WNS (Holdings) Ltd (WNS) 2017 Q2 法說會逐字稿

Good morning and welcome to the WNS (Holdings) fiscal 2017 second quarter conference call. (Operator Instructions)

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

Thank you. And welcome to our fiscal 2017 second quarter earnings call. With me today on the call I have WNS's CEO, Keshav Murugesh; WNS's CFO, Sanjay Puria; and our COO, Ron Gillette. A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.wns.com.

Today's remarks will focus on the results for the fiscal second quarter ended September 30, 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 those 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 is defined as operating margin, excluding amortization of intangible assets and share-based compensation; adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets, share-based compensation, and associated taxes. These terms will be used throughout the call.

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

Thank you, David, and good morning everyone. Our second quarter financial and operating results were once again solid, and was highlighted by healthy constant currency revenue growth, profitability, and cash flow.

Second quarter net revenue came in at $143.7 million, representing a year-over-year increase of 7.8% on a reported basis and 16% on constant currency terms. Sequentially, reported revenue was up 2.1%, or 4.6% on a constant currency basis.

In the second quarter, WNS added six new clients, expanded 11 existing relationships, and renewed 14 contracts. Despite headwinds from depreciation in the British pound, our business momentum continues to be healthy. Revenue growth and our deal pipeline remain strong and broad-based across verticals, services and geographies.

In the past quarter, WNS added important new clients in Banking and Financial Services, Healthcare, Travel, Insurance, and Retail CPG verticals, which highlights our domain expertise and differentiated approach to BPM.

In Banking and Financial Services, we've added two new logos in the area of digital loan servicing. These clients are both in the UK and have selected WNS as a partner, due to our long-standing history of loan processing and our ability to manage end-to-end digital solutions.

In Healthcare, we have expanded our roster of pharmaceutical clients with the addition of two new clients, one in the US and another in the UK. Both are for high-end research and analytics work and will leverage our recent Value Edge acquisition.

We also had a very strong quarter in the Travel vertical, where WNS signed three new deals across airlines and online travel agencies. These clients have chosen WNS for our demonstrated capabilities and technology-enabled solutions in their respective areas of focus. Geographically, these new Travel relationships will span three different continents, including the US, Europe and Asia.

In Q2, WNS's Retail CPG vertical closed a new engagement with one of the world's largest e-tailers, adding to our roster of brand name digital clients and demonstrating the Company's ability to help service their complex process and rapid growth requirements. While this relationship will start small, we believe the long-term opportunity is significant.

And finally, we are excited to announce that we have added a new logo to our Insurance roster, which has the potential in the coming years to become a top five client for WNS. This customer selected WNS for our domain expertise and for our unparalleled track record of servicing the end-to-end business requirements for some of the world's leading global insurance organizations.

Several of these new contract signings have yet to generate their first dollar of revenue and may not be major topline contributors in fiscal 2017. However, these deals provide us with a solid foundation for revenue growth in the coming years. We believe these successes demonstrate that our investments in domain expertise, analytics and technology are resonating well in the marketplace and are positioning WNS for long-term success in the BPM industry.

As I mentioned earlier, the British pound continues to depreciate, which is creating a headwind to reported revenue and to a smaller degree, profitability. That being said, I want to reiterate that at this point in time Brexit has not had an adverse impact on our core business, including the deal pipeline, contract awards, project ramps and volumes with existing clients. In fact, we have been proactively helping clients examine how Brexit may impact their business and how we can quickly and more efficiently adapt to those changes as and when they are finalized.

We continue to believe that smart companies in the UK and Europe will leverage the capabilities of strategic partners like WNS to help drive cost savings and efficiency gains, generate actionable insights with analytics, implement and manage their digital strategies and deal with the added business complexity resulting from Brexit.

In our press release issued earlier today, WNS updated our full-year guidance for fiscal 2017. We currently expect revenue to be in the range of $551 million to $567 million, representing topline growth of 4% to 7%. Excluding the impacts of currency and hedging, guidance reflects constant currency revenue growth of 10% to 14%. Visibility to the midpoint of growth has increased from 95% to over 98%, consistent with October guidance in previous years.

Adjusted net income for fiscal 2017 is expected to be in the range of $84 million to $89 million, or $1.60 to $1.70 per adjusted diluted share. These figures include the tax effects on our non-GAAP adjustments for amortization of intangibles and share-based compensation, which Sanjay will discuss in his prepared remarks.

In conclusion, we are pleased with our second quarter performance and remain excited about our business momentum and differentiated positioning in the BPM marketplace. We feel that the demand environment for our services remains stable and healthy, with clients looking for a broad range of capabilities and solutions from their partners. These include reducing cost, improving efficiency, meeting regulatory and compliance-related challenges, providing actionable insights, improving the end customer experience, and digitally enabling the organization. Our investment programs have been geared towards meeting these requirements and we believe the Company remains well positioned to capitalize on these trends and to deliver enhanced value to all of 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 second quarter financials, net revenue increased to $143.7 million from $133.3 million in the same quarter of last year, growing 7.8% on a reported basis and 16% on a constant currency basis. Year-over-year, quarter two revenue was pressured by depreciation in key revenue currencies against the US dollar, including the British pound and South African rand.

