WNS (Holdings) Ltd (WNS) 2015 Q2 法說會逐字稿

Good morning and welcome to the WNS Holdings second-quarter fiscal 2015 conference call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Thank you, and welcome to our 2015 second-quarter earnings call. With me today on the call I have WNS's CEO, Keshav Murugesh; WNS's CFO, Sanjay Puria; and our COO, Ron Gillette.

A press release detailing our financial results was issued earlier today. This is 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 second quarter ended September 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 2014. This document is also available on the Company website.

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

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

I would now like to turn the call over to WNS 's CEO, Keshav Murugesh. Keshav?

Thank you, David, and good morning, everyone. The second quarter was a good quarter for WNS from both a financial and operational perspective.

During the quarter, the Company was able to boost revenue, margin, profit, and cash flow. Q2 net revenue was $126.5 million, up 9.7% year-over-year and 3.7% versus the previous quarter.

Year-over-year, revenue growth was aided by almost 6% due to appreciation in the British pound against the US dollar, but reduced by a similar amount due to the OTA transition and Aviva contract extension. Excluding the impact of exchange rate movements, our Q2 constant-currency revenue grew 3.9% versus the second quarter of last year, and 3.8% sequentially.

During the quarter, we added five new clients, expanded three existing relationships, and renewed 13 contracts. We also closed one new large deal during the quarter, bringing our year-to-date total to three.

This new US logo is one of the world's largest online travel agencies and further enhances WNS's market leadership position in the OTA space. Our deep knowledge of the online travel industry and ability to deliver from multiple global locations were critical factors in the client's decision to partner with WNS.

While sales performance is making steady progress, accelerating the team's productivity continues to be a top priority for the Company. The sales organization, which currently stands at 79 members, has built a solid pipeline with a healthy mix of both new logos as well as client expansion opportunities.

These include several large deal opportunities which would enable us to meet our target of at least six large deals for fiscal 2015. That being said, the Company realizes that the current team, when fully productive, has the capacity to generate revenue growth well beyond current levels.

We are also pleased to report that our second-quarter margin and profitability were extremely healthy as a result of both solid operating performance and some one-time factors, which Sanjay will explain in his prepared remarks. Year-over-year, our adjusted operating margin expanded 550 basis points to 21.8%, while our adjusted net income percentage expanded 400 basis points to 18.9%. As a result, Q2 adjusted diluted earnings per share grew 38% versus the second quarter of last year, and the Company was able to generate $25.5 million in cash from operations.

Today, WNS has a strong balance sheet and high degree of visibility to healthy cash generation going forward. This enables Company management and the Board of Directors to consider alternative uses of cash.

As we have mentioned for the past several quarters, WNS is opportunistically looking for tuck-in acquisitions which would enhance our vertical expertise, horizontal capabilities, and use of technology. While our business development teams have been actively evaluating transactions, the Company's approach remains highly selective.

This is especially given current valuation multiples for BPM assets and our own organic growth opportunities. In addition to acquisitions, WNS will evaluate on an ongoing basis our uses of cash, including debt repayment, share buybacks, and dividends.

As we enter the second half of fiscal 2015, the demand environment for BPM services remains stable and healthy. We believe that the BPM market is currently growing in the high single-digit to low double-digit range, but that opportunities exist for industry growth acceleration in the coming years, as adoption rates improve and new services and solutions evolve.

Key drivers for the industry today include finance and accounting, analytics, multichannel contact centers, healthcare, and industry-specific Business Process Management. Longer term, the expectation is that domain expertise, process automation, and platforms will create differentiation and drive further growth.

Some of these capabilities will be internally developed. However, others will have to be created through strategic partnerships as well as M&A.

We believe that WNS's strategic investment programs have positioned the Company well to capitalize on today's trends, but that we must continue to invest ahead of the curve in order to meet the evolving needs of our BPM clients. Key investments planned for the second half of fiscal 2015 and into fiscal 2016 include technology tools and resources, concept incubators, marketing and branding, strategic hiring, infrastructure cost optimization, and corporate social responsibility. These investments will largely be funded by our improving margin profile and by leveraging the investments made over the past few years.

Looking at our full-year guidance, net revenue is expected to grow between 6% and 9%. Backing out the impact of exchange favorability, this translates to constant-currency revenue growth of 3% to 6%.

Excluding the 6% headwind from the OTA transition and Aviva contract extension, our full-year constant currency growth at the midpoint of the range exceeds 10%. We currently have 99% visibility to the midpoint of our guidance range.

With respect to profitability, ANI guidance of $83 million to $87 million assumes that both adjusted operating margins and adjusted profit margins will expand year-over-year. The adjusted net income projection includes a $2 million profit and loss impact relating to the finalization of the India budget, which Sanjay will elaborate upon in his prepared remarks.

In summary, we believe that WNS is successfully executing on our strategic business plans and positioning the Company for long-term, sustainable success in the BPM space. We remain focused on helping our clients better compete in their respective industries and to growing our revenue and maintaining profit margins at or above industry rates.

