WNS (Holdings) Ltd (WNS) 2016 Q4 法說會逐字稿

Good morning and welcome to the WNS Holdings' Fiscal 2016 Fourth Quarter and Full Year Conference Call. At this time, all participants are in a listen-only mode. After managements 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 in Finance and Head of Investor Relations. David?

Thank you and welcome to our fiscal 2016 fourth quarter and full year earnings call. With me today on the call I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria and our COO, Ron Gillette. 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 fourth quarter and full year ended March 31, 2016. 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 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 fourth quarter results were once again solid, despite ongoing topline pressures, driven by depreciation in key revenue currencies against the US dollar. Fiscal fourth quarter net revenue came in at $135.3 million, representing a year-over-year increase of 7.4% on a reported basis and 12.7% constant currency. Sequentially, reported revenue was down 0.4%, but increased 2.8% on a constant currency basis.

In Q4, WNS added eight new clients, expanded nine existing relationships and renewed 15 contracts. Adjusted operating and net profit margins in the fourth quarter remained healthy, coming in at 22% and 19.9% respectively.

In addition to strong financial performance, the Company also had several operational highlights in Q4. In a press release issued last month, WNS announced the signing of a large contract win with QBE Insurance in Australia, one of the world's top 20 general insurance and reinsurance companies. WNS will deliver high-end analytics for QBE across claims, underwriting, actuarial, distribution and fraud. This is one of the largest and most comprehensive insurance analytics deals in the BPM history -- BPM industry, pardon me, and a true testament to our deep domain capabilities.

In the fiscal fourth quarter, WNS also launched a suite of technology-enabled solutions for the insurance vertical, aimed at helping clients accelerate the digitization of their business processes and better service their end customers. The collection of four unique offerings span the insurance value chain and leverage best-in-class embedded analytics, business automation, mobility and robotic process automation to address industry challenges, including claims settlements, fraudulent claims and insurance policy life cycle management.

In March, WNS was pleased to announce the acquisition of Value Edge Services Private Limited, a leading provider of commercial research and analytics services to the pharmaceutical industry. This asset gives WNS consulting grade marketing and data analytics capabilities, a cloud-based advanced technology platform for competitive intelligence, and a blue-chip roster of clients, including six of the world's top 20 biopharma companies. We believe this tuck-in acquisition strengthens our capabilities and domain expertise in the pharma space.

As you may recall, in the weeks preceding the Value Edge announcement, WNS was positioned in the Winner's Circle in HfS Blueprint Report for pharmaceutical industry specific BPO. The Company was cited for capabilities across both execution and innovation, including account management, delivery performance, generating actionable data, vision for pharma as a service, creating intelligent engagements focused on business outcomes and investing in digital solutions. WNS also received further validation of our capabilities in this sub-vertical with the extension of our high-end research and analytics contract with GlaxoSmithKline, through the end of 2020.

And finally, WNS was recently named to the Aon-Hewitt best employer list in India for 2016. The company was cited for creating a world-class work environment that drives collaboration across diverse cultures and countries and enables the Company to deliver innovative and differentiated solutions. WNS will continue to align our talent initiatives with people's career and growth aspirations and to ensure we have the right skills to transform our clients' businesses in this age of disruption.

I would now like to take a few minutes to recap the highlights of our fiscal 2016 performance. From both an operation and financial perspective, fiscal 2016 was a solid year for WNS. Net revenue growth was 5.6% on a reported basis, while constant currency revenue grew 11% after adjusting for the impacts of exchange and hedging. Growth was entirely organic and was broad-based across clients, verticals and service offerings. Sales productivity continued to improve for both hunting and farming opportunities, driving a steadily expanding pipeline and the acceleration in constant currency revenue growth.

In fiscal 2016, WNS added 24 new clients, expanded 30 existing relationships and renewed or extended 69 contracts. All of these figures represent solid improvement from fiscal 2015 levels.

While currency net of hedging was a headwind to revenue, it did provide a tailwind to margins and profit. Full-year adjusted operating margin and adjusted net income percentages both expanded by over 100 basis points, and adjusted EPS grew by over 11% to $1.92 per diluted share.

In fiscal 2016, WNS generated $103 million in cash from operations, paid off our remaining debt balance and completed the Company's first ever share repurchase program, buying back 1.1 million shares of stock. In March, WNS received shareholder approval for an additional 3.3 million share buyback, which can be executed over the next 36 months. We finished the year with $175 million in cash and no debt, representing a net cash position of $3.26 per diluted share.

WNS also made significant strides in 2016 in terms of capability creation and strategic positioning. We rolled out new technology-enabled solution suites for the travel and insurance verticals, announced the acquisition of Value Edge in the pharma space, entered into strategic relationships with technology and analytics partners, including Blue Prism, [Xllent] and Rosslyn Analytics and launched several new hiring and training initiatives designed to ensure WNS resources are prepared for the future of BPM.

Entering 2017, the demand environment for BPM services is stable and healthy. As we have discussed on previous calls, there are a number of disruptive trends pushing clients to evaluate and adjust their operations, processes and technology. These include leveraging analytics to generate competitive advantage, managing regulatory and compliance-related changes, enhancing the end-client experience and driving ongoing cost and efficiency requirements. We are seeing these requirements impact WNS in all phases of the demand cycle, with improving activity levels for client discussions, RFPs and facility site visits. The demand is broad based in nature, cutting across verticals, services and geographies. The net result is that WNS enters fiscal 2017 with a healthier new business pipeline than last year and solid visibility to topline growth. Currently we have 90% visibility to the midpoint of our revenue guidance, which represents over 11% constant currency growth.

