WNS (Holdings) Ltd (WNS) 2016 Q3 法說會逐字稿

Good morning and welcome to the WNS (Holdings) Fiscal 2016 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, we will conduct a question-and-answer session and instructions for how to ask a question will follow at that time.

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

Thank you and welcome to our fiscal 2016 third quarter earnings call. With me today on the call I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our COO, Ron Gillette. A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.wns.com.

Today's remarks will focus on the results for the fiscal third quarter, ended December 31, 2015. 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. This document is also available on the Company website.

During this call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliations of these non-GAAP financial measures to GAAP results can be found in the press release issued earlier today. Some of the non-GAAP financial measures management will discuss are defined as follows. Net revenue is defined as revenue less repair payments. Adjusted operating margin and adjusted net income, or ANI, are defined as operating margin and profit, excluding amortization of intangible assets and share-based compensation. These terms will be used throughout the call.

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

Thank you, David, and good morning everyone. Our fiscal third quarter results highlight continued strength in the Company's operating and financial performance. Fiscal third quarter net revenue came in at $135.9 million, representing a year-over-year increase of 5.9% on a reported basis, and 10.4% constant currency. Versus the third quarter of last year, the continued depreciation of several key currencies against the US dollar adversely impacted our revenue. Sequentially, revenue improved 1.9% on a reported basis and 3.7% constant currency.

In the fiscal third quarter, WNS added five new clients, expanded six existing relationships and renewed 21 contracts. The sales pipeline remains healthy and broad based, highlighted by opportunities for emerging verticals, disruptive services and large deals. In fact, this quarter, WNS added over 1,500 employees with headcount crossing the milestone level of 30,000 globally. This hiring was primarily in support of three large accounts, which will be ramping up over the next few quarters and highlights the Company's underlying business momentum.

In the third quarter, our adjusted operating and net profit margins were once again strong, despite some unanticipated costs.

Sequentially, the reduction in adjusted operating margin of 100 basis points was largely driven by a $2.2 million charge relating to an amendment of the India Payment of Bonus Act, which increased employee bonus amounts for certain wage categories retroactively from April 1, 2014. This legislation was passed on December 31, 2015 and WNS strongly disagrees with the Indian government's decision to make this amendment retroactive to the beginning of fiscal 2015. Sanjay will discuss the details of our quarter-over-quarter and year-over-year margin movements in his prepared remarks.

From a balance sheet perspective, WNS ended the third quarter with no debt and $149.2 million in cash or $2.80 per diluted share. Putting our strong balance sheet to work for us remains a key focus area for WNS. In addition to share repurchases, we will continue to look for tuck-in acquisitions to augment our abilities, our capabilities rather and solutions, and help position the Company for continued long-term success.

As many of you are aware, there were severe floods in the city of Chennai last quarter, which had a devastating impact on the city. From an operational standpoint, WNS was able to implement our business continuity and disaster recovery plans to ensure our clients' operations were not disrupted. As a result of these efforts, Q3 revenues were not impacted. We did, however, incur some additional costs as a result of the flooding, which included transportation, housing, overtime wages, clean-up costs, and contributions to the relief and recovery efforts. We believe that WNS has robust BCP capabilities and a diversified global delivery infrastructure, which enables us to mitigate the impact of natural disasters, as well as other geopolitical challenges, including economic crisis and terrorism. WNS combines these BCP capabilities with rigorous data and cyber security, operational excellence and strong governance to ensure our clients' business processes are safe and secure.

This is a very exciting time for the BPM space. Today, there are several disruptive forces driving clients to adjust their business models. These include the need for digital strategies and better analytics, the ability to manage regulatory and compliance related changes and traditional cost, quality and efficiency requirements. This business disruption serves as a demand driver for the BPM industry and at WNS, we are seeing this manifest itself in both client discussions and the new business pipeline.

Despite all of these exciting changes, it is important to remember that at the end of the day, the ability to help transform a client's business is predicated on domain expertise. Deep domain expertise remains the most important skill to helping clients manage their traditional, transitional and transformational requirements and to delivering quantifiable outcomes and true business impact.

On the subject of digital, at WNS, we are seeing new opportunities present themselves in several different ways. The first type of digital project is helping the clients create, integrate and manage new technology-enabled, client interaction channels to augment their traditional models. Examples of these front-end channels include mobility, social media and data acquisition tools, such as sensors.

The second type of digital engagement we are seeing is far more disruptive and transformational in nature. This is the end to end conversion of the legacy business models to digital, impacting the client's front, middle and back office. These engagements involve not only technology enabling processes, but fundamentally changing how companies operate. These executive level strategic initiatives must be well planned to avoid digitizing an inefficient process and to drive competitive advantage across the organization.

Finally, we are also seeing opportunities to service e-commerce organizations, which were born digital. Many of these companies are on hyper growth mode and focused on improving brand awareness, market share and client acquisition. WNS is gaining a reputation as a partner that can help enable business acceleration by providing much needed process expertise, domain knowledge and analytical capabilities. Today, WNS is servicing these types of clients in the online, travel, e-tail, transportation and logistics and hotel industries.

The disruptive changes to our clients' businesses will also require providers to adjust the skill sets necessary to deliver BPM solutions. As technology and automation reduce the need for manual involvement in lower end repeatable process tasks, BPM partners will increasingly need to focus their labor forces on domain expertise, operations and process knowledge, analytical capabilities and much higher levels of specialization. Last quarter, we discussed WNS' increased focus on employee training initiatives to help develop these specialized, higher value skill sets. We spoke about our broad-based entry level college training program to help generate interest in BPM and create language and business skills to help increase employability. We also highlighted our domain universities for WNS employees, which provide a structured learning environment, designed to enhance vertical expertise and operational excellence.

