WNS (Holdings) Ltd (WNS) 2018 Q1 法說會逐字稿

Good morning, and welcome to the WNS (Holdings) Fiscal 2018 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. Now I would like to turn the call over to David Mackey, WNS's Corporate Senior Vice President of Finance and Head of Investor Relations. David?

Thank you, and welcome to our fiscal 2018 First 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 first quarter ended June 30, 2017. 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 is defined as operating margin, excluding amortization of intangible assets, share-based compensation and goodwill impairments. Adjusted net income or ANI is defined as profit, excluding amortization of intangible assets, share-based compensation, goodwill impairment and all 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. WNS is pleased to report that our fiscal first quarter results continued to demonstrate the solid business momentum we've been able to create over the past few years. First quarter revenue came in at $175.3 million, an increase of 24.5% versus last year on a reported basis and 27.5% constant currency.

Excluding our acquisitions of Value Edge, Denali, and HealthHelp, organic constant currency revenue increased 13.3% year-over-year.

Revenue growth was broad-based and healthy across verticals, geographies and service offerings and represents solid traction in both hunting and farming activities. In the first quarter, WNS added 7 new clients, expanded 16 existing relationships and renewed 12 contracts. Adjusted operating margin and adjusted net income margin came in at 17.1% and 13.5%, respectively.

This reflects the seasonal impact of our annual wage increases. I would like to take a few minutes today to provide a little insight into a major transition our business has undergone over the past 5 years. While our improvements in revenue and profit have been highly visible, what may be less obvious is the significant amount of business diversification that has taken place during this period.

For example, 5 years ago, WNS received 51% of its revenue from customers in the U.K. Today, the U.K. represents 35% of company revenue, despite having grown 17% on a reported basis, and 45% on a constant currency basis over the same period.

In fact, the reduction in our U.K. exposure has been driven by accelerated client growth in geographies, such as North America, Australia and South Africa as well as acquisitions.

Today, WNS receives 42% of its revenue from North America, 40% from Europe and 18% from the rest of the world. Similarly, our largest client 5 years ago represented 19% of company revenue. Today, they remain our largest customer, but this quarter, accounted for just under 8% of revenue. With respect to our verticals, WNS's traditional areas of strength, which is travel and insurance, which were 55% of revenue in the first quarter of fiscal 2013, now contribute 43% of revenue.

This reduction has been driven by outpaced growth in Healthcare, Retail and CPG, utilities and shipping and logistics. In addition to the diversification of our revenue composition, the shift in our global delivery profile has also been significant. Delivery from India has reduced from 76% to 51% over a 5-year period, driven by client demand for services provided across the globe and acquisitions. And finally, in the first quarter of fiscal 2018, WNS had 108 clients generating over $1 million of revenue.

This number has expanded by 66% from 65 clients in fiscal 2013 and provides us with fuel for growth in the coming years. In summary, what this means for WNS is that we have dramatically derisked our company exposure to any 1 client, geography, vertical or delivery location and created a broader-based set of opportunities, from which, we can continue to outperform.

In order to ensure we're able to properly attack these opportunities, WNS has been adding sales headcount over the past year. At the end of fiscal Q1, we had 91 sales resources across the globe, representing a 20% increase in capacity from 1 year ago.

The growth has been split evenly between hunting and farming profiles and skewed towards the North American region. These resources will also be focused on deals led by technology, digital, analytics and finance and accounting across our core verticals. While it may take some time for newer hires to bear fruit, we believe this investment is necessary to meet our growth objectives going forward and reflects the opportunity in front of us.

I would also like to provide you with a quick update on our acquisitions of Value Edge, Denali and HealthHelp. Today, Value Edge is fully integrated into the WNS environment and we have already been able to leverage their domain-based analytics to open new accounts and add deeper value to our existing pharmaceutical clients. With respect to Denali, integration is nearly complete and we have hit the ground running based on our history of working together. We've signed new logos based on our ability to deliver an end-to-end procurement offering and have been successful in cross-selling Denali's high-end source-to-contract procurement capabilities into existing WNS accounts. The integration of HealthHelp is also going very well and we expect to complete activities during the third quarter.

We believe HealthHelp will continue to deliver healthy growth servicing core specialty benefits management for Healthcare payers and have already begun discussions about selling WNS capabilities into HealthHelp's installed base.

The longer-term opportunity for us will be to leverage HealthHelp's technology, data and knowledge base across other areas of clinical care management.

From a macro perspective, the demand environment for BPM services remains robust and healthy, driven by disruption in our clients businesses. To be successful, clients must now learn to thrive in a constant state of disruption, including changing regulations, competition, technologies and customer expectations. As a result, they are increasingly turning to partners like WNS, to help them meet these requirements and to provide the creativity, flexibility, efficiency, speed and vision to help them compete in their respective industries.

We think this trend plays directly into WNS's core strength. Our ability to combine a domain-focused approach, with expertise in analytics, automation and digital processes to deliver true business transformation.

We've spoken over the last few quarters about some of our investments to bolster capabilities in these areas, including tuck-in acquisitions, centers of excellence, targeted employee training and reskilling programs, analytics offerings and the development and deployment of technology via WNS TRAC. You should expect to see WNS continue to address the evolving BPM marketplace in the coming months with additional solutions, including productized analytics offerings, digital process models supporting targeted industry sectors and technology-driven omni-channel.