Given the market opportunity for BPM in fiscal 2017 and beyond, WNS must continue to invest in our business in order to meet the changing needs of our clients. The objective of these investments will be enhancing our capabilities, including specialized domain skills, high-end analytics, digital accelerators and technology tools and platforms. In addition to internal operational initiatives and R&D efforts, we will continue to look for strategic partnerships and tuck-in acquisitions to augment our offerings. Leveraging our healthy balance sheet to help achieve these goals will remain a focus area for WNS in fiscal 2017 and beyond.

Additionally we will need to ensure that we are hiring and training our talent force to meet the changing BPM landscape. Technology and automation will reduce requirements for lower-end repeatable process tasks. Analytics will be embedded in all key business processes and end clients will increasingly expect high-end, multi-channel servicing. Despite these changes, it is important to remember that at the end of the day, the ability to help manage a client's traditional, transitional and transformational requirements begins with deep domain expertise. We believe our vertical structure and industry focus provides WNS with a differentiated position in the marketplace and a unique ability to deliver quantifiable outcomes and true business impact.

In our press release issued earlier today, WNS provided our initial full-year guidance for fiscal 2017. We currently expect revenue to be in the range of $551 million to $583 million, representing topline growth of 4% to 10%. Excluding the impacts of currency and hedging, guidance reflects constant currency revenue growth of 8% to 14%. Consistent with prior years, we enter the fiscal year with 90% visibility to the midpoint of the range. Adjusted net income for fiscal 2017 is expected to be in the range of $97 million to $105 million, or $1.83 to $1.98 per adjusted diluted share.

In summary, we are pleased with our fourth quarter and full year 2016 fiscal and financial and operational performance and excited about our business momentum as we enter fiscal 2017. Demand for BPM services is evolving and growing and we believe that WNS is well positioned to capitalize on industry trends with a unique combination of domain knowledge, operations expertise, analytics capabilities and technology-enabled solutions. We will continue to focus on driving industry-leading topline growth and profitability while investing in our business and managing our capital allocation programs efficiently in order to drive long-term value for all of our key stakeholders.

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 our fourth quarter financials, net revenue increased to $135.3 million from $126.1 million in the same quarter of last year, growing 7.4% on a reported basis and 12.7% on a constant currency basis. Year-over-year quarter four, revenue was pressured by deprecation in key revenue currencies against the US dollar, including the British pound, South African rand, Australian dollar, euro and the Canadian dollar. From an industry perspective, revenue growth was broad based, with the shipping and logistics, consulting and professional services, travel, healthcare and utilities verticals each growing 9% or more year-over-year. With respect to our service offerings, revenue growth versus the prior year was driven by high-end customer interaction services, research and analytics and technology services.

Sequentially, net revenue was down 0.4%, but increased by 2.8% on a constant currency basis. Quarter-over-quarter revenue growth was broad-based and healthy, but offset by currency headwinds net of hedging.

Adjusted operating margin in quarter four was 22% as compared to 20.7% reported in the same quarter of fiscal 2015 and 22.1% last quarter. On a year-over-year basis, adjusted operating margin increased 130 basis points as a result of currency favorability, net of hedging, improved seat utilization and operating leverage on higher volumes. These benefits were partially offset by the quarterly impact of our annual wage increase and costs associated with hiring requirements for ramping projects. Sequentially, adjusted operating margin was down by less than 10 basis points. Cost associated with hiring ramps were largely offset by improved seat utilization and the reduction in catch-up costs from the India Payment of Bonus Act recorded in Q3.

The Company's other income was $2.6 million in the fourth quarter, down from $2.8 million reported in quarter four of fiscal 2015 and up from $1.9 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. Sequentially, interest income increased due to higher average cash balances.

WNS' effective tax rate in the fourth quarter was 17%, down from 20.4% last year and 17.1% reported in the previous quarter. The year-over-year decline in tax rate is largely the result of the shift in our investment instruments, which was offset by the lower interest income previously mentioned.

The Company's adjusted net income for quarter four was $26.9 million, compared with $22.9 million in the same quarter of fiscal 2015 and $26.4 million last quarter. Adjusted diluted earnings were $0.50 per share in quarter four, up from $0.43 in the fourth quarter of last year and the same as reported last quarter.

As of March 31, 2016, WNS' balances in cash and investments totaled $174.8 million and the Company had no debt. WNS generated $31.8 million of cash from operating activities this quarter and free cash flow of $23.1 million, after accounting for $8.6 million in capital expenditures. DSO in the fourth quarter came in at 28 days, the same as reported in both quarter four of last year and in quarter three of this year.

With respect to other key operating metrics, our total headcount at the end of the quarter was 32,388. WNS continued to hire throughout quarter four, as we prepare for committed project ramps in the first half of fiscal 2017. Our attrition rate in quarter four was 35%, up from 32% reported in the fourth quarter of last year and up from 30% in the third quarter.