By vertical, revenue growth was broad based with the Healthcare, Travel, Shipping and Logistics and Retail CPG verticals each growing 10% or more year-over-year. With respect to our service offerings, revenue growth versus the prior year was driven by technology services, finance and accounting, high-end customer interaction services and research and analytics. Sequentially, net revenue was up 2.1% or 4.6% on a constant currency basis.

Quarter-over-quarter revenue growth was broad based and healthy, despite headwinds from currency, net of hedging. During quarter two, the Company also benefited from some delays in anticipated project ramp-downs and a spike in volume relating to seasonality in our Travel vertical. We do not anticipate that these revenues will continue into fiscal quarter three.

Adjusted operating margin in quarter two was 19.8% as compared to 23.1% reported in the same quarter of fiscal 2016 and 18.6% last quarter. On a year-over-year basis, adjusted operating margin decreased due to currency movements, net of hedging, the impact of our annual wage increases and cost associated with the India Payment of Bonus Act. These headwinds were partially offset by operating leverage on higher volumes. Sequentially, adjusted operating margin increased as a result of improved productivity and higher volumes. These benefits were partially offset by wage increases and a reduction in seat utilization.

Quarter-over-quarter, favorability from the $1.7 million balance sheet revaluation charge taken in quarter one, which did not recur in quarter two, was offset by the negative effects of currency, net of hedging.

The Company's other income was $2.1 million in the second quarter, up from $1.8 million reported in quarter two of fiscal 2016 and down from $2.3 million last quarter. The variance in interest income, both year-over-year and quarter-over-quarter, reflects the changes in our cash balances and effective interest rates on investments.

WNS's effective tax rate in the second quarter was 27.7%, up from 25.9% last year and 26% in the previous quarter. These fluctuations are primarily due to timing and the mix of profits between geographies. As Keshav mentioned earlier, our non-GAAP tax rate now reflects the tax impacts associated with our adjustments for amortization of intangibles and share-based compensation. As per our previous calculation method, the effective tax rate would have been 15.5% in quarter two as compared to 16.9% last year, and 16.3% in the prior quarter.

The Company's adjusted net income for quarter two was $22 million, compared with $24.2 million in the same quarter of fiscal 2016 and $21.1 million last quarter. Adjusted diluted earnings were $0.42 per share in quarter two, versus $0.46 in the second quarter of last year, and $0.40 last quarter. Again, this figure reflects the revised non-GAAP calculation method.

As per the old method of calculating our non-GAAP ANI and adjusted EPS, the figures would have been as follows. Quarter two ANI of $25.7 million, versus $27.1 million last year and $23.9 million last quarter. Quarter two adjusted EPS of $0.49 per share versus $0.51 last year and $0.45 last quarter.

As of September 30, 2016, WNS's balances in cash and investments totaled $159.6 million and the Company had no debt. WNS generated $18 million of cash from operating activities this quarter and free cash flow of $11.1 million, after accounting for $6.9 million in capital expenditures.

The Company also repurchased 395,444 shares of stock in quarter two, at an average price of $29.43 per share, totaling $11.7 million. DSO in the second quarter came in at 30 days, versus 27 days reported in quarter two of last year, and 29 days reported last quarter.

With respect to other key operating metrics, our total headcount at the end of the quarter was 31,719. The ramp-down in headcount occurred at the end of the quarter and relates to the project ends and quarter two Travel volume spike mentioned earlier. Our attrition rate in the second quarter was 35%, the same as reported in quarter two of last year and up from 34% in the previous quarter.

Global billed seat capacity at the end of the second quarter was 26,996, and average billed seat utilization was 1.19. As always, we expect the seat utilization metric will fluctuate quarter-to-quarter based on facility build-out requirements and hiring cycles.

In our press release issued earlier today, WNS provided updated 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 $567 million, representing year-over-year revenue growth of 4% to 7%. Revenue guidance assumes an average British pound to US dollar exchange rate of $1.24 for the remainder of fiscal 2017.

Excluding exchange rate impacts, our revenue guidance represents constant currency growth of 10% to 14%. We currently have over 98% visibility to the midpoint of the revenue range, consistent with October guidance in prior years.

With respect to ANI and adjusted EPS, we are pleased to report that despite reducing our assumption for the British pound to US dollar exchange rate in our guidance, from $1.30 last quarter to $1.24 today, we have been able to absorb the impact to earnings and actually increase the midpoint of our EPS guidance.

Adjusted net income is expected to be in the range of $84 million to $89 million, based on a INR66.5 to US dollar exchange rate for the remainder of fiscal 2017. This implies adjusted EPS of $1.60 to $1.70, assuming a diluted share count of approximately 52.5 million shares.