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

Thank you, Keshav. With respect to the second-quarter numbers, net revenue increased to $126.5 million from $115.4 million in the same quarter last year, growing 9.7%. On a constant-currency basis, net revenue grew 3.9%, as top line was aided by appreciation in the British pound against the US dollar. Year-over-year, quarter 2 revenue growth was adversely impacted by approximately 6% as a result of the ramp-down of our OTA client and Aviva contract extension.

Revenue growth was led by the utilities, shipping and logistics, consulting and professional services, and insurance verticals, which all grew over 10%. From a service offering perspective, revenue growth versus the prior year was driven by research and analytics, which grew at 27%, and finance and accounting, which grew at 21%.

Sequentially, net revenue increased by $4.5 million or 3.7%, with broad-based growth across most verticals and service offerings. On a constant-currency basis, second-quarter revenue increased 3.8% sequentially.

Adjusted operating margin was 21.8% in quarter 2, as compared to 16.2% reported in the same quarter of fiscal 2014 and 17.9% last quarter. On a year-over-year basis, adjusted operating margin improved 550 basis points as a result of currency and hedging favorability, increased operating leverage on higher volumes, and improved productivity.

Second-quarter adjusted operating margin was also favorably impacted by $1 million of performance-based incentives and gain-sharing. We believe that these incentives serve to validate the tangible business value we are delivering for our clients. The sum of these benefits more than offset the impacts associated with Aviva contract extension and our annual wage increases.

The sequential adjusted operating margin improvement of 390 basis points was a result of currency and hedging favorability, volume leverage, better productivity, and quarterly gain-sharing. We do expect, however, that operating margins will return to the 18% to 19% range in the second half of the year, based on today's currency and hedging rates, anticipated investments, and the nonrecurring nature of gain-sharing.

Interest expense this quarter was $0.3 million, down from the $0.8 million reported in quarter 2 of last year and $0.5 million last quarter, as WNS continues to reduce our debt levels.

The Company's other income was $2.9 million in the second quarter, up from $1.8 million reported in the same quarter last year and down slightly from $3.1 million last quarter. The year-over-year increase in other income is the result of higher cash balances and $0.3 million for the nonrecurring sale of some assets.

WNS's effective tax rate in the second quarter was 20.7%, up from 13.3% reported last year and from 16.5% in the previous quarter. The second-quarter tax rate included additional taxes of $1 million resulting from the finalization of the India budget, which changed the taxability of our Fixed Maturity Plan investments. The India budget change for Q2 and associated first-quarter catch-up added 3.3% to the effective tax rate this quarter.

The Company's adjusted net income for quarter 2 was $23.9 million, compared with $17.2 million in the same quarter of fiscal 2014 and $20.4 million last quarter. This represented a growth of 39% year-over-year and 17% sequentially.

Adjusted diluted earnings were $0.45 per share in quarter 2, up from $0.33 reported in the second quarter of last year and from $0.39 in the prior quarter.

As of September 30, 2014, WNS's balances in cash and investments totaled $153.7 million. The gross debt position was $62.5 million, with the Company reporting a net cash position of $91.2 million at the end of quarter 2.

WNS generated $25.5 million of cash from operating activities this quarter and free cash flow of $17.1 million, after accounting for $8.3 million in capital expenditures. The Company also reduced gross debt levels by $20.5 million this quarter, as improved cash generation has reduced the need to use debt for some of our short-term working capital requirements.

DSO in the second quarter came in at 30 days, consistent with quarter 2 of last year, and down from 32 days reported last quarter.

With respect to other key operating metrics, our total headcount at the end of the quarter was 27,734. Our attrition rate in quarter 2 was 35%, the same as reported last year and down from 36% in quarter 1.

Billed seat capacity was 24,019 at the end of the quarter, up 96 seats versus quarter 1. Average billed seat utilization in quarter 2 was 1.16, as compared to 1.17 reported in the same quarter of last year and 1.16 in the previous quarter. The Company remains focused on improving this key operating metric for the next few years, while (technical difficulty) 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 fiscal 2015. Based on the Company's current visibility levels, we expect net revenue to be in the range of $500 million to $516 million, representing year-over-year revenue growth of 6% to 9%. Revenue guidance assumes an average British pound to US dollar exchange rate of 1.62 for the remainder of the fiscal year.

Excluding the projected year-over-year exchange rate impact, our constant-currency revenue guidance represents growth of 3% to 6%. This guidance includes a 6% revenue headwind associated with the OTA transition and Aviva contract extension, in addition to a normal business volume and productivity reductions. We currently have 99% visibility to the midpoint of the revenue range, consistent with October guidance in prior years.

Our 2015 guidance reflects year-over-year expansion in our adjusted operating margin and that adjusted net income will grow faster than revenue. We currently expect adjusted net income to be in the range of $83 million to $87 million based on a INR61 to US dollar exchange rate for balance of the fiscal year.

ANI guidance includes a $2 million negative impact to fiscal 2015 as a result of the India budget approval. As a result, we now expect our full-year effective rate to be between 19% and 20%. Adjusted EPS is expected to be in the range of $1.56 to $1.63, based on a diluted share count of approximately 53.3 million shares.