Global [billed] seat capacity at the end of the fourth quarter was 26,407 and average [billed] seat utilization came in at 1.22. Based on the aggressive hiring in quarter three and quarter four, this improvement in seat utilization is to be expected. However, given that the headcount increases were largely in advance of revenue ramps, there was a corresponding reduction in productivity. As always, we expect the seat utilization metric will fluctuate quarter-to-quarter, based on facility buildout requirements and hiring cycles.

I would now like to provide you with a brief financial summary for fiscal 2016 before we turn our attention to the coming year. Net revenue for the year came in $531 million, growing 5.6% on a reported basis and 11% on a constant currency basis. Full year revenue growth was led by the shipping and logistics, retail CPG, utilities and travel verticals, which all grew 10% or more.

The Company's fiscal 2016 adjusted operating margins expanded over 110 basis points to 21.8%, driven by currency and hedging gains, improved seat utilization, operational productivity and higher business volumes. These benefits were partially offset by the impacts of our annual wage increases, cost associated with the Indian Payment of Bonus Act, advanced hiring and ongoing investments.

Interest income, net of interest expense, was down $2.4 million, largely as a result of the shift in our investment strategy in response to changes in the India dividend distribution tax for certain instruments. While this reduced our interest income, there was an offsetting reduction in our effective tax rate, which dropped from 19.5% in fiscal 2015 to 17.1% in fiscal 2016.

Full year adjusted net income increased from $92.3 million in fiscal 2015 to $103 million in fiscal 2016, growing 11.6%. WNS generated $103 million in cash from operations and $75.6 million in free cash. The Company spent $27.5 million on capital expenditures, $26.2 million on debt repayments and $30.5 million on share repurchases. The net result was that WNS ended fiscal 2016 with $174.8 million in cash and no debt, an increase in the Company's net cash balance of $34.6 million or 25%.

The Company was also pleased with the continued progress in several of our key operational metrics in 2016, including reduced customer concentration levels and improved seat utilization.

In our press release issued earlier today, WNS provided our initial guidance for fiscal 2017. Based on the Company's current visibility levels, we expect net revenue to be in the range of $551 million to $583 million, representing year-over-year revenue growth of 4% to 10%. Revenue guidance assumes an average British pound to US dollar exchange rate of [1.42] for fiscal 2017 as compared to [1.51] last year. Excluding exchange rate impact, our revenue guidance represents constant currency growth of 8% to 14%. We currently have 90% visibility to the midpoint of the revenue range, consistent with April guidance in prior years. Guidance includes our normal recurring revenue headwind of 5% relating to committed productivity improvements, project run-offs and lower client volumes. Similar to prior years, these headwinds are skewed to our fiscal first quarter. We expect our hedging gains to be lower in fiscal 2017, based on current FX rates and hedge positions. And excluding the impact of reduced hedging gains, year-over-year adjusted operating margins in fiscal 2017 are expected to be relatively stable.

Ongoing investment in our business will be funded by productivity improvements, leveraging prior investments and higher volume. Adjusted net income is expected to be in the range of $97 million to $105 million, based on a INR66.5 to US dollar exchange rate for fiscal 2017. This implies adjusted EPS of $1.83 to $1.98, assuming a diluted share count of approximately 53 million shares.

With respect to capital expenditures, WNS anticipates our requirements for fiscal 2017 to be in the range of $22 million to $25 million.

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

(Operator Instructions) Frank Atkins, SunTrust.

Thanks for taking my question and congratulations on a good quarter. Wanted to ask a little bit about the banking and financial vertical. Any color you can give us there in terms of the demand trends or opportunities you see?

Let me take that Frank. I think for WNS, obviously given the fact that our exposure to do traditional banking and financial services is somewhat limited. I don't that we're the best to provide that for you. We have seen actually some healthy growth in terms of the banking areas that we service. On a year-over-year basis, we were able to grow this business, which is a good sign for us, and the fourth quarter was also very healthy. But as I mentioned, the banking/financial services vertical for us only represents 6% of revenue. So not really the highest exposure. If you're including the insurance in that segment then I think we'll probably have a slightly different perspective.

And then as my follow-up, wanted to ask about revenue by contract type, a little bit of tick up in FTE-based contract. Anything driving that, what do you expect going forward? And then finally, what's the tax rate embedded in guidance?

Sure. I'll take that, Frank. In terms of the contract type, you're correct, we have seen good healthy growth in the FTE-based revenues and I think that's largely a function of what we've been discussing over the last couple of quarters, which is the fact that as we bring on new clients and we start to engage in new services, the trend tends to be that folks that are newer to outsourcing and moving processes for the first time tend to do so on an FTE basis that allows us to provide the right level of comfort, it allows the client to maintain some level of control over the processes. And for us, most importantly, it actually allows us to establish the proper benchmarks to convert those processes into transaction and outcome based models.

So it does tend to work very well. I think what you're seeing in terms of the growth in FTE for WNS, similar to the growth that we've seen in our customer interaction services is the fact that we're bringing on a lot of new clients, we're bringing on a lot of new processes and clients are proceeding cautiously, but it's a direct correlation to the acceleration in our growth.