The ANI and adjusted EPS figures include the impact of tax effects on our amortization of intangibles and share-based compensation. As per the prior method of calculation, the corresponding ANI and EPS ranges would have been $95 million to $100 million and $1.81 to $1.91.

Under the revised calculation method, we expect our effective tax rate for fiscal 2017 to be in the range of 26% to 27%, as compared to 17% to 18% under the prior methodology. With respect to capital expenditures, WNS anticipates our requirements for fiscal 2017 to be in the range of $23 million to $25 million.

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

(Operator Instructions) Joseph Foresi, Cantor Fitzgerald.

I think you mentioned in your remarks that the headcount change and the utilization change was due to a ramp down in Travel. Maybe you could just talk about how much of that was seasonality versus the ending of a project; I think you mentioned a project, and how we should think about that going forward?

So, from a headcount drop perspective, as you rightly mentioned that it was seasonality, as well as the project, and specifically the project ends which got delayed, which was expected earlier by the end of quarter one, but we've got also delay beyond expectation to quarter two. And as well as it was also due to the mix of the productivity if you also observe that our revenue growth is faster than the headcount growth, and this as related to another headcount drop. But we expect our headcount to grow in quarter three and quarter four, based on some of the recent wins, as well as some of the traction what we are seeing, which Keshav also mentioned in his prepared remarks.

Okay. I guess, just was it one project or a couple projects that ended or didn't -- you thought you were going to get and you didn't get? I'm just trying to understand exactly where the ebbs and flows of Travel. Obviously, it's going to pick up again next quarter and move forward, but was it one project that you had in the pipeline that fell out of the pipeline? If so why did it fall out? Just some more clarity around that would be great.

Sure, let me take that Joe. We did not have anything that we expected to happen that didn't happen. Essentially what we had were a couple of processes and a couple of projects that were scheduled to come to completion at the end of the fiscal first quarter; because the clients had some delays in terms of transitioning work, and because some of the project scopes got expanded, they moved into Q2 and helped generate some additional revenue in Q2.

But this had nothing to do with the pipeline, this had nothing to do with won or lost deals. This just had to do with essentially extended visibility onto some things that we thought were going to come to completion in the fiscal first quarter. And it was across several projects and several clients.

The Travel seasonality is a completely separate issue and relates more to the fact that as we've seen in the past, we know that there are seasonal impacts to some of our clients' businesses, especially in the OTA space. I do believe that this will be a seasonality issue for us going forward to where we do see some spikes in the fiscal second quarter related to volume and a pullback in the fiscal third quarter, but essentially this is now going to be a little bit of ongoing seasonality to our business.

And really what we saw in terms of Q2 revenue and the impact going into Q3 is that both the Travel seasonality issues and the projects coming to completion have created a headwind moving from Q2 to Q3. But, again, nothing that was not anticipated or expected.

Got it; okay. Then my second question, just I understand there is no immediate impact from Brexit, but obviously it's a long process. How should we think about the process as it helps or hurts your business? Has there been any change in pipeline or deal conversion? Thanks.

So I will take that. Very frankly, from our perspective at this point in time, it continues to just be positive. So we are not seeing any change in customers' behavior; we have seen no change, whatsoever, in how prospects are interacting with us. If anything else, what we're seeing is a little more positive momentum, because I think our teams have been quite successful in terms of convincing prospects that they should really not be waiting for the next two years, but making smart decisions earlier.

So, from our perspective, we are continuing to see solid momentum, we are continuing to see people take decisions. We are not seeing anyone take their feet off the accelerator. And if anything else, our sales teams are using this as an opportunity to really sell more to both existing clients and prospects.

So, now the overall process is obviously going to take quite a long time, and we'll have to wait to see what the long-term impacts are. But from our perspective, at this point in time, we just are looking at it as business as usual and we continue to make good progress.

And if you just look at some of the wins we had recently also, they actually came from the UK. So we are not seeing smart management teams not taking decisions. In fact, they are.

Great. Thank you.

Anil Doradla, William Blair.

So, couple of clarifications. So when I look at the first quarter, second quarter, combined, from a headcount addition, obviously this is lower than what we've historically seen. So optically, should I -- I mean I'm trying to rationalize it, because when you look at second half of last year, you had a very strong headcount addition. So was the first half of this year largely more or less absorbing some of the greater than expected ramps that you saw in the second half of last year? Is that a right way of looking at it?

I think, Anil, when you look at what we saw in terms of the revenue acceleration in the first half of this year, it was more about the headcount and the hiring at the end of fiscal Q3 and during fiscal Q4 last year, than about what took place in the first quarter of this year. So we talked a lot about hiring ahead of demand in Q3 and Q4 of last year, that we had firm visibility to growth and acceleration. Some of that was for the seasonality that we saw in the Travel business, but some of it was for new clients that were ramping up, as we discussed, around some of the larger wins that we saw in Q3 and Q4. So I believe we hired over 2,500 people in the back half of last year.

