WNS (Holdings) Ltd (WNS) 2018 Q2 法說會逐字稿

Good morning, and welcome to the WNS Holdings Fiscal 2018 Second 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 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, 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 the 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 operated 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 all associated taxes. These terms will be used throughout the call.

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

Thank you, David, and good morning, everyone. In the fiscal second quarter, WNS once again posted solid financial results with healthy performance across revenue, margin, profitability and cash flow.

Q2 net revenue came in at $182.3 million, an increase of 26.9% versus last year on a reported basis and 25.3% constant currency. Excluding our acquisitions of Denali and HealthHelp, organic constant currency revenue increased 12.6% year-over-year.

Revenue growth continues to be broad-based and healthy across key verticals, geographies and service offerings.

In the second quarter, WNS added 7 new clients, expanded 8 existing relationships and renewed 19 contracts. Year-over-year, adjusted operating profit increased 19% and both adjusted net income and adjusted earnings per share increased 26%.

WNS is committed to differentiating ourselves in the marketplace and helping our clients solve complex business problems. We continue to receive positive feedback from key external stakeholders for our strategic investments, client-centric approach and superior execution. These efforts are being validated through recognition from the industry analysts and advisers, the addition of new clients and growth within existing accounts.

Recently, WNS has received several significant awards from the influencer community, which helped position the company as a leader in the BPM space. This recognition cuts across domain expertise, technology, corporate social responsibility, human resources and analytics.

I would like to highlight 3 of these awards on this quarter's call. First, WNS was named a star performer in Everest's PEAK Matrix for analytics business process services. Of the 18 analytics providers covered in the market report, WNS was 1 of only 3 named a star performer. The company was cited for its new logo additions, investments in technology and advanced analytics, strategic partnerships and domain-based approach.

Second, WNS has been named a leader in the 2017 IDC MarketScape vendor assessment report for worldwide financial accounting BPO services. This IDC report recognizes WNS's F&A strategy and delivery models, including the company's commitment to tools, methodologies and technology-enabled as-a-service offerings with embedded robotics and analytics. This report also highlights WNS's verticals and geographic market focus and tuck-in acquisition strategy.

And finally, WNS was recently placed in the Winner's Circle in HfS's 2017 Blueprint Report for Insurance as a Service. The Winner's Circle is the highest ranking for service providers and is marked by companies making the largest investments to deliver value for clients, having the strongest vision for as-a-service delivery, leading the discussions on technology-driven solutions and business -- and driving business outcomes.

WNS was specifically cited for its depth and experience in insurance, end-to-end process enablement, vision for actionable analytics and investments in talent and technology.

While recognition from the analysts and adviser community is important, the true measure of success comes from new and existing clients, frankly acting with their wallets.

Year-to-date, WNS has signed on 14 new logos, an increase of 17% versus the first half of last year. We've also added 15 clients of over $1 million in revenue, a year-over-year increase of 16%.

Revenue per client is up 7% and revenue per employee is up 15%. All told, through the first half of fiscal 2017, WNS has grown constant currency revenue by 26% and organic constant currency revenue by 13%.

This demonstrates that our differentiated domain-based approach, strategic investment programs focused on automation, analytics and digital solutions and ability to help our clients better compete, are resonating well in the marketplace.

Since automation is getting a lot of industry wide attention, I thought I would take a few minutes today to discuss WNS's views, approach and progress.

Today, we see the client adoption of technology and automation is still in the early stages. Usage of tools, such as RPA, is increasing for cost reduction and delivery of committed productivity improvements and is most visible in front office, client-facing processes and lower-end repetitive back-office transactions.

Larger end-to-end technology transformations remain quite rare due to the amount of client disruption and behavior change involved. These initiatives require processes to be completely re-thought and reengineered, and also requires that clients modify organization structures, employee roles and skill sets and operating models.

At WNS, we are seeing steady gradual progress in the deployment of automation and technology into our client environments. Several of our larger, more established accounts have been increasingly aggressive adopters, while many other clients are currently involved in consulting, assessment and proof-of-concept engagements.

Over the past few years, WNS has been proactively addressing the shift towards automation through a combination of tuck-in acquisitions, strategic partnerships and internal R&D efforts.

Our acquisitions of Value Edge and HealthHelp were predicated on their ability to leverage proprietary technology to generate business value for our clients. And over the past several quarters, we have announced strategic partnerships with leading software providers of across vertical-specific platforms, RPA, machine learning and artificial intelligence.

Internally, WNS continues to invest resources towards the creation of technology-enabled tools, platforms and solutions. This quarter, within our RPA and digital transformation center of excellence, we launched a new BYOB, or build your own bot program designed the development of innovative automation, operational and quality improvements and RPA penetration across our customer base.