Yeah, Frank, this is Keshav, I'll just add on to that. In fact, from our perspective, it's actually a very positive signal of the fact that we are bringing in a number of first-time outsources into WNS, and as you know, many of them when they start off on this basis and thereafter move to other models, but it gives WNS a six-year to eight-year run in terms of the ability to penetrate and radiate across [platforms]. So, actually it's very exciting in terms of the pipeline, the kind of customer visits we are having, the conversion ratios that we're seeing and how some of these contracts that started off on an FTE basis, maybe two years ago, have started transitioning to other models as well.

And to the second part of your question, Frank, we expect the tax rate in fiscal 2017 to be fairly consistent with 2016. We're looking right now in the range of 17% to 18%.

Joseph Foresi, Cantor Fitzgerald.

I was wondering what puts -- we talked about the guidances out there for next year, you had some pretty good growth rates to exit this year and I think you talked about the pipeline being better heading into this year than last year. So, I'm wondering on the guidance range for this year, what puts you at the bottom end of that range, and what puts you at the upper end?

I think, Joe, the methodology as we walk into the year is consistent. As I said, you know we walk in with 90% visibility to the midpoint of guidance, which is a little bit above 11%. I think the things that help us get to the higher end of guidance are faster ramps of the projects that we have visibility to today and acceleration in new business and just overall healthy demand in the space. So there are certainly a number of factors that could help us get towards the higher end or potentially beyond the higher end of guidance. Again, this is 90% visibility, 12 months out from the end of the year. So, very happy with where we stand today.

In terms of what creates downside relative to the midpoint, obviously if we're unable to sell the remaining 10% or close the remaining 10%, that is one of the factors. But if you look historically at how the Company has performed and executed as we move throughout the year, at this point in time I would say that the biggest risk on the downside to the midpoint of guidance would be if something unexpected were to happen and we were to lose a piece of business for some reason that we don't have visibility to today.

Got it.

And I'll just add -- Joe, I just want to add something here. Having said all of that, in terms of momentum from a company point of view, going into 2017, we feel really great. The momentum is great. The client interactions are solid and quite early in the year we're seeing some very, very good signals in terms of potential client decision making. So I feel extremely good about where we are entering into the year.

Yeah. That's why I asked that, figured it there's maybe a bias to the upper end of the guidance range. Just it sounds like you have some -- maybe some larger deals that are embedded in -- obviously we've seen in the headcount growth. Can we get some color on the flow of revenues in the upcoming quarters? I think you mentioned the first quarter in your commentary. How should we expect revenues to flow throughout the year on sort of a quarter-by-quarter basis, I'm just looking for sort of a rough idea of that?

I think you're right, Joe. I mean clearly we've had some good traction in terms of large deal signings and in terms of new client adds over the past couple of quarters and you've seen that in the fact that we've actually hired 2,500 people over the last two quarters. So, we do expect those 2,500 people, these new clients to ramp over the first two quarters of fiscal 2017. Q1 for us is going to be soft as it has been over the last few years. We typically see the biggest impact in our business from productivity, from project run-off, from volume impacts, hit us in Q1. So, we are expecting at this point in time that on a reported basis Q1 will be relatively flat with Q4. But if you look at Q1 on a year-over-year basis, assuming a flat revenue number, for example, what you're looking at is 7% reported growth and 13% to 14% growth on a constant currency basis.

So, I think as Keshav mentioned, we do walk into the year with considerable momentum. We are expecting that that revenue growth from a reported basis will be biased towards the back half of the year, but fairly healthy and consistent throughout the year.

And the last question from me, just on the margins. We saw seat productivity pick up a little bit and then you talked about it sort of fluctuating around headcount. How should we think about that metric in relationship to the margins on both the short and long-term basis, if you can give any color on that that would be helpful. Thank you.

Yeah, you're right, Joe, we've made considerable progress over the last couple of years, in fact, on the seat utilization metric and our fourth quarter numbers came in at 1.22, the full year numbers came in at 1.21, and I believe that's up from a low two years ago where we did 1.16. So we have done a good job of getting that number up. We do expect it will be volatile quarter-to-quarter. I think as Sanjay mentioned in his prepared remarks, when you hire at an accelerated rate, the way seat utilization is calculated, it's going to have a favorable impact on seat utilization. The flip side to that is when you're adding heads and you're not actually billing the client for those heads, it has a negative impact on productivity or revenue per employee. But directionally what our goal is over the next couple of years is to continue to move that seat utilization in the right direction, to move up from 1.22, towards 1.25 over time. But we want to do that, while also improving productivity or improving the revenue per employee metric.

So what we want to do is make sure they are both moving in the right direction, and not one is headed north and one is headed south. So I think to accurately gauge our performance you need to watch both of those metrics. On a standalone basis, same, a 1% move in our seat utilization has a positive benefit to our operating margins of about 20 basis points. But again, need to make sure you're viewing that in parallel with looking at what's going on in terms of employee productivity.

Anil Doradla, William Blair.

Hey guys, congrats from my end too, glad to see continued (multiple speakers) execution. So, couple of things. You guys talked about the headcount, obviously a very strong growth here for the headcount. It takes some time for these guys to ramp and become productive. So couple of questions around it. One is if I got my numbers right, Philippines seems to have witnessed a nice spike there. Can you remind us again what Philippines has used from a geography point of view, from a competency point of view?

Yeah, so let me start that answer, I'm sure Ron will have something to add on as well. But, yes, absolutely we're quite excited about the growth we're seeing all over. Now, obviously, in this quarter we saw some significant growth from the Philippines, driven a lot by our travel vertical and the insurance vertical. And as you're aware, we do a lot of work on the customer interaction side from the Philippines and we're seeing some of our high growth accounts ramp very, very fast.