So I think what you're really seeing now is that we've been able to stabilize that. We've also seen, over the last two quarters, a good acceleration in our productivity. I know Keshav throughout the call wants to talk a little bit about technology and automation and some of the impacts that it's having on our business.

But we've dramatically improved revenue per employee over the first half of the year. As a matter of fact on a constant currency basis, revenue per employee is up a little bit over 6% year-to-date. So what we want to do long-term, obviously, is to make sure that we're continuing to grow revenue at a faster rate than headcount.

There's obviously going to be some seasonality to that in terms of the hiring cycles and when people join and when people leave. But I think what you're seeing is that all of this growth tends to even itself out over three, four quarters and we're now positioned for growth in the back half of this year, that should be more in line with Company growth.

Great. Now, Keshav, glad to see your macro commentary, especially on the Brexit, which is very different from what we're seeing in the IT world. But now there are two ways of looking at it, right? One is the uncertainty in spending and the other thing is the declining purchasing power by some of your customers. Now, I understand many of your contracts are in local currency. So the second one may not be impactful.

But going forward, if you were to break it down into these two parts, if you guys and more generally the BPO industry were to be impacted, which of the two areas do you think is perhaps something you would see first, rather than the other?

Look, I think that's a great question. And again, this is -- I must underline the fact that this is quite futuristic, because at this point in time, it is still business as usual. As I said, we're still seeing lots of signings, we're seeing a lot of activity on the ground. And I think customers still (technical difficulty) they want to work with clients, or rather with providers who understand their business well and who can lead them through the significant change that they are going to see over the medium to the long term. So I think that is where really WNS is scoring.

The whole currency impact, as well as the impact of what could happen in the future is something that is not really a key consideration at this point in time. I think everyone is really looking at business impact and how they stack up against competition at this point in time, and that is what is driving results.

So, I still like to think that even in the medium to long-term, as we continue to invest in our core verticals, build very, very strong capabilities in our horizontals, add very, very strategic kind of consulting -- thinking inside our Company, that is what is going to resonate in the minds of our customers, as opposed to what the long-term impacts of Brexit is going to have, because as long as they need to be in business, they need to be highly competitive and they need to work with smart providers. And I think that's where we'll continue to score.

But Dave, Sanjay, Ron, if you have any theories or views or guesses on what could happen over the next two or three years, feel free to add on.

All right. And if you don't mind me squeezing in one final comment, so Keshav, you're the Chairman of the NASSCOM, so you get to see what's going on with many of your BPO players. So the narrative and commentary that you talk about the Brexit and the relative insulation, clearly you're seeing that with WNS. But is it fair to say, putting on your Chairman hat, that statement could be extended to the BPO industry in general?

Yes, I would say that generally, the BPM industry has delivered very differently to most of the other sectors, as you would have seen over the past few quarters. And I think this comes from essentially the fact that we have understood the business requirements of our customers better. We have probably invested ahead of the curve in terms of some of the things that they want, and as a result of which, we are driving the agenda with them, as opposed to being dictated to. So, I think that's a very, very different way of looking at our business.

I would like to really say that the overall industry impact for BPM is very different to what you probably are seeing or hearing about from the others. And within that space, again, the more differentiated players are probably going to be producing better results, and producing better impact with their clients.

Great. Thanks a lot, Keshav.

Edward Caso, Wells Fargo.

Could you talk a little bit about where you are and where the industry is in the automation cycle? I know as you've been adding clients, they often start T&M. Are you having any influence in maybe getting them to convert to automation fixed price, fixed unit contracts to help protect margins here? Thank you.

Ed, let me just start with that answer, and then we'll have Ron talk a little bit more about it. But, very frankly, from our point of view, the whole automation story, as well as the need to drive these models, where headcount and revenue were being delinked, was something that we started speaking about years ago, and we, in fact, underlined it as one of our core differentiators. So, in terms of building internal IP, building internal automation tools, creating more mini platforms within the Company, these were things that we started years ago.

Over the past few years, we've added a number of very, very strong relationships as a result of which our technology impact, in terms of creating very sticky revenue streams for ourselves and at the same time going into client environments and saying that we can actually help you with the help of domain, technology, and analytics to dramatically change how you look at a particular problem, has been significantly enhanced.

Having said that, I must say that every client, as I've said in the past, has three stages. One is the traditional model, the transitional model and the innovative or transformational model. So you have to use different impacts of both analytics and technology in each one of these stages, based on where the client is in its life cycle.

Based on where the advisors and the analyst community is in terms of advice, I think a lot of them are pushing to the client community the fact that they should be much more wary about the whole technology stack and the technology game. And, therefore, clients are talking a lot more about it.

Many of them are not completely ready for some of it. So from a WNS perspective, as we sign a number of new clients, which is a very, very healthy sign, let me assure you that a lot of them actually start on the T&M model first. And it is only over a period of time that they move to much more technology intensive models.