These offerings will leverage WNS's deep domain expertise along with state-of-the-art technologies across robotics, artificial intelligence, machine learning, cognitive computing and natural language processing. In fact, we are increasingly seeing our pipeline and new deal wins led by technology-enabled solutions.

In summary, WNS continues to perform well in a healthy environment and to invest and position the company for long-term success in the business process management industry.

Our financial goals of delivering industry-leading growth and profitability are unchanged and we remain focused on delivering increased value for our employees, clients, shareholders and the communities in which we live and work. I would now like to turn the call over to Sanjay Puria, our CFO, to further discuss our results and guidance. Sanjay?

Thank you, Keshav. With respect to our first quarter financials, net revenue came in at $175.3 million, up 24.5% from $140.8 million, posted in the same quarter of last year, and up 27.5% on a constant currency basis.

Organic constant currency revenue grew 13.3% with acquisitions contributing an additional $19.3 million. Year-over-year, first quarter revenue was pressured by 11% depreciation in the British pound against the U.S. dollar.

By vertical, revenue growth was broad-based with the Healthcare, Banking Financial services, Retail, CPG, utilities, insurance and shipping and logistics verticals each growing more than 15% year-over-year.

With respect to our service offerings, revenue growth versus the prior year was driven by strength in industry-specific BPM, finance and accounting and research and analytics. Sequentially, net revenue increased by 13.7% or 11.7% on a constant currency basis. Sequential revenue headwinds in quarter 1 associated with annual client productivity commitments and approximately $4 million of onetime benefit in quarter 4 were more than offset by $13 million of revenue from acquisitions, healthy growth with both new and existing clients and approximately $5 million of nonrecurring revenue benefit, which is not expected to continue in quarter 2.

Our sequential organic constant currency growth in quarter 1 was 3.4%.

Adjusted operating margin in quarter 1 was 17.1% as compared to 18.6%, reported in the same quarter of fiscal 2017 and 18.1% last quarter.

On a year-over-year basis, adjusted operating margin decreased, due to the impact of our annual wage increases and lower productivity on quarter 1 hiring. This headwind was partially offset by hedging gains, net of currency movements, and operating leverage on higher volumes. Sequentially, adjusted operating margin reduced as a result of the impact of our annual wage increases and currency net of hedging.

This margin pressure was partially offset by operating leverage on higher volumes. The company's net other income expense was $1.7 million in the first quarter, down from $2.3 million reported in quarter 1 of fiscal 2017 and up from $1.6 million last quarter.

Year-over-year favorability in interest income associated with higher cash balances was offset by debt expense associated with our quarter 4 acquisitions.

Quarter-over-quarter additional interest income was largely offset by a full quarter's worth of debt expense. WNS's effective tax rate in the first quarter was 25.7% down from 26% last year and up from 18.9% in the previous quarter. The tax rate in quarter 1 normalized after the company received a onetime benefit of approximately $1.5 million in fiscal quarter 4 resulting from the reversal of a 2011 tax reserve, which was no longer required. Other changes in the quarterly tax rate are primarily due to the mix of profits between geographies. The company's adjusted net income for quarter 4 was $23.6 million compared with $21.1 million in the same quarter of fiscal 2017 and $24 million last quarter.

Adjusted diluted earnings were $0.45 per share in quarter 1 versus $0.40 in the first quarter of last year and $0.46 last quarter.

As of June 30, 2017, WNS balances in cash as investments totaled $194.5 million and the company had $116.9 million of debt. WNS generated $14.1 million of cash from operating activities this quarter and free cash flow of $6.8 million after accounting for $7.3 million in capital expenditures.

DSO in the first quarter came in at 30 days versus 29 days reported in quarter 1 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 34,789. In quarter 1, WNS continued to hire and train resources for increased volume in the quarter and committed client requirements. Our attrition rate in the first quarter was 32% as compared to 34% reported in quarter 1 of last year and 34% in the previous quarter.

Global billed seat capacity at the end of the first quarter was 28,932 seats, and average billed seat utilization was 1.21. We expect the seat utilization metric will continue to 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 2018. Based on the company's current visibility levels, we expect net revenue to be in the range of $693 million to $723 million, representing year-over-year revenue growth of 20% to 25%.

Revenue guidance assumes an average British pound to U.S. dollar exchange rate of 1.29 for the remainder of fiscal 2018. Excluding exchange rate impacts, revenue guidance represents constant currency growth of 19% to 25%. Acquisitions have added $69 million of year-over-year revenue or 12% of revenue. We currently have 95% visibility to the midpoint of the revenue range, consistent with July guidance in prior years.

Adjusted net income is expected to be in the range of $98 million to $106 million, based on an INR 64.5 to U.S. dollar exchange rate for the remainder of fiscal 2018. This implies adjusted EPS of $1.89 to $2.04, assuming a diluted share count of approximately 51.9 million shares. With respect to capital expenditures, WNS anticipates our requirement for fiscal 2018 to be in the range of $28 million to $30 million. We'll now open up the call for questions. Operator?

(Operator Instructions) Our first question comes from the line of Frank Atkins with SunTrust.

I appreciate the color. I wanted to get a little bit more depth on the Healthcare vertical. What your demand outlook is? What's kind of baked into guidance as you bring those kind of new revenue streams on?