In addition to these two initiatives, WNS recently announced a joint MBA program in business analytics with NIIT University in Delhi. This first-of-its-kind program was co-created by economic experts at NIIT University and senior leaders from the WNS analytics practice and combines intensive academic content with practical work experience via a WNS internship. Graduating students will receive placements in the WNS research and analytics practice, which is currently over 2,500 professionals strong. The program will begin in June 2016 and is expected to create a dedicated supply of focused analytics experts and to help improve the WNS brand in India. It is these types of innovative programs that will help WNS meet the changing needs of our clients.

In our press release issued earlier today, WNS provided an update to our fiscal 2016 full-year guidance. We currently expect revenue to be in the range of $528 million to $532 million, representing growth of 5% to 6%. Excluding the impacts of currency and hedging, guidance reflects growth of 10% to 11% on a constant currency basis. Consistent with previous years, we currently have over 99% visibility to the midpoint of the range. Adjusted net income is now expected to be in the range of $99 million to $101 million or $1.86 to $1.90 per adjusted diluted share.

In summary, we are pleased with our third quarter financial and operational performance and overall business momentum. We are excited with the health of the BPM space and believe that our unique combination of domain knowledge, operations expertise, analytics capabilities and technology enabled solutions position us front and center to meet the industry's evolving requirements. We will continue to invest in the areas of digital, analytics, domain and technology with the goal of generating improved business value for all our key stakeholders.

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 our third quarter financials, net revenue increased to $135.9 million from $128.4 million in the same quarter of last year, growing 5.9% on a reported basis and 10.4% on a constant currency basis. Year-over-year, quarter three revenue was pressured by depreciation in key revenue currencies against the US dollar, including the British pound, Australian dollar, South African rand, euro and the Canadian dollar.

From an industry perspective, revenue growth was broad based, with the Shipping and Logistics, Retail, CPG, Travel, Consulting and Professional Services and Utilities verticals each growing 10% or more year-over-year. With respect to our service offerings, revenue growth versus the prior year was driven by high-end contact center work and technology services.

Sequentially, net revenue increased by 1.9%, or 3.7% on a constant currency basis. Quarter-over-quarter, revenue growth was broad based and healthy, despite currency headwinds, net of hedging.

Adjusted operating margin in quarter three was 22.1%, as compared to 22.3% reported in the same quarter of fiscal 2015 and 23.1% last quarter. On a year-over-year basis, adjusted operating margin decreased 25 basis points as a result of $2 million of one-time benefits recorded in quarter three of last year for the removal of FX collars on certain client contracts, the quarterly impact of our annual wage increase and $2.2 million charge for the India Payment of Bonus Act, which Keshav discussed. Approximately half of this expense is related to the retroactive nature of this amendment and represents catch up from fiscal 2015. These unfavorable items were largely offset by currency and hedging gains, better seat utilization, productivity improvements and increased operating leverage on higher volumes.

The sequential adjusted operating margin reduction of 100 basis points was a result of $2.2 million charge for the India Payment of Bonus Act, which was partially offset by improved productivity and higher volumes.

Interest expense this quarter was $0.1 million, down from the $0.3 million reported in quarter three of last year and slightly below last quarter's level. The Company's other income was $1.9 million in the third quarter, down from $3.1 million reported in quarter three of fiscal 2015 and slightly above the $1.8 million last quarter. Year-over-year, the reduction in other income is largely the result of a change in the India Budget, which increased the dividend distribution tax. In addition, interest rates in India have reduced versus last fiscal year.

WNS' effective tax rate in the third quarter was 17.1%, down from 20% reported last year and up from 16.9% in the previous quarter. The year-over-year decline in tax rate is largely the result of the shift in our investment instruments, which is offset by the lower interest income previously mentioned. The Company's adjusted net income for quarter three was $26.4 million, compared with $25.1 million in the same quarter of fiscal 2015 and $27.1 million last quarter.

Adjusted diluted earnings were $0.50 per share in quarter three, up from $0.47 reported in the third quarter of last year and down from $0.51 in the prior quarter. Year to date, the Company has increased adjusted diluted EPS 9% on a reported revenue increase of 5% and a constant currency revenue increase of 10%.

As of December 31, 2015, WNS' balances in cash and investments totaled $149.2 million and no debt. The Company generated $27.7 million of cash from operating activities this quarter and free cash flow of $24.1 million, after accounting for $3.6 million in capital expenditures. DSO in the third quarter came in at 28 days, the same as reported in quarter three of last year and up from 27 days reported last quarter. The Company remains focused on putting our healthy balance sheet to work and we are actively looking for tuck-in acquisitions to augment our current capabilities. The M&A pipeline continues to improve and includes opportunities in the areas of analytics, domain expertise, finance and accounting, and technology tools and platforms.

With respect to other key operating metrics, our total headcount at the end of the quarter was 31,340. As Keshav mentioned, we hired over 1,500 new employees to support wins at large three accounts. This hires occurred late in the third quarter and are expected to impact our margins in fiscal quarter four, as resources are trained and work is transitioned. While we expect some modest transition revenue in quarter four from these accounts, the majority of revenue is expected to flow from quarter one of fiscal 2017 onwards.

Our attrition rate in quarter three was 30%, down from 32% reported in the third quarter of last year and down from 35% in the second quarter. Global billed seat capacity at the end of the third quarter was 25,708 and average billed seat utilization came in at [1.19]. While average seat utilization was down slightly quarter-over-quarter, our period-end number improved by almost 5% as a result of our quarter three hiring. This should help drive average seat utilization higher in fiscal quarter four. As always, we expect this metric will fluctuate quarter-to-quarter based on facility build-out requirements and hiring cycles. But directionally, annual seat utilization levels are expected to improve over the next few years.