So from our perspective, we actually believe that the penetration is at a different level at this point in time. We're very positive about the number of clients we have signed, where they are in their overall journey. But in terms of technology as a whole, I will have Ron add a little more now.

So, Ed, let me add on to what Keshav just shared. So, as far as the pricing model goes, the conversations are being much more positive around outcome based pricing. Clients are seeing the value in that to themselves of outcome based and unit transaction pricing. We are seeing some of that find its way into initial deals as well, not just relationships with existing clients. So I think that's very positive to see the education of the clients move up and see the value towards themselves.

As far as technology enablement, that's been part of our message for a long time. It's part of how we deliver the value to our clients over time, in both quality and productivity. Those conversations have gone well and we are seeing acceptance of what we offer and bring, more so than we would have seen a year ago.

So, I think the story is positive. It's caused us to continue to look at what we are able to bring to our clients and create more solutions to bring to them as well. So, a positive story on both fronts.

My next question is on competition. Just curious, are you seeing people getting in, are you seeing people getting out and does it matter whether they are attacking the market vertically, specific solutions, or more generic sort of horizontal F&A kind of opportunities? And does this automation, ahead of the curve that you've talked about a competitive advantage? Thanks.

That's an excellent questions, I must say. Let me say that in terms of competition in the deals that we are in, I'd like to reconfirm that it's the usual suspects that we see. I think clients are also quite discerning in terms of who they want to see in that final list. So, even if a hunt starts with 10 or 15 players that include pure plays, integrated SIs, whatever, ultimately you will see, based on the vertical or the horizontal component of the discussion, it quite often ends up being two or three of the leading pure-plays, and then one or two of the others added into the mix, so to speak.

But, having said that, again, I think clients -- if you look at how we have been positioned, we're seeing that whether it is a horizontal-led deal or a vertical-led deal, or a deal that starts with, say, a higher-end service like F&A or analytics, I'm really proud to say that WNS is now positioned globally across all the significant deals across every one of our key verticals, while some of the others are probably still focused on delivering on their older go-to-market approaches. So, therefore, if it's an F&A deal, you will see a particular kind of company. If it's an insurance deal related to North America, we would expect to see certain players competing, but all of them should expect to see WNS in every one of their deals. So that is where I think we're scoring extremely well, and the confidence around the pipeline. That's one.

And the second, as we've invested so significantly in terms of the whole technology story, as Ron talked about, some of this is actually helping us with brownie point as we go into some of these deals. You saw one or two quarters ago, we spoke about a large insurance company awarding probably the largest analytics-led contract to WNS. That has taken off extremely well. We are now looking at expansion mode.

At the same time, one of the new contracts that we've signed very recently, and I spoke about, again is focused a lot on domain, but I think what also helped us win was the fact that our knowledge of technology and platforms and higher value services scored better than competition. So, I will say that we will have to keep investing in these areas.

Customers will be more discerning, but at the same time the relationships between WNS and its customers is becoming even more strategic. It is going to the highest levels. It is going to the boardrooms and to the CEOs' offices and I'm delighted with that progress.

Thank you.

Brian Kinstlinger, Maxim Group.

Can you provide some details in Travel and Leisure, as well as Healthcare, both were up 33% year-over-year it looks like in revenue, based on your segment results. Can you highlight how much is coming from older customers versus new relationships ramping and where are we in that ramp?

Let me take a crack at that Brian. Certainly, with the Travel business, I would say that the acceleration and the improvement is a combination of new customers ramping, as well as some of our longer-term Travel clients accelerating their positioning, their spend with WNS. This has been a business for us that was seriously impacted two plus years ago by the loss of Travelocity and we've been in recovery mode since then.

But what we've been able to do is add several new anchor accounts over the last two to three years. Keshav spoke in his prepared remarks today about three new customers in the Travel vertical that were added just this quarter alone. So, we've got really good traction, which we would expect, given our track record, our domain expertise, our roster of customers, and we've now got in a position where I think a lot of the headwinds to our Travel business are behind us and we're seeing good healthy acceleration across both new and existing clients.

On the Healthcare side, again, I think there are two things going on. One, new customers adding. Second, the addition of the Value Edge here in the second quarter has helped us as well. And we're seeing cross-sell opportunities from that, both in terms of selling the Value Edge technology to additional new customers, which Keshav mentioned, but also selling Value Edge and its capabilities into our existing customer base.

So, the good news there is both from a -- if you will, a hunting and a farming perspective, I think both the Travel and the Healthcare businesses are extremely healthy.

And then within that Travel piece, you mentioned Travelocity. Now, that relationship, there was an expectation that you'd hope to gain share there over time with the new partner. How has that played out? Was that a driver of growth or has that not materialized like you'd hoped?

I would say it's been a driver of growth, it's been instrumental to some of the acceleration in our Travel business. And we're very happy with the relationship, the health of the relationship and the progress that we've made over the last year and a half.