Sure. Let me take that Frank. I think for us, obviously, we've had historically a pretty good footprint in the Healthcare vertical, largely around pharmaceuticals. We were able to augment that a little bit early last year with the acquisition of Value Edge, which really helped us with analytics and additive intelligence, respective to the Pharma vertical. HealthHelp for us is a little bit of a new animal, in that, it's really given us a footprint not only in the Healthcare payer market, but also in the clinical care side of Healthcare. We think there are a lot of good opportunities for growth, just expanding on what HealthHelp already does. And as Keshav mentioned in his prepared remarks, we've started to already look at adding WNS core services into the health care -- into the HealthHelp installed base. So lot of opportunities, lot of great expansion possibilities for us. Obviously, it's going to take time as we've spoken about. We still have another quarter or quarter plus of integration to be able to get this fully acclimated into the WNS ecosystem. But we think we're positioned the right way within the Healthcare vertical. We're playing at the very high end. We have access to analytics and information, which health care clients across the spectrum will be interested in. And our challenge now as an organization is to be able to bring that to market and take advantage of that opportunity. But in total, very excited about Healthcare as a vertical for us going forward and would expect outpaced growth in that area.

Okay. Great. And for my follow up, I wanted to do ask -- appreciated the color on the sales update. Just give us a sense of where you are? Are you comfortable with the current sales force, where it is? And as you look at the portfolio of services that you are providing, what are your expectations about productivity increases with the sales team?

This is Keshav, I will take that. So I would say that first and foremost, based on the results that we have been producing, based on the pipeline that we have, both on the hunting side and the farming side, and as I've already pointed out, which is very, very healthy, we're quite happy with the progress we've made on the sales hiring front as well as the kind of talent that we have brought in. I think the key here is to remind ourselves about conversations we've had as a company over the past 2 or 3 years in terms of how we constantly measure productivity of salespeople and also the impact that they are having in a constantly changing and disrupted kind of environment. And I would say at this point in time, we are delighted with the kind of people we have, the spread that we have across all our core geographies. The fact that these people are -- understand our services, understand the disruption in the marketplace, are able to appreciate the impact of technology, analytics, higher kind of services that WNS brings to the market. And are also able to provide appropriate business models to clients, which help them, but also help WNS in terms of both top line growth and profitability. So that's where we are in terms of the sales side. From our perspective, I think between Ron and me, we will continuously keep looking at the productivity of each salesperson, right? You don't expect everyone to be wildly successful. And we have a very disciplined process in terms of just making sure that we give each of these people a solid run. And if they are not matched for the company over a period of time, we will bring in the appropriate profile by replacing them.

I think it's also important, Frank, to remember that we essentially had gone the better part of 3 years without adding on a net basis any new sales. And both from the standpoint of making the existing team productive and accelerating overall company growth, we felt it was important to add. The other thing that's important as Keshav mentioned is that we dramatically diversified our business opportunities. So whether it's different geographies, whether it's new verticals, whether it's new types of services, including technology-enabled and automated services, what this allows us to do is make sure that we have got the right people to attack these new opportunities moving forward.

And our next question is from Ashwin Shirvaikar with Citibank.

Keshav, thank you for highlighting the diversification of revenue as well as delivery assets. I guess, 1 question I had along those lines was whether you have an eventual target ratio for these in terms of where you would like the revenue to come from? Any comments on that on a multiyear basis would be very helpful.

Right. Ashwin, thank you for that question. I will tell you the only 1 metric that I would like driven at the company at this point in time, based on the excellent opportunity that there is there in the market is industry-leading top line growth and industry-leading profitability. And all of these are moving parts, they will keep moving around I think. Our job is to make sure that we have -- we de-risk the company. We ensure that every geography has the right opportunity from a -- to be serviced by WNS people. And some of those things is where we can focus. But I can tell you, the core metrics that we will continue to focus on is industry-leading top line and profitability. And we'll keep talking about this as we make progress.

And then sort of sticking with the topic of diversification. As I look at contact type, now only 62% of revenues are FTE-based, which is quite remarkable progress on the non-linearity front. Can you comment on the sort of the margin cash flow, given the risk implications of this kind of what seems to be a fairly rapid and possibly accelerating shift that's happening?

Sure. Let me take a crack at that Ashwin and I think Keshav would also like to add some color. The reality is that there has been an ongoing gradual shift in the move from FTE to transaction-based. Some of that has been masked over the last couple of years at WNS, because as we've accelerated growth, we brought more clients into the fold, starting with an FTE or a headcount-based model. And honestly, it indicates a certain level of client maturity to move to transaction and outcome-based models, a certain level of comfort that comes with that, one of the key accelerators here in the first quarter for that move away from FTE was the acquisition of HealthHelp. That is a business that is almost entirely under an outcome-based model or a transaction-based model. So that had, had a lot to do with what you saw in that shift in the first quarter. And we do believe that going forward, there will be a gradual shift as clients become comfortable with us, comfortable with the services and comfortable with the right benchmarks to establish outcome-based models. But the reality is, I think you're looking at something that will be evolving over the next few years as opposed to something that will be having the kind of impact that we saw here just in the first quarter.