And when I look at the year, from an average revenue per employee, obviously 2016 would be a down year just because of the mix, new guys coming on board. But as I look at fiscal 2017, can we expect to see an year-over-year growth in the average revenue per employee metric, or do you think that will continue to take some time before it reverts to being positive?

Actually, let me take that, Anil, because there are some really interesting optics to our business. One of the things that I think people fail to take into consideration when they look at our revenue per employee metric and how that's tracking over time is the impact of currency. So if you look at our average headcount in fiscal 2016, we had a little over 30,000 people. And when you look at that as compared to fiscal 2015, what you'll see is that you're looking at about a 3.5% reduction in revenue per employee on a year-over-year basis. But what that doesn't do is take into account the impact of currency, as I mentioned. So when you adjust for currency, what you would see in fiscal 2016 is that our revenue per employee actually grew 1.5%. So, I think when you look at this metric and you look at how it's been trending over time, we've been improving revenue per employee between 1% and 2% per year. And certainly as we move forward, the goal is to continue to move in that direction and continue to look at technology enabling services, to work smarter, to flatten the delivery pyramid and to do all of these things to drive productivity, hopefully in conjunction with how we are improving our seat utilization.

So, effectively what I sense is that in spite of a big headcount increase, productivity improvements and technology utilization is offsetting whatever time it takes for those guys to be productive. Is that a conclusion?

That's correct. I mean when you look at our margins for next year and we have a significant number of investments that we've embedded into our plan and those investments, in addition to the impact of annual wage increases are going to get funded through improved seat utilization. They're going to get funded through improved productivity, they're going to get funded through higher operating leverage on topline growth. The compression that you see in margins, the pressure that you see on the bottom line for next year is entirely about currency. A portion of it related to the depreciation in the British pound, a portion of it related to the [roll-off] of our hedging position, but essentially what we're doing is funding ongoing investments in our business with running our business smarter and more efficiently.

Ashwin Shirvaikar, Citigroup.

Thank you guys. Good morning and congratulations on the good quarter.

Thanks, Ashwin.

So, I guess the first question I have is, just to clarify, I think Keshav you mentioned ramping a number of clients that are new to outsourcing this year. You talked a little bit about the revenue cadence. Is there also sort of a cash flow cadence that we have to worry about in terms of the quarters or the full year?

Let me take that Ashwin. I think when you look at the seasonality of our business, again there is a history there. We pay bonuses in Q1, we have lower revenues on a quarter-over-quarter basis in Q1. So what we typically see from a cash flow perspective is Q1 tends to be the softest quarter of the year and those cash flows tend to improve as we move throughout the year. So there is some seasonality to the cash flows with Q1 being seasonally light. But other than that nothing that we would expect in fiscal 2017 different than our normal pattern.

And in terms of competitive intensity in general for the pipeline and when it comes to projects like the QBE win that you mentioned with insurance analytics, what sort of -- are you seeing differentiated competition as you move deeper into those sorts of analytics or is it basically the usual suspects?

So, first of all I'll say that I think all the good work that our business leaders and our sales teams did across the whole of last year meant that we kept growing the pipeline, building the pipeline and refining the pipeline along the way. And as we enter the year, we obviously have deals that we expect will have decisions very early in the year, which I think is very, very good enough from our perspective. That's one.

The second is, over the past few years, we have kept investing in some of these new higher value services and differentiating ourselves with our unique domain based kind of focus, as well as finance and accounting, research and analytics and new capabilities within each one of these areas. I think I'm very enthused with the fact that as we went into this particular account, for example, we actually entered with a high value kind of a project, which also from a scale and size point of view can be very, very significant. The ability for us therefore, when you go in with this kind of an offering, gets selected, your ability thereafter to -- you radiate across the account by providing solutions that we are outstanding at is also very, very high.

So, very good discussions happening inside this Company, as well as other companies. And I will say that in terms of competition, they will be the unique -- the usual suspects here and there, but I think the way we positioned ourselves as a company that understands the space very well and then understands how to leverage the data that this Company was generating is what helped us stand apart.

So, let me add to that a little bit. When we look at our competition across our different industry verticals, it differs because the focus of the competition, the client's interest. But within those verticals, the competition does appear to be the same in many cases. When we talk about the example used with QBE with a unique solution required, it's a slightly different competition set than we would typically see in our core business process management business. But I think that shows our strength that we're able to compete against traditional competitors in our core business and compete effectively and win in those areas that we choose to compete on a stronger basis, like in analytics.

So, last question for me. Obviously you've been growing the tech-enabled solution suite capability and automation relationships over the last couple of years actually. But what sort of productivity give-backs are currently being embedded in your contracts? The amount that you normally give, or historically have given, has that gone up as the productivity from automation might be a little larger, or they are still not scaling?