In our press release issued earlier today, WNS provided revised guidance for fiscal 2016. Based on the Company's current visibility levels, we expect net revenue to be in the range of $528 million to $532 million, representing year-over-year revenue growth of 5% to 6%. Revenue guidance assumes an average British pound to US dollar exchange rate of [1.48] for the remainder of the fiscal year. Excluding exchange rate impact, our revenue guidance represents constant currency of 10% to 11%. We currently have well over 99% visibility to the midpoint of the revenue range, consistent with January guidance in prior years.

Adjusted net income is expected to be in the range of $99 million to $101 million, based on a INR66.50 to US dollar exchange rate for the remainder of fiscal 2016. This implies adjusted EPS of $1.86 to $1.90, assuming a diluted share count of approximately 53.2 million shares.

It is important to note that without the impact of the amended India Payment of Bonus Act, our expected full year ANI in fiscal 2016 would have been higher by $2 million and $0.04 per diluted share. With respect to capital expenditures, WNS anticipates our requirement for fiscal 2016 to be in the range of $23 million to $25 million.

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

(Operator Instructions) Anil Doradla, William Blair.

Hi, this is Maggie Nolan in for Anil Doradla. I was wondering where you think opportunities for growth are in terms of existing clients versus new clients and how that will drive you going forward, especially in the context that you've seen a slight decline in the top customer concentration this quarter?

Actually, from our perspective, I think the business momentum across, whether it is with existing clients or with new prospects continues to be very, very exciting. Again, having said that, I must say that the business momentum and the kind of interactions that are taking place between prospects, existing clients and WNS are across the globe, across verticals and transcend all our business horizontals as well. I think the most important area for us to be excited about is the fact that there is so much of disruption that is taking place in clients own business models, so while some existing clients may take a little longer to take decisions on the business transformation, we know that finally decisions are inevitable. They have to be influenced and impacted by us, while many of the others are moving much faster ahead.

So at this point in time, as you look at momentum, it is coming across the globe and across all horizontals and verticals and something new that we are seeing for the past few quarters is that is coming from the new disruptors in technology as well.

And then, obviously, your net headcount additions were quite high and this is in anticipation of those three ramping large accounts. Can we get a little more color on those three accounts, maybe what verticals those are, if you foresee those becoming some of your top clients down the road?

So let me just start off with that answer and have Ron add a little more color, but yes, absolutely, that's a perfect indication of the exciting kind of change in terms of business momentum. The three verticals are across different areas. One is a utilities vertical, one is travel and the third one is on the retail and the CPG area. Again, these deals are large transformational in nature and transcend geographical boundaries, as well as different offering areas from WNS. And in some cases we have to skill some of our resources in a trade and bring them in early, train them and make sure that their skills are up to date in terms of some of the new services that we will be offering here and that's the reason that the addition has taken place early. But again, very, very exciting in terms of the potentials.

So this is Ron. In addition to what Keshav said, we are excited about this, because it is across these three different industry verticals, three different geographies and being delivered from three different geographies. We are very disciplined in our approach to transitioning and bringing on new clients. We thought it was prudent to take the time to deliver this, these are very large additions to our services, to our clients, rather, and I think that we are doing throwing this in a very disciplined and measured way. Again, we'll see the revenue impact in Q1 of 2017, as this transitions complete and we go forward.

Edward Caso, Wells Fargo.

Hi, good morning, it's actually Rick Eskelson on for Ed. I guess, just following up on that last question, are these all new clients for WNS, are they expansions of existing relationships, and maybe if you could talk a little bit more about how the sales process and how long it took these deals to close?

So, it's a combination. Some of them are existing clients. In fact, two are existing clients -- sorry, the other way around -- it's two new and one existing client. And yes, the sales process, again, varied. It depends on which particular one we are talking about. Some actually accelerated and went through the sales process extremely quickly. And on the utility side, it took longer, because it's a first time outsourcer in this space and it's in a completely new area to what WNS has traditionally serviced. So, it's opened up a very exciting new area on the utility space that goes beyond the traditional power sector. And so, yes, it's just, I think, good focus from our sales teams, lots of interactions at senior most levels between both companies and while these are the first kind of contracts that have been signed up, we believe that the ability to penetrate and radiate all these accounts is immense. And as I said, two of them are first time outsourcers as well.

Then just turning to the adjusted operating margin side, the strength obviously continued there, is better than what we had thought and sort of above the high-teens number that you guys have talked about. Is it still the right guidance, is that still the right place for investors to be thinking in terms of the longer-term adjusted operating margin, in the high teens?

From a operating margin perspective, on the longer term, as we guided towards the high-teen, it's going to be a gradual movement over two to three years, and provided assumption is where the currency is there, it's on the assumption that where the currency is now and where the hedge book is going to [end]. But it's not going to be like immediate, next year, but gradually over two to three years on the high-teens and we are comfortable with that.

And I must also say that we are obviously extremely focused on delivering industry-leading margins in order to, first of all, be relevant in order to make sure that we have enough surpluses to keep investing in the new exciting models and the new exciting opportunities that we're seeing. And I think based on that differentiation and the way we are driving our technology-based solutions and some of our digital-based solutions, we believe our ability to hold these margins for the foreseeable future is high.