Yes. And I would just add on that I think it's important for us being one of the leaders of the industry, to really help our clients transition the model in such a way that we're delivering the kind of impact that they want to see while delivering the right impact to our stakeholders as well. So if you look at it, the kind of investments we have made in the new areas, including analytics, including some of the things that I laid out finance and accounting, artificial intelligence, cognitive thinking of things like that. All of it are focused on ensuring that irrespective of where the client is, we, as a high integrated company, are ready to partner them and send out a strong signal that we're an extension of their enterprise, right. Let's face it, whether we like it or not, technology is going to be something that will be driven by all of us. Clients will want more non-linear models driven, they would want more outcome-based pricing done. And over a period of time, they will want to interact more and more with WNS talent, which are more thinkers, less doers. That's how this model is going to shift and WNS is leading the charge. So from our perspective, I can only tell you that we will drive this change but we will also have a very solid controllership program at the company, to ensure that it is calculated risks that we are taking while we lead our clients in this direction.

Our next question is from Joseph Foresi with Cantor Fitzgerald.

So my first question here is just how we should think about the upside in revenues this quarter. How much was the seasonality? And I think you got the constant currency guidance the same. Why not raise it up?

So primarily, the quarter 1 revenue was driven by 3 aspects. It was acquisitions, it was nonrecurring revenue of almost $5 million and FX benefit of $3 million, right. And as you see, it's not reflecting into the guidance for the full year, specifically on the constant currency side because primarily the entire revenues on the guidance is up because of the FX and some organic growth. The nonrecurring of the quarter 1 what we got and there is an incremental ramp down during the year, which was not visible when we gave the guidance last quarter and that offsets each other.

Got it. And what was the acquisition contribution in the quarter?

$13 million, compared to the last quarter.

Okay. And then, a much broader question just about the industry. If we looked at what -- how a deal kind of takes place and I know we just talked about outcome-based pricing. If we look at how a deal takes place today and the components of that deal, how does that measure up with 3 years ago or 5 years ago? Because we're hearing a lot about different pieces, right. We're hearing about outcome-based pricing, we're hearing about the contribution of automation. And it seems like there is more, I guess, one-off bonus payments in revenues. I'm wondering if you could give us some idea of if you took the top 3 comparatives of what a deal today looks like versus 3 years ago and how WNS is prepared to compete in that manner?

That's an excellent question. So actually it will be -- I think the core difference is that may be 3 years ago, clients were much more focused on FTE-based thinking, although, they were talking a lot about nonlinear models and wanting to benefit from outcome-based pricing. But I think what has actually happened is, that over the last 3 years, the comfort and the confidence that they have had based on some of the strategic programs that we have driven inside our company has enabled them to actually change the quality of discussion with us at least. I'm pretty certain that, that will become the benchmark in the market as well. So if you look at it, again, it will depend a lot on the outsourcing journey of the prospect of the client. If it is a first-time kind of outsourcer, you must expect that, although, they would want all of these good things, they would probably start with the FTE-based pricing. But into the contract, they will put some milestones or mechanics to move from there to some of these other models. But if it's a more mature kind of a client, which is now going into Phase 2 or Phase 3, quite often they are actually looking at us to come in, look at a process traditionally that they may not have outsourced or may have run themselves and actually leverage our toolkit and our knowledge of the business domains to transform the process first and then ship it overseas. And so take advantage upfront in terms of the cost and the efficiency, and thereafter, move it to offshore locations to a truly global model. And thereby, deliver even more, I would say, cost leadership to them and the other allied efficiencies. And I think a lot of these deals now are focused on embedding the technology stack up front as well as embedding outcomes based on how we are interacting with their data to give them decision support kind of thinking. So at this point in time, I would say, it is still early days. It is still something that is gradually changing. But we are extremely well positioned. And I'm really proud to say that in the last few quarters, some of the new deals that we won across both business as well in the finance and accounting side in particular have all been led by technology. And in some cases, these were actually first-time outsourcers as well. So you have to expect that this is the journey that we will go through. And while in the short term robotics and all of this may cannibalize revenues, may create impact on personnel and people, in the longer-term, it would only add revenue opportunity and add profit opportunity.

Got it. So just -- and last one from me. Just on the automation, sort of digital aspect of the business, I think people would look at BPO and traditional BPO the way that you would do it and say that, these could be too disruptors or maybe the end of some of the traditional BPO type of work that you do. Maybe you could just address that potential problem and how it is a benefit, not a distraction.

Once again another excellent question, Joseph. I can tell you, I think here, at WNS, we are super comfortable with the fact that the opportunity for growth, while we are leading our clients into all these new models, is actually accelerating. And the reason for that is, every client, as we have said over the past few quarters, actually has a traditional agenda, a transitional agenda and this innovative or innovation or transformation kind of agenda. And actually as opposed to the opportunity shrinking, we're actually seeing them get more aggressive in terms of involving us in some strategic areas that expand and go beyond the traditional area. So it's now it's like each client has 3 clients embedded inside it. What will happen as a result of greater leveraging of technology and platforms and some of the things that we spoke about will be that, we'll probably use fewer people but higher quality people to deliver the outcomes. But we will also get invited to more opportunities, because the actual disruption that is taking place is not on our side, the disruption is actually taking place in the marketplace for our clients. And they more than anything else need a strategic partner like us to really help be an extension of their enterprise and drive their success for the longer-term. So I am super-excited and super-confident about the long-term future of the industry and of WNS as well, particularly for companies that take -- make this leap of faith, make investments in the right areas and are driving this agenda.

Our next question comes from Edward Caso with Wells Fargo.