We will now open up the call for questions. Operator?

(Operator Instructions) Joseph Foresi, Janney Montgomery.

Hi, my first question here is just on the large deal signings. You're about half of the way through. Just two parts to the question.

First, how comfortable do you feel about the remaining three targets? And then, when do you start to see the impact from these deals as they start to ramp?

Joe, first of all, as I mentioned earlier we continue to be very positive about how the salesforce has positioned WNS with a number of these large deals. As of the end of Q2 we have now already signed three of them, and we definitely have a very good pipeline which we think should help us get to that six large deal number that we've been speaking about.

So very confident in terms of the pipeline, in terms of the interactions we've been having with prospects, in terms of the business that we are seeing, and in terms of the ability to get there.

Now, in terms of progress thereafter, obviously all of these have different ramifications in terms of progress once you sign a deal. It depends on what stage of the evolution in outsourcing the client is in: are they first-timers, are they more mature outsourcers? Things like that. But at this point in time we are quite comfortable that beyond the transition period our ability to ramp as we have traditionally done over the last few years is very high.

Okay. This year we've had, I guess, the issue in the travel business; and then of course you've had the renegotiation on the large contract. I just wanted to know, are those two issues largely behind the Company at this point? And do you see any headwinds to top-line growth going forward?

Those two issues that we spoke about were issues that really were beyond the Company's control, and as soon as we came to know about them we brought them out. I am delighted to say at this point in time they are firmly behind us.

We have also done a press release on the insurance client, so that's well behind us. At this point in time we believe that both these accounts have significant potential for WNS over the medium to long term.

Having said that, as we see it at this point in time, we do not see any other new headwinds of the same nature, other than the traditional, usual stuff that you should expect to see when you move from one year to another. And that is essentially driven by productivity and the usual, traditional fall-offs that we have seen year-to-year.

Okay. Then lastly for me, on the margin front, obviously the goal is to accelerate or expand the margins and increase the productivity. Maybe you could just talk a little bit about what pace that's going to take place in; how we should think about the changes from quarter to quarter and year to year, just from a modeling perspective.

Let me take that, Joe. I think from a Company perspective the goal at this point, given where the BPM industry is and how we've invested and positioned within this industry, is to accelerate our top line. And that's clearly something we've been focused on and doing a good job of as well. We've also been successful at the same time in accelerating the Company's operating and profit margins.

That being said, if you look at where we are today -- and again, second quarter being somewhat of an anomaly in terms of how healthy the margins were -- what we're looking at, very, very healthy adjusted operating margins for the fiscal full year here in 2015. The Company's goal going forward is to continue to try and nudge these numbers forward, but not at the expense of missing out on top-line growth opportunities.

So we must continue to invest in our business to make sure that we're positioning WNS for long-term, healthy, sustainable, profitable growth. But we do think there are opportunities over the next few years, as the industry evolves, as it shifts to higher-value models, as it shifts to higher-value engagements, that we could see some margin expansion.

But the primary focus right now is to accelerate top line and to make sure that our operating margins and profit margins are at or above industry levels, and we're comfortable that we should be able to do that. Certainly we would like to, at the same time, nudge those numbers forward over the next couple of years; but again, not at the expense of top line.

Okay. Just to be clear, what are you considering industry levels for the margins?

Well, if you look at where the peer groups are now, we're looking at 15%, 16% adjusted operating margins. For WNS this year, when you look at the numbers that were included in our guidance, you're looking at adjusted operating margins that are 19%. So clearly from a Company perspective we believe we're above the industry at this point in time, but want to make sure that we're investing at proper levels while continue to do some of the things to leverage the investments that we've made in the past.

Thank you.

Anil Doradla, William Blair.

Hey, guys; a couple of questions. Now, digging a little deeper into the OTA and the Aviva contract, when I look at your guidance from last quarter, for the year, to the current revision, which is I think lowered at about $8 million at the midpoint, can you share with us what happened from these two dynamics? From the perspective of these two dynamics?

Sure. From that perspective, Anil, there has been absolutely no change quarter to quarter. There has been absolutely no change since we initially provided guidance two quarters ago. So with respect to the headwinds, there has been absolutely no change in terms of magnitude or timing.

When you look at our guidance now, the midpoint of our total is at $508 million. It's down from $514.5 million last quarter, which is a $6.5 million drop. And as we've said, we've had about an $8 million -- just over $8 million impact as a result of currency.

So at the midpoint of guidance on a constant-currency basis, we are actually up quarter over quarter.

Fantastic, okay. Just wanted to double check on that.

Then, based on your commentary right now, you are talking about you guys being above industry level on the margin front. Is it fair to say that, as we look into fiscal 2016, the margin profile that we have will come back to the mid-teens? Are you suggesting that?

Or how should I be looking at -- how should I interpret your commentary about above industry-wide? And how -- and given that you guys want to re-accelerate the top line?

Let me take that. I think what we are seeing is that we have actually focused a lot on growing top line, but also focused a lot on growing profitability ahead of our revenue growth. And that is something that we have done in spite of the fact that we still see a number of other levers for growth, one of which really is seat utilization.