Great. And then in the current quarter we're in, it sounds like you are expecting revenue to fall some, and less Travel and some seasonality in the quarter. How much revenue is falling off from either projects ending or less Travel?

So I will take that. From quarter two onwards, it's going to be around 1%, 1.5%, or approximately $2 million falling, due to the Travel seasonality what Dave mentioned, as well as, almost $3 million from the project-ends, which we spoke about, which you were expecting at the end of quarter one, but it went till quarter two end. And as well as there is going to be the currency volatility, which is going to be impacting, because the guidance, if you see, based on the British pound depreciation from $1.30 to $1.24 that may also impact the revenue quarter three and onwards.

So, $5 million a quarter before currency?

Just for Q3, right. (multiple speakers) We do expect that the seasonality issue on the Travel side, though, will certainly create a fall-off in Q3, but that number should pick back up, if you will, from an apples to apples volume perspective in Q4, Q1, Q2 of the next year.

Great, okay. And then finally, just on the cash and the change in accounting, is that a better proxy now for cash taxes? And then what prompted the change in the middle of the year?

So, as we keep on continuously evaluating our public reporting on the non-GAAP basis, specifically more towards a relevant presentation of our non-GAAP financial and the performance, and this is where we believe that this was the right time for us to change our ANI methodology, specifically on the tax impact, which was not there earlier, and nothing very specific, but just to have a more relevant presentation of our non-GAAP financials.

Is that a better reflection of the tax cashes, is that why?

So it's nothing from a cash perspective is going to [beg], it's only on the non-cash item, which is specifically on the amortization, as well as on the share-based compensation. So, no cash impact from an overall cash flow perspective.

Okay. Thank you.

Frank Atkins, SunTrust.

First question is a little bit of tick-down in the top customer as a percentage of revenue. Could you talk about what's driving that and has there been any change in the growth trajectory there?

Yes, I think there is no change, Frank, in terms of the health of that relationship. We do continue to see volume pressures on a standalone basis with that customer. Obviously, the biggest issue that you see quarter-over-quarter is depreciation in the British pound, which affects how that customer shows as a percentage of revenue.

We do have and spoke about some opportunities at this customer over the next couple of years and have seen some very early signs of progress in terms of their ability to integrate an acquisition that they've done. So that is an opportunity that we hold out for this customer.

But bottom line is, when you look at where we are today, you look at the currency headwind, as Sanjay just spoke about in terms of the British pound going from $1.30 to $1.24, it's entirely possible that this will not be a 10% client this year. And all of this, by the way, obviously is baked into our guidance. But from a diversification standpoint, from a client concentration standpoint, these are very good things for WNS long-term.

Okay; that's helpful. And then wanted to ask a little bit about the Research and Analytics horizontal. What type of pipeline are you seeing there and how are clients accepting these capabilities and can we expect to see that continue to tick up as a percentage of revenue going forward?

Absolutely. I mean actually that's a very, very exciting area of growth for the Company and it has actually been delivering fantastic results for us. So, I don't know if you're aware, but we now deliver almost 20% of our Company's revenue from the whole research and analytics space, 13.4% on a standalone basis, and the rest which is embedded in industry specific solutions.

Now, as we have publicly stated in the past, we do not believe that standalone analytics alone is something that companies or clients would want to pay for and that's the reason we have embedded these kind of offerings inside our domain-based offerings. We believe that the value that we deliver to our clients as a result of embedding analytics along with the traditional business process is very much appreciated and something the client will pay for with higher pricing as well.

At this point in time, the margin that we are delivering from these services is actually higher than the overall margin of the rest of the services. So very, very positive and salutary in terms of how analytics is playing out.

Now, what we are doing, therefore is, continuing to build out very, very strong capability in these areas. The recent M&A that we did with Value Edge is really adding more capability there. Analytics, Consulting and Incubation groups have been created. Some labs have been created in-house. Specific investments being created in the talent pool, as well, in terms of scientists, data modelers, statisticians.

You will recall that last quarter we also announced a joint MBA in business analytics with a leading university out of Delhi. All of this, along with the partnerships we now have with Roslyn, with [DiNardo] on the technology side, is all pointing towards how impactful this area is and how we are investing in all of this.

And in terms of capabilities, they go across the entire spectrum of horizontal and vertical at this point in time, leveraging domain expertise, predictive analytics, descriptive analytics, digital experiences, so many other areas. And the success measures, really are around the topline, the profitability, the fact that we are starting new engagements with analytics now, as opposed to the traditional offerings that we have had.

You know that one of our largest pharma accounts depends completely on us for analytics and we do some fantastic cutting edge work for them across the globe. Similarly, the recent win that we brought in from Australia, from one of the top companies, called QBE, started with analytics. So very, very excited with this area and a strong investment area for WNS.

Fantastic. Great to hear; thanks.

Ashwin Shirvaikar, Citigroup.