I'll take that Ashwin. I think we talk a lot about the 5% recurring headwind we have to our business and certainly a portion of that is related to committed productivity improvements that we provide to our clients. Obviously, the type of services and solutions that we provide will dictate whether or not they're eligible for productivity improvements and what productivity improvements, depending on the maturity of the relationship. But I think we continue to see clients push for productivity improvements. We continue to deliver those. We continue to execute to what we commit to within our contracts. But in terms of how an initial contract starts, for example, Keshav spoke quite a bit about contract starting on an FTE basis. So while clients may in a second or a third contract look for increased use of automation to accelerate productivity or continued productivity improvements, it's also important to remember that the move towards technology enablement and automation also involves an additional loss of control for the client. So it's not always an easy decision or an easy discussion to have. We do expect that automation and technology will continue to generate productivity improvements. But I don't think it's fundamentally changing the percentage of increment that we're providing on a year-over-year basis at this point in time.

Got it.

And maybe just to add to that from a productivity perspective, though it may be cannibalizing some of the revenue, but some of the different models what we adopt, including the gain share, because that also encourage beyond what is committed from a contract perspective to help the client, as well as to improve the margin from a company perspective.

Brian Kinstlinger, Maxim Group.

The first question, we've heard this earnings season, not just from your peers, but pretty much most that discretionary enterprise spending is slowing and I'm wondering if that has any impact on your sales cycles or project starts?

Yeah, I think, let me say that from our perspective, we are seeing no impact at all, because the reality is the kind of people we interact with are people who take decisions, who do not have budgets, who have to deliver shareholder outcomes. So, we are not a traditional IT services firm, so no such issues and in fact, as I've underlined earlier, going into the year, I've never felt as good as I am feeling at this point in time in terms of our pipeline and the kind of interactions we are having with our clients. So, no impact of any of that as far as WNS and our pipeline is concerned.

My follow-up is we talked about this, I think, two and three quarters ago. Your largest UK insurance customer made a large acquisition a bit ago, yet revenue from your top customer is down 14%. I realize you get efficiencies every year. You also realize currency hurt you. I'm just curious at this point have you seen increased volumes related to the large acquisition, and if not, do you still expect to in a meaningful way? Thanks.

Yeah, let me start with the second part of your question, Brian. Yes, we expect -- we definitely expect to see more volume coming our way from this client, as they digest and integrate that acquisition. There have been delays on their end in terms of some decision taking, as I've been updating you over the past few quarters. Having said that, in certain areas where they could move faster, they've taken decisions and actually WNS has already won some of those contracts, right. But I think the bigger opportunity is still out there, discussions are still ongoing and it's more a case of timing of the decision that is impeding that growth coming in, but we are pretty confident it's out there, it's available, good discussions are taking place and it will happen.

Just quick one on that. Is that customer planning to consolidate the two brands, have they communicated that in the public yet?

I don't believe the formal strategy has been communicated yet, Brian, no.

Edward Caso, Wells Fargo.

This is actually Tyler Scott on for Ed. So, first, if I could just go back to the adjusted operating margin, I believe you said that assumed in guidance is kind of a flat core operating margin year over year. Just wanted to make sure I heard that right. So it looks like the hedging gains are about 200 basis points this year. And then also if you could just provide any timing update in terms of those hedges rolling off.

Let me start and then -- let me just start by giving the high level kind of view point here and then have Sanjay and Dave take it further. But the reality is, yes, I just want to confirm that that's what we said in the prepared remarks that we actually expect to see operating margins generally in the same range that you've seen. And after taking out the impacts of ForEx gains and losses and roll-off of hedges in the high teens is where we expect -- 19%, 20% is where we expect to see it. And on specifics, could you just --

From a FY17 perspective, when we see from a -- let me just take a little bit step back, when you see from a year-over-year perspective, last three years, when we take FY14, FY15, and FY16, there has been a hedge loss in FY14, there has been a gain in FY15 and there has been a further gain in FY16, and that's where Keshav was mentioning that when you just exclude those hedging gains, from an operational perspective, our performance has been pretty consistent and stable on operating margin, which is in the range of 19% to 20%. And as you're aware that we've a 24 months hedging program, which is a roll-on year-over-year. So, it all depends that -- what's the FX rate when we enter into the year, as well as where is our hedging position. And it has been so volatile that we've to wait and watch that which way the currency moves. But as per our hedging program, we're already 86% to 90% hedged for the year. And any movement, based on the option in the forwards what we have, we may have impact, but operationally it's going to be stable from 19% to 20% on the operating margin.

So, I guess based on those comments I was going to kind of follow up, it looks like the pound is already moved sort of in a favorable direction since maybe you set your hedges, but have you changed the strategy at all preparing for the possible UK vote, leaving the euro or have you just sort of maintained the old strategy?

So, we just avoid speculating where the FX is going to be. What we believe in a very rule-based hedging program and the policy which we have been consistently following and has been working for the organization. So we don't plan as of now to move away with our philosophy and the hedging program.

And that's why we also prefer to report constant currency kind of numbers, just to make sure that all of us are on the same page.

And just a quick follow-up. If you could just provide a quick update on the capital deployment strategy and maybe how you're balancing share repurchases versus tuck-in acquisitions. And maybe just also how the pipeline for acquisition works is looking and as well as when you can get back into the market and repurchase shares. Thank you very much.

Sure. Let me take that Tyler. I think our approach to capital allocation is to be a balanced approach. I think we do fundamentally believe in the long-term value of the Company and believe that share repurchases are an effective use of cash. I think when you look at our share repurchase programs and what we're expecting to do over the next three years, I think everyone would be comfortable saying that we don't believe that the share repurchases are at the expense of any other opportunity. So we can take those decisions completely independently. We can buy back shares. We have a lot of visibility in our business. We know we've got $175 million in cash today. We know we're going to generate significant free cash in fiscal 2017 and fiscal 2018.