Trying to better understand the shortfall at least to our model on the adjusted operating margin. Was it a ramp-up in sales and impact from acquisitions, slow margins on that $5 million nonrecurring. Can you sort of help us to understand why, again, the people and the utilization metrics all look solid, so just trying to understand that.

So quarter 1, usually the margin is always lower, due to seasonalities specifically on the wage inflation, when you compare with quarter 4 or the average of the full year -- previous year. And that's what the quarter 1 reflects over there. Despite there's a wage inflation, integration cost and sales investment in quarter 1, as even Dave specified that. But for the full year guidance if you see, the margin is pretty much intact and pretty consistent. And in fact, on the earnings side, you see it has been up by almost $1 million overall. So in short, the margin is pretty much consistent and intact for the full year, and quarter 1 will usually have a seasonality.

Okay. Can you just provide us what the -- remind us what the range is for the margin guide for the year? Also what the tax rate guide is?

So the margin -- the operating margin, if you see the range is between 18.5% to 19.5%, and the tax rate, the range is 26% to 27%.

And again -- I just want to reiterate again that there is no change to our operating model that we have previously spoken about.

And our next question is from Joseph Vafi with Loop Capital.

I was wondering if there was any update on the rest of the Autoclaims business after the divestiture last quarter?

No real update. If you look at the first quarter numbers, you will see that the Autoclaims business is down sequentially. We did take a little bit of a hit. We do have another hit coming to the Autoclaims business in Q3. And the good news is, we still expect this business to be profitable. We're evaluating how it fits into the overall WNS ecosystem. But essentially, no change to the outlook for the year or the positioning of this asset, relative to where we were a quarter ago.

Okay. And then on the new customers. I was wondering if there was anything special to note in those new 7 or the expansions this quarter, in terms of potentially large logos over time. And I was wondering also if we could get an update on that e-tailer that you signed a couple of quarters ago.

I would just start the answer. I'm sure the others would like to add on. But I must say that we're very positive about some of these new logos that came on. Not only because of the fact that these are interesting opportunities, the kind of work that is going to be done or is being done for them is quite reasonably unique and very different from a traditional BPM point of view. And as I said, sum of it is actually being led by technology enablement. But I think the scope and the scale and the size of some of the deals that we have won as well as that are in the pipeline is what is enthusing me a lot. I don't think that WNS has traditionally actually seen the size and scale of some of these deals in the past. And I'm pretty confident that over a period of time that some of these deals that we have won and which are in the pipeline and we're confident of doing well on and winning reasonably soon could end up being top 10 or top 15 accounts for the company as a whole. So that's the level of confidence we have on some of these deals.

Yes. And also just to give a little more color on this Joe, and to add to the other part of your question, the 7 new logos that we added actually span 5 different verticals. They span 3 different geographies. So kind of consistent with the theme that we've been providing broad-based help in our business. The other thing that's a little bit interesting and you alluded to, an e-tailer that we added a couple of quarters ago, slow progress with them. But I think what is becoming apparent, we are starting to see it in the pipeline, we are starting to see it in some of the new deal wins is that we're getting a bit of a reputation in the marketplace as a company that can effectively service digital companies, organizations that if you will were born digital, e-commerce-lead companies. And I think this is helping us not only engage with these types of companies, but also helping us engage with digital models with traditional brick and mortar types of companies. So both an opportunity from a stand-alone basis to service these hypergrowth types of companies as well as an opportunity to leverage what we know about those businesses to help our traditional clients move their businesses forward as well.

Our next question is from Anil Doradla with William Blair.

So Keshav, kind of 1 of the big picture questions I want to ask. When I look at the average revenue per employee, perhaps the highest ever in the company's history, now HealthHelp obviously must have benefited you guys. But when I look at your margin profile, now a variety of reasons were given, it's kind of on the lower end of the historical performance. So I think what I wanted to understand some of the puts and takes on this. You are going towards a little bit more nonlinear model, more automation kicking in, getting into more domains. And on the other hand, you need to invest into your technologies, you need to invest into your sales channel and so forth. So can you give us a sense -- now you've addressed some of these issues, I think, with previous questions. We're trying -- what I'm trying to understand is, one is, the average revenue per employee a better metric and potentially could replace utilization or move towards that? And the second thing is that, how do we look at the business model if -- could you potentially end up investing in new technologies and new businesses over the next couple of quarters, which you didn't anticipate based on some opportunities?

Anil, this is Sanjay here. So revenue per employee, this metric, keeps on moving based on various mixes, right. It depends on the geography, depend on the services. So if you have more and more onshore, your revenue per employee may keep on going up. But what we measure is more on the operating profit per employee and that's been pretty consistent from our perspective. And as I mentioned that quarter 1 right now is just because of the seasonality and some sales investment in the integration cost what we have, but for the full year, operating margin is still intact and consistent over there. And from an investment perspective, whether it's a technology and other areas, we have been consistently investing into various of the programs for the growth of the company and that will be continuous, and we don't believe that, that will impact our margin.