And I think that's an important distinction, Rick. When Sanjay talks about longer term, the operating margins settling into the high-teens and it taking two to three years for that to happen, essentially all we're doing is projecting that the hedging gains that we've been receiving for the last couple of years in a stable currency environment will eventually roll off. And if you look at having roughly $10 million of hedging gains this year on revenue of $530 million, you're looking at 190 basis points of operating margin. So if you look at where we're going to be this year, take 190 basis points off of that number over the next two to three years, that's how you get to the high teens. But very important to remember that if currencies continue to depreciate, that number is going to continue to get pushed out. So similar to what we talked about last quarter, similar to what we talked about last year, these adjusted operating margins are a function of where the currency and where our hedge rates are. But operationally, we don't see our adjusted operating margins changing much over the next couple of years.

Just the last question on the fiscal 2016 guidance change on the topline. Can you just decompose how much of that change was due to adverse currency moves? I mean, obviously, you've seen a lot of the key currencies go against you and it seems like that's the majority by our math. But I was wondering, if you could just decompose that for us. Thank you.

So from -- on the adjusted net income basis, currency and from a topline perspective, if you see on the constant currency, our growth has improved from 10.4% to 10.6% on the midpoint. And so, the balance number over there is based on the currency impact, because of the currency movement, specifically. So it's going to -- it's around $2 million to $3 million.

So, short answer, Rick, yes, absolutely correct. The only thing that's changed from our guidance last quarter is that we've rolled through some additional currency softness. On a constant currency volume basis, we're actually up slightly from a quarter ago.

Joseph Foresi, Cantor Fitzgerald.

My first question is just on demand. Have you seen any changes in decision-making, and as we start this new calendar year, how does the pipeline look this year versus last year?

From our perspective, based on the earlier commentary, as well as the experience we're having with interacting with existing clients and prospects, we feel extremely good about our positioning and our business momentum as we move towards the end of 2016. So I think what is really positive at this point in time is we are not seeing -- so we are not seeing any unusual headwinds at this point in time.

And in terms of decision making, as I'd pointed out earlier, we're not seeing significant change in terms of how things are moving along, but we are seeing some clients wanting to climb on the bandwagon quickly and we're seeing a much more -- it's more client specific. So like I said in my earlier answer, in the case of two clients that we recently signed up, we actually found acceleration in terms of how quickly they moved with their decision. So it's very much client-centric, but nothing to be alarmed about in terms of how things are progressing. And let's wait and see how the business environment outside looks over a period of time. As you know, in our business, as the business environment remains moderate, actually the demand for our services actually become stable and sometimes accelerates. So let's wait and watch, but at this point in time, momentum is solid.

Can you frame for us the size of digital and/or analytics and maybe provide us some level of growth rates, if you have a [morph], if you could just give us some idea of what that's meaning to your business right now?

So let me first talk about the impressions that we're seeing. So, first and foremost, we are seeing clients really leveraging technology as a competitive advantage for the front, middle and back office, in terms of their own business areas. And from our perspectives, I think it is our superior domain knowledge, as well as the investments we've made in technology, the whole SMAC areas, as well as artificial intelligence models that enable all these clients to be even more effective and impactful. I think the wonderful thing about this disruption and the clients need to get after digital models, in terms of their interaction with their end customers is that there is new opportunity being thrown our way all the time. And when clients interact with WNS, they understand that over the past few years, we've been investing significantly in some of these areas. So we're a very logical choice for them.

Simple examples, you know, we spoke a few quarters ago about our disruptive -- disruption management solution for the airlines that's playing very, very well with every one of the airlines, it is very different to something that they have seen traditionally. Our verifier solutions, the upgraded solution, again, is seen as really exciting from their perspective. On the F&A side, the accounts payable work bench again is a model that they are lapping up extremely well. And essentially, all this is doing is driving more business efficiency for clients, but for us it is creating a much more sticky kind of revenue stream.

And then just, finally, you talked about acquisitions and we have heard about them for a number of different years. How is the valuations and the pipelines in those acquisitions? And then just for clarity on the margin front, what kind of expansion do you expect per year? I know you talked about a high teens number, but I just want to get some clarity on that as well. So what's on the acquisition pipeline, and if we can get any clarity on the expansion of margins on an annual basis?

So let me talk a little bit on the M&A side and as I've said for the past few quarters, the pipeline around building capability for WNS continues to remain strong. And at this point in time, we are having some strong -- very good discussions one or two very focused kind of players. Let's see what happens in terms of progress there.

Again, the pipeline for M&A is on our capability and it transcends two or three business verticals, which are the focal invest verticals for us, as well as one or two horizontal kind of areas, right. And, again, in terms of timing, obviously we cannot predict what will happen, but I think it's -- there is a heightened sense of what we need to do and how quickly we should get things done. In terms of valuation, we haven't seen any significant change, compared to what we saw over the past few quarters. Again, it depends a lot on the kind of deal and the area we are after. So, as and when we execute on something, we'll have to keep you updated.

Sanjay, you want to take the question on margin?

So from a margin expansion perspective, as we have been driving a lot of automations and the tools and the RPA, robotics, the productivity keeps on improving. But having said that, also we are seeing lot of those disruptions and we need to keep the speed and those margin expansions are getting continued investment back into the business from a long-term perspective, and that's where even we've alluded that operationally we believe that we will be -- we expect the operating margin to be into the high teens, and that's going to be gradual over two to three years.

Right. So I think kind of the macro takeaway, guys, is that our overall adjusted operating margins are expected to decline over the next two to three years from where they are today into the high teens. Our operational margins, excluding the impacts of currency and hedging, are expected to be relatively stable. So as we leverage the investments that we've previously made, things like our global infrastructure, things like our sales force, as we leverage those investments, we're going to be reinvesting that money to make sure that we're well positioned for where the demand is moving. So more into digital, more into analytics, more into technology enablement, to make sure we're able to service our clients.

So on an operational basis, adjusted operating margin should be relatively stable. It's just the impact of currency roll-off that's going to drive down our adjusted operating margin over the next couple of years.