Guys, good quarter, good to see you all overcome pretty significant FX headwinds here.

Thanks, Ashwin.

Keshav, you just expanded on Analytics. But I wanted to broaden that out to discuss digital and digital transformation, something that you mentioned very frequently in your comments today. And it's good to see you are getting digital wins, but I'm curious as to the economics of these digital add-ons relative to the other works you do. Would you expect a sort of corresponding delinking of headcount growth and revenue growth and the types of headcount for digital, how does that change?

So I think it will impact all the areas you spoke about, Ashwin. And at this point in time, I think it's important to appreciate and understand that not just WNS is so focused on digital, but generally, thanks to all the buzz from the analyst and the advisor community, a lot of the clients and prospects also want to have a digital story. And from that perspective, they're also carving out areas where they are ready, and in those areas, that's where we come in with our offerings and we help them in terms of providing a different kind of resource. One. Second thing, provide a different kind of outcome-based kind of solution to them, and more importantly, enable them to become much better connected with their client base.

In the past few quarters, we have spoken about a number of offerings that we've kept coming out with, across in our verticals, particularly the Travel side as well. So, I won't go into those details again, but all of those offerings are resonating extremely well in the marketplace. Whatever started off as pilots a few quarters ago are now offerings, which are creating tremendous buzz and excitement with our airline clients, with our OTA clients, with our new digital clients that we spoke about, the e-tailers and people like that.

And you have to expect, therefore, that some of these models will create faster revenue growth with lower headcount. And we also expect that the way we deliver it, it will also have very positive impacts on margins.

Having said that, I also want to mention that not every client is completely ready for these models. And I also want to make sure that everyone appreciates the fact that what we do is to be a solid extension of our clients' enterprise; and therefore, managing their traditional needs, managing their transitional needs, and managing their transformative needs is where we earn our bread and butter, and which is what is very much appreciated by our clients. So this is a journey that we have to go through. All of it won't happen at one shot. But the fact that we have been investing behind the scenes in all of these areas is seen very positively by our clients.

Okay. Perhaps we can take your comment on digital related margins offline, because I do want to ask a question about cash usage. I am wondering why, given your healthy balance sheet and cash flow, we are not seeing maybe a more aggressive buyback, and is that because of your M&A pipeline being fairly active?

You are absolutely right. As Keshav mentioned earlier also, from a capital allocation program perspective, we are very actively looking for the tuck-in acquisitions, for the capability and we have a really good pipeline around that, into the multiple areas, where we really want to go after. Having said that, where the stock price is today, definitely gives the opportunity for us to really accelerate some of the share buyback program, and we are actively looking at pursuing that.

Just as a point of reference to it, important to note that last quarter our assumption for average shares outstanding were 53 million. The average shares outstanding assumption for this quarter was 52.5 million.

Yes, yes; got it. The follow-on there was, the last question I promise, was I know you're doing well in the UK, but it's also important for investors that you maybe should not be overly exposed to any particular geography. And is that changing how you look at either your M&A or your organic pipeline?

So, from our perspective, I think in terms of the M&A pipeline, our focus really is around capability creation, capability acquisition. And everything that we do from a capability point of view, we expect will have strong impact in momentum across all of our verticals and geographies as well. So we expect, as we do this, it will drive revenues globally.

At the same time, from a pipeline point of view, I must mention that our pipeline in every one of the geographies, including North America and Asia Pac, are very positively positioned at this point in time. And some of the M&A targets that we are also looking at could also have a slant or a bias towards North America, essentially because of how they are positioned. But having said that, while they may bring in -- they could bring in higher North America or US dollar revenues, the capability that they bring in can be leveraged across the globe. So, again, our focus is capability enhancing M&A, but at the same time, we are very conscious about how to drive this M&A pipeline, as well as our models of organic growth for the Company.

It's also important, Ashwin, to understand that we've made some significant investments in building out our global footprint. And whether that's having two centers here in the US to service clients, whether it's fine-tuning and expanding the sales force in the US over the last three to four years. And the reality is, I think what you are seeing now is, on an organic basis, that diversification is taking place.

Our growth in North America in the first half of this fiscal year is almost 30%. So we have very good traction in the US, we're seeing good healthy growth. Sure, we would love to augment that. We would love to further diversify and obviously having the history and the legacy as a UK company, with both British Airways and with Aviva, is something that we've been living with for many, many years.

But to Keshav's point, there is great opportunity for us in the UK. We have a great brand name reputation. Brexit is creating disruption, which we certainly don't want to invite competition into our backyard, but the goal is to try and grow our other geographies at a rate faster than the UK and to continue that diversification, but not at the expense of missing out on good client opportunities.

That makes sense. Thank you, guys.

Bryan Bergin, Cowen.

On the new clients, are the additions broad-based across the service lines, or did any specific activity stand out? Then you mentioned the new insurance logo. How should we think about the ramp-up on that new client?