I think overall, Anil, the message is consistent. We've spoken for several years now about a model that is going to be a high teens adjusted operating margin model. Obviously, we were above that for quite a couple of quarters and 2 years. Because of the hedging and how that rolled and we were pretty transparent with [The Street] about telling them this 20-plus percent operating margin was not sustainable. But we've been running this business right around 19% give or take adjusted operating margin for 3 or 4 years now. And we've said that this is the right place for us to be. Now with that margin, what we've been able to do is essentially leverage investments that we've made in the past, whether that was investments in sales, investments in infrastructure, investments in capability creation, investment in global delivery. We've been able to leverage those investments over time to accelerate our spend in places like analytics, in places like technology, in places like digital. And as Keshav just mentioned, we talked about adding 20% to the sales force over the last year. And you've seen us add that 20% of the sales force without changing the expectation on the adjusted operating margin line. So we're very comfortable running a business that is 300 to 400 basis points higher than our peers in terms of adjusted operating margin today. We do think there are leverageable opportunities going forward, both in terms of leveraging investments as well as moving to higher value services, moving to transaction and outcome-based models. But for the time being, the plan is for us to take that investment, if you will, and make sure that we're continuing to invest for the future. This is not the right time, given the market opportunity as Keshav mentioned, this is not the right time to under-invest. We think this is a great healthy market. This is a great time to be in BPM and we certainly don't want to miss on that by short spending. And if we can do that while delivering industry-leading growth and industry-leading margins, we think it's a pretty good place to be.

So clearly, the message is that the ability to maintain margins at these levels and have enough of, call, a dry powder to invest in upcoming technology?

Absolutely. I think, Dave, answered that perfectly. Because now if we just take this discussion away from here back to the opportunity in the market, Anil, it's so interesting. If we just -- first and foremost, as these guys underlined, the operating model is not changing, in terms of our expectations around margin and things like that. So that's something we're reiterating the committee. But more importantly, if you look at the disruption that is taking place in the industry, while a lot of players seem to be very scared and concerned about it, we are actually extremely positive about it. Because we are actually seeing some of our traditional clients who were operating in 1 vertical earlier, because of the impact of the Internet of Everything, Internet of Things and other new disruptions, are actually now also starting to play on the fringe of other verticals. It means we can bring capability from a second vertical into these clients and actually start looking at them as a new client. Along with this as you look at new thinking in terms of what clients want, what the end customer wants, this whole move towards personalized services. Again, is something that is driving new energy and focus from clients, but at the backend driven completely by us. So new services being offered. For this, we need to keep investing behind it. And of course, as we all know, automation is going to be something that won't be a buzzword any more, it will gain pace. But what it will do is, it will help drive cognitive thinking, it will help complete kind of processes and it will help with the integrity of processes between 2 players. And at all -- at the front end of all of this, WNS is investing. So as Dave said, this is not the time for us to under-invest. We're going to keep investing in this area and we're very comfortable with the operating model for the short-term. And who knows, over a period of time, we'll have to wait and see how it actually plays out in terms of longer-term profitability and things like that.

Our next question is from the line of Dave Koning with Robert W. Baird.

I just had a couple kind of numbers questions. The first one. The $5 million nonrecurring type revenue, what's kind of the margin profile around that? It looks to us like it probably came in the U.K., just given, U.K. was up about 10% sequential constant currency, which is much higher than normal, so maybe you can just -- those couple of things.

So the nonrecurring revenue comes with the average margin what we have, because these were some of the project-based and other type of the revenue. And it was pretty much broad-base spread across the geography and just not U.K.-based.

Okay. So if it's nonrecurring, it doesn't sound like it was isolated to one type of payment, it was across geographies. Was it just some project that was especially strong? Is that what you're kind of saying? And then we should just assume that is a sequential headwind then in Q2?

Let me take that Dave. So if you look at what happened in the first quarter, we actually got $5 million that to be very honest was probably a little bit of a happy surprise to us. That $5 million is, as Sanjay mentioned, carried an average revenue profile, but it really was comprised of 3 or 4 different things. So we did have some additional short-term volumes with a couple of our clients, where we have volume-based contracts. We did have some incremental transition work for new projects that ramped up and we had to do hiring for that, so you saw that in the quarter. We also had a couple of projects that we had expected to fall off that didn't fall off in Q1. So a little bit of retention in the quarter. But you are correct in the assumption that, that $5 million of increment in Q1 becomes a direct headwind to Q2. And in fact, between the $5 million falloff from Q1 to Q2 and the normal seasonal headwinds that we see in Q3. I spoke a little bit earlier about the Autoclaims business where we have a contract issue, we have the travel seasonality that affects us in Q3. You're going to see that roughly across the first 3 quarters of this year, our revenue should be in the same general ballpark. But the underlying growth remains very healthy on both a quarter-over-quarter and year-over-year basis.

Got you. Okay. That's good. The kind of nonrecurring type stuff actually sounds like good execution rather than even any sort of just true one-time whatever other stuff, but it just sounds like you're doing well. So that is good.

Absolutely. And it's not -- you are right. It's not one-time in terms of it's a project or that we've changed the nature of how we execute. And it doesn't mean, to be very honest with you, that it couldn't continue or couldn't happen again next quarter. The difference is that we just don't have that level of visibility. So when we provide our guidance, our guidance is visibility based. If it's not already in the bag, we don't include it. But it doesn't mean that we can't have these kinds of surprises that are positives for us. It's just at this point in time, we can't see it.

Got you. And then just a couple other ones. One is, I guess, if sales reps are growing 20%-or-so. I mean, is that kind of a precursor to what you think. Could revenue actually accelerate from here? I mean, it's probably not perfectly linear between reps and growth, but there's probably some lose correlation right?