So at this point in time, we are obviously not going to dilute the impact of where we are as far as margins are concerned. We want to give you comfort that there are actually a few more levers that we have which we are working on.

But at the same time, we will not take our eyes off the ball in terms of investing in our business, whether it comes to new offerings, new capability, sales, marketing, technology, things like that. But at this point in time, we will say that we are very comfortable with the margin profile, but we will continue to invest.

Good, great. Finally, can you share with us, what was the latest seat utilization?

Seat utilization for quarter 2 was 1.15. Sorry, 1.16.

1.16? Okay, thanks.

Edward Caso, Wells Fargo.

Good morning. Good evening. Just -- we have been hearing more and more that the finance and accounting part of the BPM universe is becoming more mature and requiring greater levels of automation. You had another good quarter on that front.

Is that related to the rollout of large deal wins? So, why are you doing well, one? And two, what are you doing on the -- to make yourself more efficient, to be competitive going forward? Thank you.

Great question, Ed. I'd like to say that the reason we are doing well on the F&A side is because we are probably the best in terms of delivering on our strategic messages there. Clients who have experienced us understand that, appreciate us, and provide excellent references to advisors and the analysts as well as other new prospects. So that's one.

Having said that, we have kept investing very strongly in building new capability on the F&A side, kept taking the value to new levels, as a result of which we are reaching deeper and deeper into the controllers' as well as the CFOs' offices. Really progressing higher up the value chain in terms of some of the services we offer, which are also obviously higher-growth areas but also higher-margin areas.

And in areas that involve high levels of calculation and which can be automated, we've actually been able to experiment with and successfully deploy robotic process automation tools, which have actually enabled us to keep the pace very, very positive. So overall a healthy growth area for us, big area of focus for us, and my view is that this is an area that is going to sustain for a long time for WNS.

Yes, and just to add to that, Ed, I think the other thing that's important to remember is, as we start new relationships and really start to transform the growth profile of WNS away from our traditional customer base towards the large deals and the large relationships that we've added over the last 2 to 3 years, it's very important to remember that F&A is typically a logical entrypoint for a lot clients. So it's very rare to see a customer -- even a customer who has a vision to what their BMP initiative might look like over a 4- and 5-year period -- it's very rare to see that client start with core operations as the entrypoint to that relationship.

So I do think some of the acceleration that we've seen in F&A is directly related to the fact that we're adding new customers and new relationships, and they typically will start with an F&A type of a component to the business. It's very similar to what we've seen in terms of the mix of our profile between transaction outcome-based and FTE-based. When you're starting with new clients and you're adding new revenues, it's very common for us to expect that it's going to start on a time-and-material basis, and that it's going to start with some of the lower-end services like F&A.

The Tier 1 India-centric providers have been talking different levels of success getting into the BPO sector. Obviously they have a much bigger client footprint that WNS does.

How much are you seeing them in the market? What success are you having when they're involved in a bid situation?

Again, I think in terms of what we have seen over the past few quarters, I will say that there's no significant change really, Ed. We believe that some of these players have been more opportunistic in terms of getting into a client and trying to expand the IT kind of areas.

With existing relationships they've also been defensive. We've not essentially seen any significant pricing impacts; and pricing has been more or less stable, except for a few exceptions where somebody has been desperate to do a deal, maybe. But I would say that we've not seen any major changes.

And I must again underline the fact that the value proposition that WNS offers to its clients, through a superior understanding of business domain married with horizontal understanding and appreciation as well as technological superiority, where we make the process far more intelligent and far more efficient, is what clients look for. Because the next really is all about using this information to deliver analytics and providing business decision support ideas, which they are far better served by engaging with people like us, as opposed to the traditional IT companies, who are really good at IT services.

Last question. I believe that your prior disclosure around the FMP program was a $3 million impact; and now you're talking $2 million. Is that a pretax versus aftertax, or is there just a lower impact?

Basically the $2 million impact is -- again, it's a pretax impact over there. It is on the India budget change which was there. Earlier we talked about $3 million, but after the finalization of the India budget they rectified and amended some of the stuff over there. And based on that the final tax impact is on $2 million, which has increased the tax rate by 3.3% for quarter 2 as well as it's going to be in the range of 19% to 20% for the year.

So just to clarify, the $2 million is a pretax number?

The $2 million is a tax number.

A tax number?

Correct. So the big difference from where we were a quarter ago when we highlighted a potential impact to our earnings is the fact that the Indian government has removed the retroactive component of that tax. So when we talked about $3 million last quarter, what was proposed by the India budget was that the tax would actually go back into fiscal 2014. The tax is now effective the first of fiscal 2015, and that's why we only have a $2 million impact for the year.

Terrific. Thank you and congratulations on a good quarter.

S.K. Prasad Borra, Goldman Sachs.

Thanks for taking my questions; a couple if I may. Firstly, on your guidance for FY15. On the large deals, are you assuming that six deals need to be signed to hit the midpoint of the guidance?

And second question is on the profits. Can you please quantify what is the benefit you are seeing from your hedging strategy on operating profit for second quarter, and also for second half of this year?