Frank Atkins, SunTrust.

Wanted to talk a little bit about the pipeline and the three large wins. Any change in terms of contract type, either fixed price or outcome based or transactions, or any trends you see in the pipeline looking forward that would impact that distribution?

Yes, that's an excellent question. And let me start with the last part of your question, in terms of what kind of contracts clients are looking for. And here I want to underline that the most important and exciting phenomenon that we're seeing is a lot of clients, as well as a number of prospects that we interact with are trying to accelerate their digital presence, trying to really change their legacy models to new models. And therefore, we have to appreciate that inside every client's environment, there is a traditional business that needs to be serviced, there is a transitional business where they have understood delivery models for years by working with people like us and they are transitioning it -- we are helping them transition to a completely new model. And there is an innovation agenda where the model of engagement also will be completely new. And so, all three have to be managed. So on the traditional side, where they're outsourcing for the first time a new process, I think a lot of them are still much more comfortable with the older legacy models of interacting, so that both WNS and they get comfortable with each other before they move to an outcome-based pricing model. On the other two, we are seeing discussions taking place. And in some cases, actually the more mature clients moving to outcome based kind of models.

So this is the interesting change that we're seeing. We are also seeing that in a number of engagements and discussions as well as wins that we have recently, the first level of interaction and win was around analytics. So we've used analytics as the Trojan horse to actually get into some of these accounts and the clients, therefore, see WNS as an analytics player and around that our the ability to influence the CXO suite and then penetrate and radiate across all our other traditional areas as well.

In terms of the business pipeline, as I've said earlier, momentum is the word I would use, and it continues to be extremely strong across all verticals, as well as our traditional horizontals.

And then attrition ticked down nicely this quarter. Any changes in the hiring environment or anything you're doing on the retention side that's driving that or just is that a function of the macro situation? Give us a view on kind of what's driving that.

Well, I would say attrition -- ticking down of attrition is essentially because WNS is the best place to work in. I think our talent sees the investments we're making in all the key areas. The talent clearly understands we are leading the industry in terms of some of the new programs, including the new tie-up on the analytics front that we spoke about. The talent ultimately works for companies where they see huge opportunities for themselves, where they see ability to accelerate their career paths, where they see absolute clarity in terms of vision and execution of strategy. So, I think all of that is helping us quite a bit. And I think we've also been favored by one or two geographies, which traditionally had very high attrition, where there's been a bit of cooling off. If you recall over the last two quarters, we spoke about two or three geographies where there seem to be heightened kind of attrition, because of captive kind of growth in some of those areas, and that seems to have cooled off a bit.

I think the important thing, Frank, is to understand that over the last five years, we've pretty consistently managed that attrition rate down and directionally that's certainly the goal. I don't know that 30% has become the new benchmark, or that we should expect that to be sustainable quarter-to-quarter. Similar to our seat utilization that number is going to move around, but directionally, our goal is to continue to nudge that annualized attrition rate down.

If I could sneak one more last one in. Where do you stand in terms of sales capacity and headcount and are you pretty comfortable with where you are do you think, and more additional investments will be needed to make in that area?

We're sitting right now at [66%] as of the end of December. That number has bounced around between this level and [75%], give or take. I would expect it will continue to bounce around at this low level, we probably need a few more salespeople, but the focus really remains on making the team more productive, continuing to build the pipeline. We think we have significant capacity at the [65% to 75%] level to generate the kinds of growth that can really help the Company move forward and the focus is on making those resources more productive. If and when we need to continue to move that number up on a sustainable basis, we will talk about that, but right now the focus is on leveraging what we have, although we may be up or down a few resources in any given quarter.

Ashwin Shirvaikar, Citibank.

So, I guess, it seems like if margins are stable, and the EPS growth should depend on the topline and whatever use of the balance sheet you can make. And you guys continue to make progress with regards to the topline, so that's been good. And I appreciate that you're being very diligent and careful about your balance sheet. Frankly, you could be sitting here two, three quarters later with no change on the M&A front. So have you considered a constant steady buyback to sort of support the stock and help with EPS growth and help the valuation and so on. Could you talk a little bit more detail about allocation of capital, because you have a lot of cash on your balance sheet?

So you're absolutely right, we've been quite diligent about the M&A side. And on the capital allocation side, you are aware that we executed very efficiently a buyback last year after the announcement. I think the Board is discussing a number of things around capital allocation, that will include a continued buyback kind of program for the long-term, obviously M&A as well. And you should wait to watch the space in terms of how things farm out out there. But, yes, we are extremely sensitive to the fact that we are delivering value and in terms of that value creation, the stock also is an important area of investment.

And just to add to that, internal discussion and the Board discussions are being on. And as an additional step, we'll also have to go and take a shareholders' approval to do that program. So we'll keep you updated on that.

From a clarification standpoint, this quarter there seemed like there were a number of one-off sort of events and I wasn't sure, I may have missed this, could you size the Chennai cost impact? I think you did size, of course, the payment of bonus impact. And also I don't want to call FX one-time, but what was topline impact in dollar terms?

So from a Chennai flood perspective, we did not have a revenue impact, because, as Keshav alluded, we did our business continuity plan, which is very robust and we invoked those business continuity plan to ensure that the clients' operations are not being impacted at all, and accordingly we did not have our revenue impact. From a cost side perspective, it was $250,000 approximately, as the impact in quarter three.

And the second part of your question, Ashwin, in terms of the revenue impact from currency, on a year-over-year basis, the movement of currency, net of hedging, cost us about $5 million and sequentially, the movement of currency, net of hedging, cost us a little over $2 million.