I think that's the hope over time, Dave, is that we were able to increase the overall capacity and throughput as a company. As we saw with the last investment that we made in the sales force, it took almost 3 years to see that group really gain traction, right. So what we're executing well now, but a lot of what you see in fiscal '17 and fiscal '18, on an organic constant currency basis, that health is more about hires and productivity relative to people that were brought on 2 and 3 years ago. So certainly, we would love to see this team produce accelerated traction. It doesn't mean that we don't believe that the old team can't continue to accelerate productivity and improve. But we want to make sure that we're not going to miss out on this opportunity. And the opportunity isn't just in terms of more bodies at the same dollars, if you will. The opportunity has expanded as Keshav mentioned. So part of the sales force hiring is mapping new geographies, it's mapping new verticals. For example, like putting additional resource into Healthcare, to help service the opportunity that has been created by HealthHelp. And it's also for us to take advantage of having the right people to position us the right way in some of the newer areas like automation, like technology, like analytics. So because the opportunity is growing and expanding, it's important for us to make sure that the sales force is growing and expanding accordingly.

Great. And then finally, just on the acquisitions, I guess is a little granular, but is there a different seasonality to those than your core business? And then do you expect organic growth of those acquisitions to be pretty similar, the 10 to 15 type range that your core business is growing?

There is no seasonality for the acquisitions. It is pretty much the same the way the BPM or the WNS overall works now. And we expect based on the opportunity of the cross-sell and the list of the new clients and the geographies around that, there is a great opportunity for us to accelerate the growth going forward.

Your next question comes from Mayank Tandon with Needham & Company.

Most of my questions have been answered but I did want to ask you about the use of cash going forward in terms of future M&A and then balancing that with share buybacks and paying down debt.

Mayank, as we've said in previous calls again, we will continue to stick to the previously disclosed capital allocation program. So from our perspective, the M&A part has for now been executed. Right now the entire focus is on digesting and integrating the 3 tuck-ins that we brought in. We will continue to look at the share buyback program. And as the board takes calls and anything else beyond that, we'll keep you guys updated. But as for now, we will continue to be very opportunistic in terms of M&A. Nothing transformational as of now, because we really want to make sure that the integration of the 3 current assets go well. And we'll keep looking at any other small tuck-in kind of acquisitions that can add more firepower to our arsenal. So that's where we are.

And just to add we already announced earlier, that we have a 3.3 million share buyback approval and we already have executed 2.2. So 1.1 million of the shares still to be executed. So the capital allocation is going to be there. And as well as you rightly mentioned, it's going to be paying off the debt.

Keshav, if you could just expand a little bit more on the future M&A? I know you have your hands full with the 3 deals you've done over the past 12 to 18 months. But as you do look ahead, what is the focus going to be? Is it going to be about capabilities, expanding your geographic footprint or a combination of both? Or are there other opportunities that you are exploring that would help you further reinforce your position in the market?

So, Mayank, at this point in time, I think from our perspective, as and when we look at any other M&A targets for now, it's all about just capability expansion, right. Because we are so confident about where the market is for our services, the way we've positioned ourselves that wherever there is any gap in any of our capability, we want to fill that gap. So I would say at this point in time, it is safe to assume that we would be opportunistic only on capability-related tuck-in acquisitions.

Our next question is from Brian Kinstlinger with Maxim Group.

Sorry to ask it, but I get margins aren't sustainable and I get -- but I'm not sure it explains the pressure on year-over-year gross margin. Revenue grew faster than headcount, productivity measures are almost exactly the same as last year, wage increases are seasonal. So year-over-year, may be why are they down? Is it HealthHelp or FX rates that are different? I don't think that's been answered?

Year-over-year specifically, when you see the quarter 1, in this particular quarter, there are the integration costs for the 3 acquisitions. And as Dave mentioned, there was a sales investment what we did this particular quarter, as well as there was a pressure from a currency perspective, where the rupee appreciated. So those were the 3 broad factors. But having said that, as we mentioned, for the full year, we expect the operating margin, the gross margin to be consistent.

Are you speaking Brian about the gross margin on a year-over-year basis?

Right. Yes, because integration of acquisition I would think would be in operating and so would sales investment. So I'm just trying to understand a 31% gross margin, not the operating margin, but the gross margin of why it was down so much?

Well the biggest reason when you look at the gross margin, because it's not protected by the hedging, is the fact that the Indian Rupee is down 4% year-over-year.

Which is what I asked, right. Okay, so that's the reason we're down is FX.

Correct. On the gross margin line, that's correct.

Okay. And so my second question, my follow up is, will we see year-over-year still the pressure, maybe not like first quarter in the remaining quarters? And then, what was the annual average increase in wages, please?