On the acquisition side, we want to continue the approach that we've had, which is primarily be looking for tuck-in acquisitions to augment our capabilities, but to make sure that we continue to be smart about how we do it. We don't need to buy assets to generate growth. We're looking for the right types of assets at the right price that will be a good cultural fit for us that we can easily digest. So, I think the approach remains the same. I think the pipeline for M&A activity has never been healthier. We're casting a wider net as an organization. We're looking for different channels to drive M&A, but feel good about how we've been able to build that pipeline, feel good that we've been able to get one acquisition under our belt here, although it was extremely small. And we'll continue to look at these tuck-in acquisitions, it's something that we can do to efficiently and effectively deploy our capital to drive accelerated growth down the road.

Maybe I'll just add a little bit here. This is Keshav. I think Dave hit all the important points and really as we go into the year -- to the early part of this year, we now feel very confident about how our business has shaped out. We feel very confident about the pipeline for M&A. We have already done one acquisition. We're scouting around looking for a few more. And while the focus really is on tuck-in, if there is something compelling that comes up which makes sense, we may also look at something a little more transformational as well. So I just want to mention that we're very, very focused on being opportunistic about this, focused on really adding more capability and leveraging all of this to drive even more faster growth and better margins for the Company overall.

Puneet Jain, JPMorgan.

So it was nice to see increase in $5 million to $10 million accounts this year, which slightly is your sweet spot as well. But as you invest in new services like technology platforms, R&D, can you talk about potential to grow those accounts to beyond $10 million, $20 million levels, which has been steady recently?

Let me take that Puneet. I think you're right, when you look at this year, we've had a really good year in terms of accelerating some of those relationships. I think we've got opportunity at almost all of our large accounts and you know what's exciting I think for WNS and what's fundamentally different from where we were four or five years ago is all of these new clients that we've added, all of these large deals that we've added have opportunity for expansion. So, while we want to continue to move these clients up in terms of their annual spend, the one thing we don't control is the timing. But feel very, very good about the amount of work that we have in the pipeline, the number of relationships that we have with opportunities for expansion. And that's a fundamental difference from where this Company was four or five years ago. We had a very mature customer base, we were managing all of their services end-to-end and the opportunities for growth within that existing customer base were somewhat limited. We feel very good about where we are today and certainly the goal is to continue to generate additional $20 million, $10 million, $5 million customers. So we want to also do that in the right type of pattern as well, which is maintaining lower levels of customer concentration. So it's a little bit of double-edge sword, but yes, we're here to service our clients. We're here to meet their needs as and when they're ready, and we certainly expect that these relationships will grow over time. We just want to make sure we've got a lot of -- we're growing at the same time, so that we don't become too heavily exposed or concentrated.

And a related question, like, if we look back like two or three years, you've significantly enhance your client base, like you mentioned, moving into new verticals, enhanced delivery capabilities with South Africa, Philippines hitting scale. Should we expect higher incremental margins going forward or maybe more focused investments in areas such as technology platforms, research analytics that you mentioned over next few years? How should we think about need for investments versus margins over the next few years?

Yeah, Puneet that's an interesting question. So as we said, at this point in time we expect margin performance in spite of all the investments that we will make and some of these investments will continue to be at an accelerated pace. We expect margin performance, or an operating margin level to be stable with what has been seen over the past two or three years and what we saw in 2016 as well.

And having said that, because of the kind of disruption that is taking place in our clients' business models, some of the new kind of models that they are seeing as well, while there is some kind of impact with a number of clients in the marketplace, around trying to respond to these changes, from our perspective, actually it's a very, very big opportunity and that's how we are focused on leveraging our investments.

So, it's safe to say that we will continue to invest in every one of these areas, we will continue to invest a lot more on technology, robotics, SMAC models, digital models. I spoke about regulatory and compliance areas, things like that. We will continue to grow our footprint in some of these compelling geographies. Our clients want us do drive more investments in some of these areas and clients want to grow faster with us in some of these geographies. But having said that it will not be at the cost of margins.

Basically what I wanted to ask was should we expect higher incremental margins on contracts on your existing book of business, which frees up more dollars for investments? I understand you expect overall margins to be steady, but like margins -- should we expect higher margins on individual contracts on existing book of business?

I think what you'll see, Puneet, is that as our relationships with existing clients, as process maturity takes place over time, the margins on those relationships will increase. The real question is going to be, do you have more relationships coming in at a lower margin on an FTE basis, than you have migrating to transaction and outcome based models and technology-enabled models. So, the real driver there will be the rate at which clients mature and move to higher level processes, higher level engagement models versus the rate at which we're bringing in new customers who are new to outsourcing, who are doing work at the lower end and on an FTE basis. So, it's more about pace than anything else. We are comfortable that our existing customer base will mature, will move to higher models, will increase in terms of margin. The real question is the pace at which they move versus the pace at which we add new customers.

Vincent Colicchio, Barrington Research.

Yes. Good quarter guys. Most my questions were asked. Just a couple here. Do you have any large contracts coming up for renewal in the near future that we should be aware of on the scale of a GSK, something like that?

