impacts wages going forward?

With regards to the attrition, yes, there was a tick up in Q1, there are factors that also historically affect attrition in Q1, so I'm not surprised that the tick up in this case in one of our geographies we had some new entrants into the area that put some pressure on us, we responded to that. So I think that we will see some variation in attrition, but we have a handle on and are clearly engaged and in tune with the need to maintain that. As far as India and the job growth, I'll give that to someone else to respond.

So, yes, we believe that from an India perspective, the talent is available and we are doing a lot of -- taking a lot of steps as an industry to really ensure that the right skills are available and people see this as a great opportunity for the future. So, we don't expect any irrational behavior in terms of wage inflation and we'll keep updating you in terms of what's happening there.

But I just want to step back and just replaying your last three questions, and all of them really were around key operational areas, whether it was the shift in the model from one model to an FTE, or fixed price or whatever basis, the whole attrition area, the whole area of seat utilization and I think you've hit a very important area of focus at WNS, and I just want to mention that that's one of the key reasons we brought in Ron, to actually run this entire operating area of the Company and I'm actually delighted at the progress we're making on every one of these fronts across the last few quarters.

If you just look at how we have delivered on operations this quarter as well and the fact that we have a handle on each of the other areas, clearly shows the fact that there's a strong focus at this Company to drive long-term profitable revenue growth and I think that's something that I want to leave behind with you.

Ashwin Shirvaikar, Citi.

Keshav that was a great segue into my question, which is really about the underlying earnings power. Obviously, you've talked a lot on this call about the noise from above-normal pricing change at one client and the OTA transition and all of the stuff you're doing. But as you've progressed over the last couple of years, has your thought process or target around what margins can get to changed?

Yes, absolutely. I think what we are doing is, first of all, ensuring that the overall margin profile is stable and operations are managed in a stable manner. That's the first thing that we're doing. At the same time, we also recognize that there are a lot of changes happening in terms of the industry, in terms of some of those new trends I spoke about, the whole area of digital enterprise, social media, analytics, the cloud. And in each one of these areas, WNS has been investing in, in order to, first of all, stay ahead of the game, but more importantly, to drive pricing power over a period of time.

So, if you just -- one of things we didn't speak about till now, but I just want to mention at this call is, we recently actually brought in a new Head of Analytics into this Company, somebody with tremendous experience and a very solid background, just managing the whole area of analytics and inside the Company, we are rethinking how to position that offering, as well as some of the higher value offerings such that it enables us to drive different engagement models with our clients.

So, you should expect that the focus at this Company is to keep, while making sure that the overall scene is healthy and stable, that we are constantly looking at new opportunities to grow margins, and some of it is already playing out. If you look at it, we are already driving profitability growth rates higher than the revenue growth rates at this point in time, but the opportunity to go beyond that is high.

And let me just add to that, Ashwin. The focus at WNS needs to be on making sure that we're meeting our clients' needs and servicing our clients. And in some cases what clients require at various stages of their outsourcing journey may or not be optimizing margins for WNS. So we talked about the fact that clients that are new to outsourcing typically start in an FTE-based model. Well, guess what, FTE-based models are not the best margin models for WNS. But it's what the client needs to do to get from A to B. We have clients today that are expanding their portfolio with WNS into newer geographies. We know that the maximum profitability for our services comes from the low cost, high quantity destinations, like the Philippines, like India. But if our clients want us to be in Poland or Romania or the US, we're going to service those customers needs, because that's how we provide value to the customers, but those businesses have lower margin profiles than the peer India-centric businesses.

Similarly, when you look at the high value versus low value services, we know analytics has good margins. We know industry-specific services have good margins. But if clients need to start with a voice-based service, or clients need to start with finance and accounting, again, these may not be the optimal in terms of the margin profile, but they are the optimal in terms of attracting and retaining clients for the long haul. So, we may see shifts in our margin profile over time as a result of it. The other wild card, as we've talked about in terms of reconciling our profitability, is the currency. As long as the rupee stays here at INR60, we are fine. But we've got aggressive hedging programs in place that allow us to smooth the impact of currency over time. But if the rupee shifts to INR50 and stays there for the next 10 years, we're going to have a long-term margin impact. So just wanted to make sure that everyone is aware of those issues.

One last thing I wanted to get into, and you kind of mentioned it Dave, was with regards to getting into new geos and expanding some of these -- some of these geographies. How do you make sure you don't over stretch? So we do have a situation with one of your comps where they're having to withdraw from a couple of markets due to lack of scale in them, and maybe you can use that question to sort of discuss your geography expansion strategy in general.

So, for our current footprint, I think we've got it right. We're in the right places to service our clients' needs, and that's really what drives our growth in different geographies and locations is being in tune with our clients, looking at our pipeline of opportunities for new clients and with our existing clients, what their need for expansion is. So we sync that up, I think, fairly well within the Company. We are not going into geographies, creating a location without a demand against it. So, we'll continue to make those prudent decisions going forward and still be able to meet our clients' needs.

So, maybe just to add that, if you look three years -- three to four years history of WNS, we have expanded into all the geography as a delivery footprint, banking one of our existing client. Wherever the demand comes from an existing client, we have gone ahead and created some of the infrastructure. For an example, we entered the South Africa with one of our utilities client who wanted us to be there because of the partnership and the relationship over there. Similarly on the Poland, where we started with one of our retail existing client. So we are taking all right steps to meet the requirement of the existing client.

And I would say, Ashwin, the one place where we've taken a build it and they will come approach has been the US, and in a lot of that had to do with having the facilities and having the infrastructure to be able to compete for US-based RFPs, and we've seen traction there, and knock on wood here, hopefully in the next quarter or so, we'll be able to have some very good news about a large deal win potentially that allows us to leverage that center.

I think I just want to mention one last thing here, and it is that as we look at some of these new delivery geographies, we are not banking on just one client and then going in. So there is a very disciplined exercise inside this Company that may -- we've taken the inputs from that one client, but also go across the Company to make sure that there is sustained demand for that location for the medium to long term before we step inside.

I just want to make it clear that we don't go in based on demand from one client, but it's a very disciplined kind of process. As a result of which every decision that we've taken in this area has actually worked out well for the Company.

I agree with you all. It's been a good operating recovery. Congratulations on the quarter and thank you.

Thanks Ashwin.

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. Have a great day.