WNS has also created a new niche offerings for our customer interaction services clients, which leverage artificial intelligence across natural language processing, voice bots, e-mail solutions and mobile apps as a service. Upcoming technology plans will address enhanced automation tools for GRC, which is governance, risk and compliance, including fraud, audit and know your customer.

These initiatives are all designed to help WNS embrace and prepare for the future, where all of our large BPM engagements will be delivered with confidence of third-party software and WNS's proprietary technology IP, process expertise and domain-led services.

The ability to properly combine and seamlessly integrate these elements to help clients outperform will drive our long-term success. We view the moment -- the movement towards technology-enabled processes as steady, multiyear evolution. In the interim, the buzz associated with technology is driving increased client interest in BPM.

In summary, WNS continues to perform well in a healthy demand environment, which is being driven by disruption in our clients' businesses. Our investments, approach and strategic differentiators are resonating well in the marketplace. And we remain focused on delivering industry-leading growth and profitability.

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

Thank you, Keshav. With respect to our second quarter financials, net revenue came in at $182.3 million, up 26.9% from $143.7 million posted in the same quarter of last year and up 25.3% on a constant currency basis.

Excluding the impact of acquisitions, organic constant currency revenue grew 12.6%. Year-over-year, second quarter revenue was aided 1.6% by currency and hedging favorability.

By vertical, revenue growth was broad-based in the Healthcare, retail CPG, Banking & Financial Services, Shipping and Logistics, Utilities and Insurance verticals, each growing more than 20% year-over-year.

With respect to our service offerings, revenue growth versus the prior year was driven by trends in industry-specific BPM, Finance & Accounting, Technology Services and Research & Analytics.

Sequentially, net revenue increased by 4% or 3% on a constant currency basis. Sequential revenue headwinds in quarter 2 associated with approximately $5 million of onetime benefits in quarter 1 were more than offset by healthy growth with both new and existing clients, currency favorability and of hedging at approximately $4 million of revenue benefit, which is not expected to continue in quarter 3.

This quarter, the additional $4 million came from higher transaction volumes with existing clients, delay in project ramp downs, gain sharing and new project work.

Adjusted operating margin in quarter 2 was 18.5% as compared to 19.8% reported in the same quarter of fiscal 2017 and 17.1% last quarter.

On a year-over-year basis, adjusted operating margin decreased due to the impact of our annual rate increases and lower productivity. These headwinds were partially offset by hedging gains, net of currency movements, improved seat utilization and operating leverage on higher volumes.

As we have discussed in the past, on a quarter-to-quarter basis, there will be trade-offs between seat utilization and productivity metrics. Sequentially, adjusted operating margins increased as a result of improved productivity, currency movements, net of hedging, and operating leverage on higher volumes.

The company's net other income expense was $1.4 million in the second quarter, down from $2 million reported in quarter 2 of fiscal 2017 and down from $1.7 million last quarter. Year-over-year favorably in interest income associated with higher cash balances was offset by debt expense associated with our fiscal quarter 4 2017 acquisitions.

Quarter-over-quarter, interest income reduced as a result of the lower cash balances resulting from share repurchases and debt repayments and a lower effective interest rate.

The effective tax rate in the second quarter was 21%, down from 27.7% last year and down from 25.7% in the previous quarter. The tax rate in quarter 2 included a nonrecurring benefit of approximately $1.7 million resulting from a corporate legal entity restructuring, which reduced the effective tax rate by 4.8%. Other changes in the quarterly tax rate are primarily due to a mix of profits between the geographies.

The company's adjusted net income for quarter 2 was $27.7 million compared with $22 million in the same quarter of fiscal 2017 and $23.6 million last quarter. Adjusted diluted earnings were $0.53 per share in quarter 2 versus 52 -- $0.42 in the second quarter of last year and $0.45 last quarter.

As of September 30, 2017, WNS balances in cash and investments totaled $183.8 million and the company had $103 million of debt. WNS generated $44 million of cash from operating activities this quarter and free cash flow of $32.5 million after accounting for $11.5 million in capital expenditures.

During quarter 2, WNS repurchased 879,539 shares of stock, impacting cash by $30 million and made scheduled debt repayments of $14.1 million. DSO in the second quarter came in at 30 days, the same as reported in both quarter 2 of last year and last quarter.

With respect to other key operating metrics, our total headcount at the end of the quarter was 35,121. Our attrition rate in the second quarter was 30% as compared to 35% reported in quarter 2 of last year and 32% in the previous quarter.

Global billed seat capacity at the end of the second quarter was 28,541 and average billed seat utilization was 1.23. 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, 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 $705 million to $727 million, representing year-over-year revenue growth of 22% to 26%. Revenue guidance assumes an average British pound to U.S. dollar exchange rate of 1.31 for the remainder of fiscal 2018.

Excluding exchange rate impacts, revenue guidance represents constant currency growth of 21% to 24%. Excluding the revenue impact of acquisitions, organic constant currency growth is 9% to 13%. We currently (inaudible) 98% visibility to the midpoint of the revenue range consistent with October guidance in prior years.