Sure, let me take that, S.K. I think when you look at the Company's full-year guidance -- two things, right? So one, on the impact of currency, we did have about a $400,000 nonrecurring hedge benefit in the second quarter.

With respect to what the full-year benefit looks like from hedging, it is very difficult for us to talk about that, because it is a function of what the benefits are in our core operating costs. The way we hedge, which is 90% with a combination of forwards and options struck over the last 2 years, serves to try and protect ourselves from volatility that actually occurs through the operating costs, which rip through our direct costs, our revenue to a lesser extent, and our SG&A levels. What we think this does is allows us to ride about half of the upside of currency favorability, but manage the downside exposure to about 10%.

So relative to where we were a quarter ago, there is probably not a huge change in terms of the impact from currency, with the exception of the British pound. The British pound has gotten worse for us; it has impacted the top line. But our hedging has actually protected us a little bit on the operating margin line below.

That is really the only net change that we have seen, because the rupee has been relatively stable.

Let me just add the other part, address the other part of the question, which was on the revenue guidance. At this point in time, our revenue guidance essentially just follows a consistency methodology.

We now have 99% visibility to that midpoint. We have offered a range of numbers; and within that number we have a lot of confidence about our ability to actually complete those six deals. We have more deals than the six deals in the pipeline, but we will actually have to wait and see how things play out.

But again, I must give you comfort there is 99% visibility to the midpoint of the range. And it's just a range that we are offering at this point in time.

So the short answer to that, S.K., is that the remaining three deals that we need to sign help us close the gap between 99% visibility and 100% visibility at the midpoint, which is $508 million. And depending on how they come in, what the timing looks like, and what the ramp looks like on those deals, could potentially help us get to or above the high end of guidance.

That's very clear. Probably just one more, on the pricing environment for the large deals. What are you seeing in terms of the content landscape?

And as you indicated earlier, as the industry moves to high-margin services, are you expecting more competition? And what kind of investments are you thinking to face that kind of competition?

So we haven't seen any irrational kind of pricing behavior by competition. I must tell you that upfront, other than one or two deals where we've seen an IT player try to be aggressive. But we do not believe that that is a sustainable long-term proposition for anybody.

Having said that, I must also say that the declines on the other side are very savvy, very, very discerning in terms of the quality of services that are required, about the impact of the required from their strategic partners. And from that perspective, we are extremely comfortable about how our pipeline is developing, what kind of pricing we are likely to receive for deals that we win, the impact that it has on margins.

But at the same time, we will continue to make investments. We are very comfortable in terms of where we are in terms of pricing with deals that we are seeing.

Very clear, thank you.

Mayank Tandon, Needham & Company.

(technical difficulty) into the big deals you signed last year, how are they faring versus your expectations? And also from a margin side, are they not additive to margins or are they still running below corporate average?

Let me take that one, Mayank. I think anytime you have a portfolio of new accounts that you've won, they're all going to progress at different rates. I think on average when you look at the five large deals that we signed last year, they're progressing as expected as a portfolio.

I think a few of them are doing a little bit better than we had expected. A few of them are moving a little bit slower than we would have expected. But overall, I think revenue expectation and the progress has been pretty much on par with Company expectation levels.

Similarly, the margins, I think we are getting to the point now where some of them have moved into profitability mode and are generating accelerated profit. Some of them are still in transition mode and as a result, create drags on margin. So for us when we look at the impact on Company margins as a result of large deals, we have to look at the overall portfolio and look at not just what's happened last year but also what's happened this year; and really looking at total transition as a percentage of Company revenues.

And the good news from a margin perspective is we have not seen a material change in terms of that percentage. And as a result, kind of as things are moving into transition mode, other things are moving out of transition mode. And the Company overall, the margins remain pretty stable.

Great, that's helpful. Then just on seat utilization, I know it is still running at low levels relative to your history. What is a realistic timeframe to expect some improvement on seat utilization, and then that can ultimately obviously drive margin expansion?

What is sort of a timeline in terms of getting that number back to maybe more normalized levels?

Let me address that. Actually, first of all, I must acknowledge that we are disappointed with the progress on our seat utilization compared to prior performance, and it is really a very key focus area for Ron and his team as we keep making progress on all these accounts.

Now, I think what has actually impacted -- the uncertainty that was created there about the ability to really improve seat utilization is essentially that a lot of the growth that we have seen over the last 18 months or so has come from outside of India; and whereas the ramp-downs and the volume-based pressures have all been India-based. So, therefore, the ability to plan for the seats have been slightly off-color at this point in time.

We have also had to add new capacities in some locations to service clients. So, for example, just to remind all of you, South Africa, Philippines, Sri Lanka, we have had to add new locations, new capacity. And when you do that, you always end up adding a higher number of seats than you may require immediately. So that again impacts seat utilization negative in the short term.

I will say that at this point in time it is a very significant focal area for our Chief Operating Officer. And we expect that over the next 12 to 18 months, we will continue to see improvement in that area, assuming that the business slow dramatically does not change from what we expect it to be at this point in time.