My last question is really about your delivery platform. In addition to India obviously you guys have grown the Philippines and South Africa as leading centers. As you look forward the next, call it, two, three years and think about your plans, where should we see net incremental investment and hiring preferentially? Do any of these geographies offer you a better pool of talent for the kinds of things that clients are looking for now?

So, this is Ron, let me try to answer that for you. We've been very disciplined in building global delivery infrastructure to meet our clients' needs and the needs vary on each client from each geography that we have to service and provide services back to. What we have seen from us in the past year has been an expansion within the geographies, we've added additional delivery centers in South Africa, China, India, you'll continue to see that as we believe we've got a very good footprint today. Talent across the globe is very widespread. We believe that we're accessing it effectively today, and we'll continue to do so. We're always looking for new opportunities of new locations we can deliver from, but again, it all ties back to client needs. Sometimes it's geographical, sometimes it's educational, there is language dependency for some of our very global clients, they want a single solution globally. So we balance all those, but you can look for us just to have a very disciplined approach to analyzing the needs of our clients, anticipating them and making those decisions to enter new locations as required.

And I think, Ashwin, the other thing that's important, when you look at scale, there is a majority of our people, majority of our delivery is still done out of India. The other two large investment areas, in terms of population skills have been Philippines and South Africa. We will continue to help service our clients from multiple geographies as their business requirements demand. But I don't think you're going to see 10,000 people pop up in a new geography, it's going to be 200, 500, maybe a 1,000 people based on client need and localized requirements. But in terms of size and scale, those are really the three areas that we're going to be delivering the majority of our near-shore and offshore-centric services from.

And maybe just add to that, as Ron alluded, it is based on the client-specific requirement, but you know, wherever those geographies where we are present, there's other opportunity and we have been constantly looking is the tier 2 location within those geography as we keep on servicing the client and based on the talent requirement.

For example, Ashwin, the three large deals that we talked about ramping over the next couple of quarters, one is going to be serviced largely out of India, one is going to be serviced largely out of the Philippines, one is going to be serviced largely out of South Africa. So I think where we've invested is lining up quite well with where the demand and the opportunities are in the marketplace.

Bryan Keane, Deutsche Bank.

The constant currency revenue growth is 10% to 11% for this fiscal year. Will these three large deals create an acceleration to that growth rate as we head into fiscal year 2017, or will they just backfill some other contract runoff?

We are very excited about these three large deals, early -- before we start the next year, which also helps to really offset of the usual 5% productivity, you know, in terms of what we see, which is a mix of productivity and project ramp-downs and the other factors over there. And having said that good traction, as Keshav alluded, from a pipeline perspective, both from existing as well as the new client. And we're pretty excited about that and we definitely expect to keep on having our growth momentum to the similar, or more around the growth, but we will update you when we provide the next year guidance on that.

I think the exciting thing Bryan is, we're sitting here and as Sanjay mentioned in his prepared remarks, we're going to see a little bit of transition revenue from these three large deals in Q4, but the majority of it is really going to start ramping in Q1 and into Q2, Q3 of next year. So we do have good visibility to revenue growth. It will allow us, at a minimum, to offset those normal 5% headwinds that we see to our business. So I think from an overall positioning standpoint as we enter the fourth quarter here, and obviously we have to see what happens in terms of signings and ramps and timings and so on so forth, but I think as we sit here at the end of the fiscal third quarter, we feel really good about how we're positioned for sustainable long-term growth in our business.

And then what's the pipeline for signing up further large deals? Do we think about it, signing three large deals a year or do you accelerate to five to seven or how do you think about that as we head into fiscal year 2017?

Bryan, hi, this is Keshav. And you will recall that a few quarters ago we stopped providing specific guidance around large deals, because I think people started getting too dependent on large deals as a metric for the growth of the company. But I can tell you that we've already seen three of these deals being signed at this point in time. We're making great progress in terms of our pipeline across geographies, across business verticals, and driven by some of our higher value kind of services, like finance and accounting, and analytics as well, and therefore the potential for us to sign more of these large deals is high. The pipeline is full of these kind of deals, but much more than just large deals, the pipeline is also full of transformational deals, deals involving the new disruptors and that I think is the most exciting aspect of where WNS has positioned itself.

And it's just good breadth across the organization Bryan. As Keshav mentioned a little bit earlier, good diversification between existing and new clients, also good diversification between new technologies, old technologies, new services, old services. And most importantly, to your point, there remains a healthy pipeline for large deals, there remains a healthy pipeline for new initiatives with new clients, so feel really good about just how the overall health of the business has continued to shape up.

And just to finish up on the topic, when large deals ramp up, I think there is -- you talked about some initial ramp of cost. How long does it take to get to -- typically to get to kind of corporate average margins. Does it take a full year or two years to get to a run rate of where the corporate average margins are?

So, from a large deal perspective, specifically it all depends how quickly they ramp up, how quickly they transition and sometimes this transition really go longer, from 6 months to 12 months, or 12 months to 18 months sometimes, and it all depends on that. So, from an average perspective, as I said -- as it depends on the longer tenure as well as a shorter tenure, so it's very difficult to put a very specific number on the impact on the operating margin, because it's volatile from a tenure perspective and very, very client-specific. Specifically, even on the areas where we are working, whether it's F&A or whether into the R&A and other space around that.

I think the thing that's a little bit different here Bryan, and it's different than how we've commented in the past is typically we haven't done this kind of advance hiring before. So there's 1,500 people we're talking about. We essentially got no revenue in Q3. We expect very little revenue in Q4. And as both Keshav and Ron have mentioned, there is a sizable amount of training and preparedness required on our side for these deals. And that's a little bit unique. Typically, when we sign a new piece of business, while it may take six to nine months for those piece of the business to ramp, we tend to remain margin neutral over that period of time.