We do have a couple of large contracts up for renewal this year and it is actually safe to assume Vince that in any given year we're going to have roughly 20% of our business that will come up for renewal. But I think at this point in time, given where our relationships are, where the discussions are with those clients that have either statements of work or Master Services Agreements coming up for renewal this year that we feel pretty good about where we are overall.

The attrition rate picked up in the quarter. Any color on what may have driven that and thoughts on the rate going forward?

The attrition rate for us does pick up often in the fourth quarter. We have seen a slight tick up; however, we expect that as we work this throughout the year and improved our attrition, you are going to see that continued program for us, a very focused effort on reducing attrition and increasing employee engagement throughout the year. But I don't see as anything of great concern to us. I think we've got a good program in place, focused management. It is one of the top metrics that we look at internally as we judge ourselves and look for our management team to stay engaged with our employees and continue to focus on keeping that number in an acceptable range for our clients.

And maybe just to add to that attrition definitely is volatile quarter over quarter, because of certain pattern or certain behavior each geography has and maybe it is a competition entering into a new area or maybe other reasons, but directionally if you see, there has been an improvement in our attrition metrics from year over year and that is what we expect to improve it directionally.

On the analytics side, clearly there is a strong macro demand worldwide for analytics talent. I'm curious, has it gotten any more difficult to secure analytics talent in your businesses?

Interesting question, Vince, and you're absolutely right that there's so much of demand out there in terms of the new business models with our existing clients, with new prospects as well, in terms of traditional kind of insurance, travel, retail kind of clients. And while we have over the years built a very compelling research and analytics practice and are leveraging the analytics practice well, we also understand that we cannot just hang around and wait to actually produce this talent. So, what we have actually done is for the first time ever in the history of the Company and frankly for the first time in India, we have actually created, in collaboration with a very well-known university, an MBA in analytics program that will help feed the pipeline of dedicated people coming into WNS with industry-ready thinking, knowledge over a two-year program. So, there's major investments going into that program. But as you can see, we are very, very positive about how the analytics pipeline for WNS looks and therefore, not only are we doing whatever is traditional, we're also actually feeding the pipeline with a new model, which has not been seen in the industry before.

Also important, Vince, to remember that one of the things we're also focused on in addition to hiring folks and creating a pipeline of talent, as Keshav patient mentioned, is continuing to look at ways to automate parts of analytics, so that our reliance on labor is reduced as well. So, there's also that component of the business that shifts to technology and automation that allows us to better manage that business as well and provides an accelerated level of scalability for the business.

Mayank Tandon, Needham & Company.

Couple of quick questions. First, either Keshav or Dave, could you comment on how the large OTA relationship is progressing that you, I believe, have a preferred relationship with? I just wanted to get some qualitative perspective on that. And then I have some modeling questions as well.

I'll just use one word to describe the relationship, outstanding.

Great. That says it all. Thank you. Keshav, just in terms of -- I guess this is more for Dave, on the modeling front, could you comment on your expectations for amortization, just so we get the model straight for the quarter. Firstly, will there be any impact from the recent acquisition that you did? I'm assuming that's pretty small. And then also, what is the expectation on the stock compensation expense?

Sure. Let's me take that Mayank. And you're right, the impact from the Value Edge acquisition for this year will be pretty minimal in terms of the amortization. We do expect in fiscal 2017 a pretty meaningful fall-off in the amortization of intangibles expenses. We had a little bit over $25 million in fiscal 2016. I think we're looking at a number for fiscal 2017 that's closer to $17 million, and the reason is because the amortization of our Aviva acquisition actually falls off, I believe in November of 2016. So you're going to see a sizable drop in the amortization number in fiscal 2017 and a corresponding sizable drop in fiscal 2018. So right now we're looking at an amortization number for this year that's going to be in the $17 million to $18 million range.

On the share-based comp side, we're probably looking at about $20 million of share-based comp for the year, which is consistent in terms of percentage of revenue with fiscal 2016.

Eric Coldwell, Robert Baird.

Hey guys, great job this quarter. I just had a question on the auto claims unit. What are your guys' expectations for margins in that unit going into fiscal 2017?

From an auto claims perspective, yes there was a pretty -- much investment into the legal services new area what we started and that's where you saw a little bit drop from a margin perspective. But going into the FY17, we expect the margin to be improved as compared to FY16, once the legal services business has been stable, and we start seeing some of the traction, based on the program what we've done into that particular area.

And I think, Eric, the interesting thing about the auto claims business is as you're aware it's heavily technology enabled. We made a number of investments, as Sanjay mentioned, so the margin is really going to be a direct function of how the topline performs. If we grow the topline in the auto claims business, you're going to see a significant amount of that growth drop directly to the gross margin line, the operating margin line, the profitability line. So the margins in that business are entirely about scale at this point. The costs in the business are largely [affected].

And then just one follow-up. On the other income expectation fiscal 2017, do you expect kind of roughly similar $8 million to $9 million as you had in fiscal 2016?

So from an other income perspective for FY17, we expect to be in the range of $7 million to $8 million. It's an impact of the buyback program what we're going to have, as well as the expectation from an interest rate that we have been seeing. From an India perspective, it's coming down. And taking that impact, we believe that it's going to be in the range of $7 million to $8 million.

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