So the average annual increase is consistent with where we've been in the last 3 or 4 years, high single digit wage inflation for offshore, low single digits for on-site locations. The expectation is we move throughout the year on the operating margin line for WNS and you see it mirror on the kind of gross margin line by the way is that we're going to be sequentially improving adjusted operating margin as the year progresses. And we're still targeting the exact same adjusted operating margin that we targeted when we provided guidance 1 quarter ago. The only thing that's going to look a little strange is, when you look at the seasonality of our business for the balance of this year, the first 3 quarters from a revenue perspective are going to be relatively flat, but what you should see is increased earnings power because the margin should improve as we move throughout the year. So realistically, not much has changed here. Honestly, if you look at what's changed overall in terms of the guidance with the exception of just a little bit of seasonality, is the fact that we have added revenue on the top line, it's largely as a result of currency improvement from the British pound. We've let some of that flow-through to the bottom line. You've seen that in terms of the increase in the adjusted net income. The offset on the EPS guidance is the fact that because we were not active in the second quarter in share repurchases, the average share count for the year expectation has gone up from 51.5 to 51.9 and that's cost us $0.02 on EPS. So the reality is the net-net of all this change from a quarter ago is higher revenue of $11 million or $12 million, additional earnings of about $1 million, and a slight offset of about $0.02 that comes from lower share count -- a higher share count, sorry.

And our next question comes from Puneet Jain with JP Morgan.

So as your transaction and outcome-based mix increases, do you typically have minimum committed revenue on such contracts? It appears some of those contracts have been driving frequent upside to your expectations in the past few quarters.

We typically do not have contractual minimums. It's not to say that we don't have cases where we don't. But most of our -- most of the processes that are done on a transaction or outcome-basis, do not have minimums. The reality is, though, in most cases were supporting core operations, you don't see tones of volatility on a quarter-over-quarter basis. The 1 place you do tend to see is, for example, the types of businesses that we have like the OTA business, where there is a seasonality in the client's business and that seasonality comes through in our business. So we do see that, for example, when you look at, like for example, Q2 to Q3 and then the headwind that we see on the revenue side that is related to the seasonality of our customer's business. But in general, no, we do not have contractual minimums that back most of these transaction-based processes.

So can you explain like the $5 million benefit you got? Like I know you talked about like the various components. So the transaction-based piece of that, was that not related to more transactions than what you expected?

Yes. So there were more transactions. In certain times what happens when the clients also see growth for a particular reason in a particular quarter and that's sort of -- we always have good staff to manage some of those -- the increase in the transaction and that's what happened during this quarter that it was more transaction coming from the client where usually they give 60 to 75 days visibility on that.

Let me give you a great example and I think it's something that most people can relate to. We had a large airline client that this quarter had some challenges in their business and WNS was required to step up and help them manage through some of the challenges that they had as a result of that. That results in incremental work, incremental volume for us. It's not something we had visibility to, not something we planned for, but something that we need to do to make sure that our clients can track their business as well as possible.

Understood. I think that's helpful. And did you disclose magnitude of integration expense -- M&A integration expense you incurred in Q1?

We did not disclose it. From an overall dollar perspective, it wasn't meaningful. And it was from just an integration perspective, similar to what we spent in the prior quarters. So the biggest change relative to the acquisitions quarter-over-quarter was the fees and the legal costs and the banking fees associated with the acquisition in Q4. The integration component of it was consistent. And those integration dollars will continue into Q2 as well.

And our next question is from Bryan Bergin with Cowen.

U.K. and European clients, can you talk about any incremental plan or any engagements that you may be starting to see just driven by the geopolitical landscape there?

If you are alluding specifically to Brexit or impacts of Brexit, let me tell you, we have seen no impact from a Brexit perspective. We continue to see prospective clients taking decisions. We continue to see them traveling up and down. And I think just as we are all waiting to see what Brexit means on an overall basis to the whole world. I think we are also looking for the same kind of clarity. But at this point in time, growth for WNS is being driven by every geography, including any geography that is likely to be impacted in the short-term or longer-term by Brexit.

The short answer to that, I think that's what Keshav is alluding to, Bryan, is that the flow of deals, the flow of information has not changed, the pipeline has not changed. But the reality is as we look forward and we look at the disruption that Brexit has the potential to create, I think based on our conversation with both existing clients and prospects, we still continue to believe that Brexit probably presents more of an opportunity than a risk at this point in time.

Okay. Great. And then just on automation, the topic of automation, can you talk about what you may be seeing in the competitive landscape? Any changes to note there, whether its competitors or pricing or contracting?

I would just say that, from an overall basis, I think everyone appreciates and understands that automation is the way to go. And so everyone seems to be making investments in those areas, whether it is in the robotics area or any one of the other areas. But I think what I'm seeing much more clearly happen is that prospects and clients are now clearly differentiating between the business process pure-play players like us who understand their core business well and then are transforming them with the help of automation, technology and analytics, as opposed to the traditional IT services players that they assumed in the past were the people who could really help them with their technology journeys. And as I have mentioned in the past, we are actually seeing more of our deals now being led through technology, which is a very positive sign I would say for WNS definitely, and I think the longer-term for the industry as well. Because it means clients now appreciate and understand that working with people who understand their business domains and the impact of some of these new areas to help them with their disruption journeys is significant. And I think from our perspective therefore, very positive about this outcome.

And our next question is from Vince Colicchio with Barrington Research.

Just one question from me. What has to happen to hit the high-end of your revenue expectations?

I'll take that. It's the same answer we always have, Vince, its timing. I think the opportunity is there. I think the one thing we don't control is how quickly clients make decisions. It's visibility-based. We've got 95% committed to the midpoint. Essentially, if things happen in a healthy fashion over the next 3 to 4 months, that will create an opportunity for us to get to the high-end. That's all it is, is timing. I don't think it's about having to add to the pipeline, I don't think it's having to add new customers, it's all about just getting what we have already towards the end of the pipe to convert.

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