So I think the unique thing about these three large deals is there really wasn't an upfront investment on WNS' part and you're going to see that impact the margins in Q4 and that's baked into our full year guidance, obviously, but a little bit unique in terms of traditionally we have not hired large blocks of resource, well in advance of the actual timing of revenue.

Brian Kinstlinger, Maxim Group.

The first question I have is, for the existing customers that you're hiring for, is that a top 3 or top 10 customer?

It is a top 10 customer, it's not currently a top 3 customer.

And then can you comment on how much the decline in your top customers, currency versus efficiency and when might a large acquisition start impacting revenue?

On a year-over-year basis when you look at our largest customer, because 100% of the revenue is denominated in British pounds, British pound on a year-over-year basis is down 4%. So 4% of the decline on a year-over-year basis comes from currency.

And then as it relates legislation that you talked about, so is the way to look at it, you added about $0.5 million in recurring wages on a quarterly basis, but recognized much more in the third quarter given it's retroactive?

There are two elements to it. One is for the fiscal 2015, the other element was for fiscal 2016, and the recurring stuff. So for fiscal 2015, the impact which got recognized in quarter three was $1.1 million. And annual recurring [of this is], we believe it's going to be $1.5 million impact, based on the current headcount what we have.

So if you look at the cost side of it, Brian, we're running about $350,000 a quarter in terms of cost, maybe a little bit less than that, and on the ANI slide, closer to $250,000, because of the tax impact.

Last one, Dave, did you say that in the fourth quarter you expect a little bit over $2 million of FX gains, based on -- you said a yearly number that it should come down over time, is that what you meant?

No, I mean, we're looking at the full year, we're going to do about $10 million of FX gains this year.

S.K. Prasad Borra, Goldman Sachs.

Couple, if I may. Keshav to start off, one on US, can you elaborate on any of the new initiatives you're taking at, especially you talked a lot about focus on digital, so any of those initiatives, particularly targeted at US customers?

Yes. So Prasad, that's an interesting question. And I think the key is for us to help our sales folks appreciate and understand that while a lot of these new buzzwords are out there and are creating opportunity, really from our perspective, WNS has been investing behind this trend for the past one or two years at this point in time and creating excitement around the fact that because of the need for existing clients and a number of first-time outsourcers to really get after these digital models, so that they are not left behind in the race that it is throwing up lots of new opportunities for companies like WNS. I think that's the first realization.

Getting our people to knock the doors of clients, of prospects, talking to them about what is the art of the possible, that's first. And in terms of specific geographical focus, let me tell you that it is not just the US that we're focused on, it is across the US obviously, but it's also all our other traditional geographies across the UK, Australia as well. So it's a global outreach program. There's a very focused program in terms of how we are presenting our capability, how our marketing team is buttressing the effort through presentations and focused on how we are interacting with the analyst community, as well as the advisors across the globe, including the US.

And one more question on hiring, sorry for that, but I'd probably still ask. Just in terms of the hiring plans you have, seems like quite a step change in your recruitment plans, when you compare that to, say, the last five years of your growth, is there something unique what happened over the last one or two quarters for you to, I mean, obviously you see the three transformation deals, would all those scale up to the extent you are?

Sure, I'll take that S.K. Prasad. I think the difference is not so much in terms of our approach to the business. The difference is the types of requirements and the types of skills that these three customers have specifically asked for.

So I don't think we're going to get into a systemic situation where we're hiring large groups of people in advance of demand. This is not a situation where we'll build it and they will come. This is a situation where we have firm defined requirements from the client. We need to get these resources prepared to meet that firm demand and it's going to take an extra quarter of time for us to do that. So that's really all that this reflects. I don't think it's a change in philosophy, I don't think it's a change in approach. It's just kind of a unique situation. We've had three fairly sizable engagements with short compressed lead times, drive us to actually do some additional hiring, additional training to get ready for the ramp in these revenues.

But I just want to add in terms of the excitement around that, is the fact that two of them happened to be in completely new areas. So while we have accelerated the hiring, brought in these people and trained them, starting with these specific clients, our ability over a period of time to leverage these resources and go after more accounts in the same space is very high. I think that is what is exciting to me.

I mean, essentially what we've had is, we've had three clients help us fund investment into three new areas. And we'll gladly take the one quarter of additional cost, quarter and a half of additional cost to be able to have the capability that we can then go take to market.

Dave Koning, Baird.

Hey, guys, great job again. So, I guess, first of all, the call center business, the contact center business, year-to-date that's up something like $22 million. And the total Company revenue is also up about $22 million, so obviously that's been a huge driver. And really the first two quarters of the year you had massive sequential growth in that. I'm wondering, does that continue, you hit pretty tough comps in the first half of 2017, but is that really that's going to be -- continue to be the growth driver?

So, though we have categorized that is still a contact center, but I think the services what we have been providing, it's more toward the customer interaction where it includes around -- some of the technology and multi-channel, mobility, all those investment what we have been doing around that.

I think that's very important distinction to make. This is not -- the growth that WNS is seeing is not in traditional contact center kind of business, though I think from a release point of view, I think they still mention it as contact center. This is domain-based customer interaction services, focused around some of the new value offerings that we provide and the margins on some of these are significant industry leading. And more importantly, in many cases, it allows us to get after many other areas inside a customer's account and you have to appreciate that with all these clients today when you go in with a domain based offering, where you have robotics behind it, you have technology solutions behind it, you have analytics embedded in there, you need to start with the interaction with the end customer using these models which go beyond traditional contact center, across chats, across multiple platforms and then you move them into some of these other areas as well. So again, I just want underline, this is domain based customer interaction services and this is margin accretive to the Company.