Great, and then one final question on the two areas that I was just looking at. Healthcare and Europe both tend to be small for you, but I would imagine they have a long-term runway. Could you just comment on anything you are seeing in those two areas? Again, there may be some overlap obviously, but any tailwinds or headwinds that could either help or hurt your business over time?

So from our perspective, Mayank, healthcare is an area to invest in, and we have taken that position. We are making that a focal area for us, making good progress on a number of deals out there, and at the same time also looking at some strategic areas that we should be investing in over the medium term. So healthcare is a positive area, area of growth for us and area of focus.

Europe, again, is interestingly for us an area where we are looking to position some more sales feet on the ground, right? At this point in time, it would be fair to say that our global client base have been expanding opportunities and delivery capability through us in Europe, but we actually believe that there is an opportunity for us to actually position more sales feet on the ground in Europe and very carefully generate new logos into the Company from Europe.

So both of them at this point in time are opportunity areas for us.

Thank you.

Bryan Keane, Deutsche Bank.

Hi, I might have missed this, but the operating margin improvement of the 550 basis points, how much of that was the currency and hedging?

Sure, let me take that. So when you look at, Bryan, the operating margin and coming in at just under 22% year-over-year, we have got just over a 500 basis point impact from currency, so a lot of it is. Now again, it is important to remember that there are a number of things on a year-over-year basis that have been negative for us.

So the Aviva contract extension impacted our operating margins about 130 basis points. The annual impact of our wage increases impacted our operating margins about 160 basis points. So really what we have been able to do on a year-over-year basis is take the currency favorability, roll it through the numbers, absorb the impact of the contract extension, absorb the impact of our wages by leveraging the investments that we have made and by improving our productivity, which is showing up both in terms of our ability to execute with fewer resources as well as our ability to win business that comes through in the form of gain shares and incentives.

So net-net, a lot of the favorability on a year-over-year basis comes from currency, but again, operationally, we have been able to offset some of the one-time issues that we had earlier this year.

That's helpful. And then wouldn't there be a benefit from currency still, given where rates are today, in the back half of the year?

On a year-over-year basis, actually in the back half of this year if you look at currency, we are getting close to where we were a year ago. So the rupee has essentially stayed quite flat for the last 12 months in this INR60 to INR62 range. What has happened, however though, is the way we hedge and the way we roll on these hedges.

As we get closer and closer to the end of this fiscal year, the hedge rates that we have will become closer and closer to the actual rupee to dollar rate. So we would expect some of the benefits that we have seen to start to dissipate because that number is going to start to match up with the hedge rate.

Okay. And then just a follow-up on an earlier question. I think the question was kind of referring to typical headwinds or any known headwinds. And I think you guys were saying both sides, Aviva and the OTA contract this year, there is nothing really known of large consequence into next year, but there is the typical business. So just remind us, typical kind of renewals and runoffs, what kind of headwind do you face as you turn into every fiscal year?

So we traditionally enter the year with about 3% to 4% of headwinds, maybe 4% to 5% of headwinds caused by some other factors that you just named. But those are standard, traditional, planned for and, therefore, when the Company grows at 10%, it means it's actually growing at 15%, but we're giving back 5% in all of these formats.

Again, happy to say at this point in time no known [impact]

on our headwinds that we are aware of at this point in time. So very much business as usual.

So as we stand here today going into next fiscal year, shouldn't we expect then an increase or an acceleration in constant currency growth rates? I mean, I guess that's the important question is, given that the size of those large contracts are coming off and given where the run rate is ex those, it looks to us as long as those large deals come in as planned that you should see an acceleration for next fiscal year.

So obviously, we will provide guidance on next year sometime in April. But I can just assure you that the management team is completely focused on accelerating both revenue and profits at this point in time.

Okay, thanks so much.

Puneet Jain, JPMorgan.

Hey, good morning. Thanks for taking my question. So following up on the earlier question from Ed, many of your IT services peers are also focusing on increasingly automating clients' business processes. So can you talk about the order of magnitude of investments in technology tools, incubators, etc., that you talked about, so as to effectively compete with much larger peers?

Sure, Puneet. So earlier in the year, we provided a $30 million overall CapEx program in our guidance for the year, and you should expect that we will spend that money this year definitely. We will continue to spend somewhere in that region across each of the years, essentially driven around seats as well as technology, automation tools, things like that, and refreshment of technology.

Now, I think I want to clarify that from our perspective when we talk about technology investments around process, it is essentially around OCR technology, workflow technology, technology that impacts the domain side of business, and the processing side that makes processing far more simple, efficient, and creates a much more sticky revenue stream for WNS.

We are not really focused on the application development maintenance areas, but much more creating smart solutions as a result of which we are able to introduce robotic automation tools, we are able to introduce faster kind of processing ideas. We are able to really help move some of our people into higher value areas, and really focus on stickiness as well as margin improvement.

So I think quite different to what the traditional IT services players would do, which is essentially around large platform play as opposed to what we will do within each one of our clients, both horizontally as well as vertically.

Understood.