Let me take that Brian. Yeah, very broad based in terms of the client additions that Keshav was speaking about. Certainly a couple of them starting with research and analytics, at least two of them starting on the industry specific side. We have one that's starting on the customer interaction side. So very, very healthy -- and actually one on the F&A side as well. So, very, very healthy, broad based, and I think it goes to show what Keshav was talking about earlier that how clients start their BPM journeys differ greatly based on their history, their culture and their immediate business needs.

So we need to be ready to meet that requirement, whether it's bolting on a social media front end to what they already do, whether it's streamlining the back end F&A, or whether in the example that he gave about the large new insurance opportunity, the long-term ability to essentially manage everything for this customer end-to-end. The ramp, we see as coming in three or four phases today. It's going to start relatively slow, as almost all these relationships do, but we do hope as we move into fiscal 2018 that we can move out of Phase 1 and into Phase 2, which should be a significant boost to revenue for us, if things progress the way we hope they will.

Okay. And then you may have mentioned on hedge position for 2018. Any change to hedge strategy? And then just medium-term operating margin, any updates here going forward?

So, there is no change in our hedging strategy as of now. We still continue with our 24 months rolling hedge with a mix of options and forwards. But we are continuously monitoring. And we do have an opportunity, specifically, how the pound is depreciating, but we are continuously reassessing that. And as early mentioned, we do expect, where the currency is today, the operating margin still to be from a high-teens perspective.

Okay, thanks. Last one, just on Retail and CPG, offshore IT service providers have had -- communicated some weakness so far in this earnings season. It doesn't sound like you are seeing that. Can you just talk about retail clients, their appetite to spend and what areas they're looking at?

Let me take that Bryan. I think what we're seeing, obviously, as Keshav mentioned earlier, in the retail space, in the banking space and in the insurance space as well, very, very different business BPM, versus IT. And what we're seeing, obviously, is good, healthy opportunity on the retail space. The opportunities are actually across the board. There are a number of large retailers, and we spoke about one large e-tailer as well, that have really not done much in terms of BPM. So, the opportunities for us in this space, which from an IT perspective tends to be pretty heavily saturated, similar to banking and financial services, similar to insurance, the opportunities on the BPM side remain extremely healthy.

Okay, thank you.

Vincent Colicchio, Barrington Research.

I have a question related to automating business processes. Are you seeing a meaningful increase of new competitors in your larger verticals?

Not really. I think the way we have to look at this is, clients want to interact with providers who, first of all, understand business, who give them a broad capabilities set that can provide an end-to-end kind of service to them. And it is from that perspective that WNS scores over any other player generally.

Now, having said that, we also would like to work with clients, or like to work with providers who have invested in some of the newer areas, including technology and analytics and things like that. And that is where, in order to ensure that we are building very sticky relationships and sticky revenue streams, we are investing in these areas and creating this differentiated kind of position.

Again, I must mention, being a software company alone does not mean you have the right of path with some of these clients. I think it is domain expertise, along with the ability to help them in their strategic journeys, their digital journeys, and the ability to bring in the right kind of partnerships and the right kind of models, which is what they value.

Okay. And then one last question. Last quarter, you said 33% of your pipeline was tied to the UK. Has that ticked back up to where your run rate is?

I would say, the overall mix of the pipeline remains pretty stable, Vince. Good, healthy opportunity in the UK, good opportunity in the US. We'll see which ones come through quicker, which ones are larger in scope.

But across geographies, our pipeline remains healthy, growing, and mix remains largely unchanged at this point in time. Wouldn't expect to change much quarter-to-quarter.

That's it for me; thanks, guys.

Puneet Jain, JPMorgan.

Good quarter, guys. Can you talk about your Auto Claims business? Seems like it was up solidly in constant currency. Was it because of the recent legal status and is it sustainable, the upside you had -- year-on-year upside you had in this quarter?

Yes, Puneet, as we mentioned earlier that we were investing into this legal services portion, because that was more relevant, as the clients were expecting an end-to-end capability from that particular piece of business. And as we invested, that has started paying off in terms of the growth. And it's still at early stage, but we do -- are seeing some good traction over there. But from a short-term perspective, we believe to be stable, from a stable growth perspective, as of now.

And then second, will increased adoption of automation result in higher than usual productivity benefits that you offer to clients, the usual 5% every year that you talk about, or will that 5% remain the same, but will stem from automation, instead of some other productivity improvement initiatives?

So, right now, from a client committed productivity perspective, it's pretty stable from a 5%. And 5% was also just not related to productivity, but it was also the mix of some of the discretionary projects, as well as the strategic decision at the client end, including captives, or consolidation, or M&A.

But having said that, as Keshav did mention about the expectation from the client on the automation is there and we are using that even as an opportunity to drive even more gain share. We know wherever we have, we lead that entire discussion to the client. So, we expect that to continue. But at the same time, maturity level from a client level differs on a case-to-case basis, but we expect a good opportunity over there.

All right. Thank you.

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