And do we expect, Dave, as Keshav mentioned, to leverage our knowledge, our understanding, our relationship with these clients to move into traditional F&A, R&A, industry specific solutions. So while we clearly have seen this segment of the business grow, the reason we're in this segment of the business, aside from it being high value, high margin on a standalone basis, is to make sure that we leverage that relationship to move into other areas, and that's clearly the goal of our Company, the goal of our sales team is to penetrate and radiate within these accounts.

Certainly. I mean, the margins are so much higher than traditional call centers, is clearly differentiated work. And then --

Dave, I'm sorry, just to interrupt here. We really take a little bit of offense to the term of call center. This is contact center in terms of how we classified it, but as Sanjay mentioned, these are client interaction services, how our customers interact with their end customers, and certainly voice is a component of that, but so is email, so is chat, so is social media, so is mobility. So very important to understand the distinction between call center, contact center and customer interaction services.

In my question, I actually was more focused on just -- it could have been any segment, my focus -- the question was more on are we hitting a tough comp in any segment in that -- that segment just was so strong, I think sequentially up 15% in Q1, 13% in Q2 and I was just wondering if we are hitting tough comps and whether it was the contact center part or whether it was the vertical specific or whatever it was, I was more wondering on that side.

I don't think so, Dave. I think the overall health of the business is broad based, as Keshav mentioned, both in terms of the traction we have with our clients and in the pipeline and I think what you've seen on the client interaction side is more a function of easier comps previously than the fact that we've grotesquely outperformed.

I guess my second question is just growth has been really strong, but consensus revenue for next year implies about 15% constant currency growth. I'm just wondering if it's time now just to start not talking necessarily about next year's guidance, but just getting in the Street to understand. I think today we had a 3% to 4% currency headwind on next year just based on where rates are and if it's comfortable, have people at 15% growth kind of going into -- when you give guidance next year or not. I mean, should we be thinking about currency today, that 3% to 4% headwind?

Absolutely. I mean any time you look at our forward year's revenues, it needs to be done on a constant currency basis and we know that we have roughly 70% of our revenue that's based outside of the US and those trends are something that needs to be taken into consideration when reported estimates are put into place. Now, from a constant currency perspective, we can have a different discussion about whether the double-digit growth that we're going to see this year is sustainable, whether it can be accelerated, and I think that's the right place to focus on our business. But in terms of the numbers that we're going to report quarter-to-quarter, the numbers that we're going to report year-to-year absolutely need to factor in the impact of currency.

And your pipeline on a core basis, it's really good, but I mean is it suggesting growth getting a lot better? Is it suggesting just ongoing strong double-digit growth?

Well, I will say that at this point in time it suggests strong ongoing double-digit growth, but based on how we have seen some recent wins, as well as some discussions and early wins in 2016 as well, the potential to accelerate over the next one or two years is also high. So we'll have to wait and watch for guidance in April.

Yes, we know over the next three, four months Dave, by the time we sit down and give a first look at fiscal 2017 in April that we're going to walk into the year with 90% visibility. So we know what the visibility number is going to look like, because we know traditionally that's been the right way to look at our business. The real question is, is it 90% visibility to a midpoint of 10%, 15%, 7%, but as Keshav mentioned, there is good momentum in the business. The headwinds at this point in time do not seem to be out of the normal range. And we've got very good traction walking into the year, especially with these three large deals ramping up.

Thanks, good job. And definitely did not mean my questions to come across on that call center question. I know they are very high value-added work, the margins are great and you guys are doing a great job. So thank you.

We know Dave, we just wanted to make sure we clarified for everyone. Thank you.

Puneet Jain, J.P. Morgan.

Can you share outlook for your auto claims business? Last quarter you had talked about legal status for auto claims. And growth rate in this quarter improved a little bit, but margins remained below average. So how should we think about growth profile and incremental margins in that business?

We were really having some challenges into the auto claim business earlier. And as you will recall, we have been talking about that, because we were not having a particular ABS license, which is to provide the legal services, so we are not able to provide an end to end service to our clients, which they would prefer with their business partner. And accordingly, some of the volumes were really getting down. Last quarter, we did speak about that we got the ABS license to now provide the legal services and we have started seeing some momentum around that, but still early stages.

And from a profitability perspective, as we were -- there was some initial setup cost to do those legal services and getting the ABS license and accordingly there was a profitability impact, but as we have started some momentum and these businesses know that as the volume goes up the profitability improves, because there is a fixed cost at a certain level. So early stages, we are closely monitoring and evaluating and seeing this and we'll keep you updated on that.

And can you also talk about your M&A criteria, given high ongoing valuation of some of those platforms, digital assets that you might be interested in and high return on your balance sheet cash? Can you talk about like, is accretion, dilution of potential acquisition be a hard constrain for you?

I think from our point of view, you know, the focus really is M&A that adds new capability or enhances existing capability at the Company. So that's really the core discussion that we're focused on. At the same time, as far as is possible, we are also looking to see that the M&A is not dilutive to the overall financial impact to the Company.

So these are the two areas that are top and central in terms of my focus areas. And we believe that there are enough assets out there that meet the criteria. And, again, in terms of where we want to invest that money on the M&A side, it is around some core verticals and capability building there, I would say, healthcare being one, insurance being the other, and the F&A and analytics space being the third.

And I think the other thing that's important to remember, Puneet, is we really have not changed our M&A criteria. The only thing we've really done as an organization is gotten a bit more aggressive and cast a wider net in terms of where we're looking for opportunities. So we do understand it's important. We are looking for those capabilities. We'll continue to look for the right fit and the right assets at the right price. I think the only difference is we're looking harder, we're not looking different.

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.