And I think from a financial perspective, Puneet, I think it is important to remember, as Keshav mentioned, that our guidance for this fiscal year includes CapEx spending of $25 million to $30 million. It includes the incubator investments that we have made. It includes our capability creation group and the work that they are doing on evaluating new technologies.

The one investment area from a technology perspective that is not included would be anything that we do from an M&A perspective.

Understood, understood. That's helpful. Can you also share more details on $1 million in performance-based payments you got this quarter? What triggered that gain? Is it repeatable?

Sure, let me take that, Puneet. I think when you look at gainsharing, both from a magnitude perspective as well as from a timing perspective, it is somewhat unpredictable. So with every one of our outcome-based clients, we have a different set of performance criteria. We have a different timeframe that generates when those reconciliations are done to determine whether or not a gain share has been earned. So there really is no consistent flow quarter to quarter, year-over-year, in terms of what gain shares are or what they could be.

What I can tell you is the Company, as we continue to try and migrate some of our existing customers or existing mature customers try to migrate portions of their business to outcome based, is to leverage that. Because obviously, the margins on this business are extremely healthy for us. And when we are able to recognize those gain shares, not only do we have a good revenue impact and a good margin impact, but obviously, we have demonstrated quantifiable value to our customers because they are only paying us when they see the benefits from that.

So from a Company perspective, very focused on trying to increase the amount of outcome-based revenue that we can generate, and also focused on executing on that. But again, somewhat unpredictable in terms of timing and magnitude, and that is why we have called it out here in the second quarter.

It is something that we don't expect to happen in the same magnitude in the back half of the year. Doesn't mean it couldn't, but again, something that is somewhat unpredictable.

Understood, understood. Last one from me about sales and marketing expense, as percentage of revenue are down from last year's level and maybe lower than what you would like them to be. How should we think about that metric on a go-forward basis?

Sure. I think our SG&A levels on an adjusted basis are a run-in in the mid-18% range for this year. They ran in the upper 18% range earlier. I think ideally, SG&A as a percentage of revenue is something that we would like to keep stable to maybe slightly bring down, but I think this is a function, Puneet, of the investment discussions that we have had earlier. Some of the investments that we need to make will show up in the gross margin line. Some of the investments that we need to make will show up in the SG&A line.

But the goal is to make sure that we are growing revenue at an accelerated rate so that we can leverage some of these investments going forward. So I don't think as a Company we are looking at any kind of a dramatic step-up in the next 12 to 18 months in our expected SG&A percentage.

Also understanding that part of the reason that SG&A percentage looks as low as it is is because of the currency impact and the offset that shows up in the FX line.

Yes, and maybe just to add to that, the first half of the SG&A, specifically on the sales and marketing percentage, is not the representation of the full year, because there are certain event-based events which are going to happen even in the second half. And accordingly, as Dave mentioned, sales and marketing percentage is going to be more stable what we have seen earlier years.

Understood, understood. Thank you.

David Koning, Baird.

Hey, guys. Great job again.

Thank you.

Yes, yes. So just had a couple quick ones. The first one, we have asked this before, the employee-based contracts or revenue contribution now, I think 74% of revenue this quarter. Just a couple years ago, that was 61%. In the transaction side kind of inverse is only about 17% of revenue. A couple years ago it was running like 27%. And I know there was the focus to get more transaction-based, and that has declined quite a bit.

So I guess one is, why? I guess the second is, does that really matter? I mean, margins are up a ton and it almost doesn't seem like it matters if the transaction part grows.

That's a great question, Dave. I think in the short term, your assessment is right. In any given year, in any given two-year period, the mix of business between FTE based and transaction based and outcome based isn't going to have a huge impact on the overall margin profile of the Company.

Now that being said, we do believe longer-term that as maturation occurs in the industry and more clients are willing to move towards transaction and outcome-based models, that there is a margin opportunity for the Company. But with respect to kind of what has happened to WNS over the last 12, 18, even 24 months, I would say there are two dynamics that have driven down the transaction based as a percentage and driven up the FTE based.

One, as I mentioned earlier, as we add new clients and more of our revenue comes from less mature relationships, we would expect these relationships to start on an FTE basis. So we can establish baselines and we can establish the right productivity metrics that enable us down the road to move to transaction and outcome-based models.

I think the second thing that has impacted us, and we haven't talked a lot about it, is the fact that some of this is specific to some of the ramp-downs that we have seen. So when you look at the online travel client that has dropped year-over-year, that business was almost entirely transaction-based and it's had a significant impact on that percentage of our total portfolio.

Yes, okay. That all makes sense. That is good. And then I guess just the second question is just on margins. I know a lot of questions already on that, but when we think about the normalized margin you talked about the levers that can make margins go up over time. Should we think of the baseline margin?

Like the rest of the year, you are talking about something like 18% adjusted margins. You are expecting expansion kind of from that level, not from the 21% or so that you just did recently. It is more of an expansion from a normalized 18% or so range over time, right?

Yes, you know, you're absolutely right. The normalized margin for the second half definitely, maybe in the range of 18% to 19%. And when we talk about expansion, it is from that normalized margin and not the 21.8% for the quarter 2, which has some onetimers.

Got you, great. Well, thanks. Great job.

Thank you.

Thank you.

Ashwin Shirvaikar, Citibank.

Thank you. Good morning, guys, and good quarter.

Thanks, Ashwin.

I guess I want to revisit your comments on guidance, because when you say 99% visibility to $508 million versus 95% visibility to $514 million, and you basically raised constant currency guide, personally I would view that as a positive move. But can you help us understand the internal process for computing that visibility percentage? Why not just keep the 95% level and just give it a higher range?

Sure, let me take that, Ashwin. I think the reason that we do this is the guidance methodology is something that has worked well for WNS. So if you look at the nature of the BPM business, because it is, to a certain extent, an annuity-based business and that there should be a high degree of visibility and predictability to it.

What we have found is that not that much variability occurs in our business from where we come into the year, which is why we typically start the year with a 90% visibility to the midpoint. It gives people an understanding of what we have committed or in the bag when we walk in, and it also gives a possible range of outcomes around it.

So if you look at the methodology for guidance, not only is it visibility-based at the midpoint, but you will also see a consistency in terms of the range between the low end and the high end of guidance every quarter. And what we understand about our businesses as we move throughout the year, A, the ability to outperform or underperform that visibility goes down significantly quarter to quarter.

So as a result, what happens is the visibility as a percentage of total goes up, and the range of outcomes both at the high end and the low end tend to come down. So we honestly think it is a philosophy that works. When you look at what this means in terms of guidance, it means we really expect as a Company to be pretty darn close to the midpoint.

If things go better than we expect or better than we see today, we have an opportunity to get to the high end or above the high end of guidance. But to get below the midpoint or to get to the low end of guidance, something actually has to go wrong that we don't have visibility to.

So what we find is this gives us a nice level of -- an ability to manage our business, to manage the guidance, and to do it in a consistent basis so that our analysts and investors are able to understand exactly what we are providing and what we are providing each quarter.

And could you comment on sort of the ramp 3Q -- 2Q to 3Q to 4Q relative to historical patterns; how should it look? I would imagine that as you get deeper into that OTA and some of these contracts you signed ramp, there should be a pretty good, healthy exit rate 4Q heading into next year, right? It should be a pretty good ramp from here.

That is clearly the goal, Ashwin, and I think it is a function of the same thing. The closer we get to the high end of guidance, the better our fiscal Q4 number is going to be and the better the exit rate and visibility will be walking into next year. So a lot of this has to do with not only whether or not we sign an additional three large deals between now and the end of the year. Because clearly getting to six large deals this year, given where we are today, is far more important to fiscal 2016 revenue than it is to fiscal 2015.

But really we have to look at the timing of these ramps and, again, given where we are today, given where the visibility is today, this is what we see. But if things move at a better clip, then yes, we should see a better acceleration through Q3 and into Q4 with a good opportunity to improve what that visibility looks like walking into next year. But as Keshav mentioned earlier, the specifics on ramps beyond what is committed today and what is in progress today is something that the client controls, not necessarily the Company.

Right. Now, as the balance sheet improves, I understand that, obviously, selective M&A is quite important. So maybe you could give us an update on the pipeline there.

But also given valuation, how do you feel about the modest level of capital return to investors? Maybe an opportunistic buyback or something like that, I don't know. Could you comment on that?

Yes, Ashwin, actually in my prepared comments I did address that, and I must mention that that is an area that the Board is discussing every now and then in terms of how best to deal with our cash. And as we mentioned earlier, obviously, things that we would look at as obviously opportunistic M&A, share buybacks, dividends, we are considering all of it. And at the right time, we will keep you updated in terms of any decisions that are taken.

Having said that, I must also mention that at this point in time we are comfortable that we are building cash. We have quite a bit of cash, but it is -- with this amount of cash, we would like to expect our clients to feel safe and sleep well at night. It is not something that we dramatically need to worry about too much at this point in time, because it is not that we have billions of dollars of cash at this point.

We are building the cash and are quite responsible in terms of how we are discussing it at this point in time.

Got it, okay. Thanks.

The short answer, Ashwin, is they are on the table; they are being considered. The Company will look at share buyback, the Company will look at dividends, the Company will look at tuck-in M&A. And again, to your question on the M&A front, you're right; we have seen a number of deals that have come through our M&A pipeline, which is fairly healthy, that have had valuations that don't meet the Company's profile.

So we want to be opportunistic about M&A. We want to find the right fits for the Company, and whether that is from a technology perspective or from a domain perspective, but we also understand that we can't continue to pay excessive multiples for these assets because the analytics space is hot today, or the healthcare space is hot today. So want to make sure that we are doing a proper job of evaluating not only bringing these capabilities into the Company, but bringing the capabilities into the Company at the right price.

And that is something that -- as Keshav mentioned -- the Board has been actively reviewing and it is actively considering. And clearly, over the last 2 to 3 quarters, putting in front of the Company, putting in front of the analyst and the investor community, options and alternatives for uses of cash have become increasingly important.

Got it. Thank you, guys. Good quarter again.

Thank you.

Thank you.

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