Adjusted net income is expected to be in the range of $101 million, $108 million based on a INR 65 to U.S. dollar exchange rate for the remainder of fiscal 2018. This implies adjusted EPS of $1.93 to $2.06, assuming a diluted share count of approximately 52.3 million shares.

With respect to capital expenditures, WNS continues to expect our requirements 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) And our first question comes from Anil Doradla from William Blair.

A couple of questions. So Keshav, clearly there's a secular tailwind going on not only with you guys, but your peers in the BPO industry, but beyond that, there's just a positive sentiment in the business environment. Is there any way for you to kind of parse these 2 -- or these different layers of demand? What I'm trying to get at is, are you and the rest of the industry benefiting from just some macro tailwinds rather than kind of BPO-specific tailwinds, if there might be something like that?

Yes, I mean, first of all, thank you for your comments. And specifically to the question on demand, yes, I think generally, the sector continues to be underpenetrated in terms of demand trends, but we're still seeing lots of heritage brands climb on the bandwagon as far as the new business is concerned. So that something that is always a positive surprise as we find our new business, and we see people that we have interacted with from a brand perspective across decades, actually doing this for the first time, it means there is a tailwind for the industry as a whole. Having said that, I think some of us who have invested very significantly in terms of a very focused differentiated strategy and are really partnering our clients in terms of solving their core business problems, while actually incorporating the so-called disruptive trends into our delivery model are benefiting more. So I think from a WNS perspective, I must say that the fact that we're seeing such a healthy demand trend and such solid kind of pipeline, such exciting visits across our global geographies, is essentially because of our core differentiation around domain. The fact that we are a company that clients can trust in terms of helping them with the uncertainty that they are seeing in the marketplace and the fact that our models of delivery are something that are attractive to them is what is fueling our business.

Great. And as a follow-up, Sanjay, I mean, clearly, some tailwinds on the operating margin front. Can you remind us once again, how should we be looking at the trajectory over the next couple of years of that operating margin?

Yes, thanks. So Anil, as we mentioned, operating margin, we expect continued to be in the high teens directionally, where we continue to invest into the areas, specifically around technology, analytics for the -- and expansion for the growth of the business. So directionally, it's high teens. Obviously, we still expect for a couple of years to come forward then.

Our next question comes from Korey Marcello from Deutsche Bank.

I just wanted to start at a kind of high level. The organic constant currency growth remains really strong in the first half. Can you maybe just start by talking about some of the core drivers of growth beyond sort of the $4 million onetime gain? And then going forward, the constant currency revenue growth and the organic growth guidance kind of implies a sort of slight moderation in the second half. Can you maybe just remind us of kind of the puts and takes of the growth kind of going forward in the back half?

Here, let me take that, Korey. I think we're, obviously, very pleased with the health of the strength of our business in the first half. As Keshav mentioned in his prepared remarks, we put up about 13% organic constant currency growth in the first half. And a lot of it has to do with, as we've always spoken about, the seeds that have been laid over the last 2, 3, 4 years. So what we're seeing is that the relationships that we kickstarted, that we've put into place are starting to kind of reach that second, third year of maturity. The clients are comfortable with us. They're accelerating their spend and that traction is working. We see that in terms of not just the number of absolute clients that we add every quarter, but more importantly, we're seeing that in terms of the number of clients over $1 million that we have. As Keshav mentioned, we're up 15 clients over $1 million year-over-year, and they're across all of the various tranches of business, so it's not just clients that are in the $1 million to $5 million or the $5 million to $10 million. We've been adding new clients into the $20 million-and-above bucket as well. So that good broad-based traction within the client base is really what's driving that growth, and we feel very comfortable about that. With respect to the lower organic constant currency growth implied in the back half of the year, this is what we discussed in both April and July in terms of the headwinds over and above normal headwinds that we had walking into this year. So as we discussed, we typically have around a 5% expected revenue headwind to our business. We walked into this year with about an 8% headwind and the reality is, if you look at where that 8% headwind is coming, the incremental piece, which relates to the drop-off in the auto claims business, the project ramp-downs that we discussed and from a seasonality perspective, the travel business, which is soft in every third quarter, this is really what's creating kind of the optical softness in the back half of the year. So nothing that we haven't expected, nothing that we haven't spoken about previously, but certainly in terms of the back half of the growth this is -- the back half of the year, this is why the growth is slowing.

And maybe just to add to that. As we spoke about that -- there is a $4 million in quarter 2, which is not expected to be in quarter 3 going forward, as well is this all headwinds are being -- are expected to be offset by the growth, what we expect from the farming and the hunting new logos. And you see our guidance has been pretty consistent because visibility-based revenue of 98%, of visibility to the midpoint. And also the guidance range, so right now, at the midpoint, though it looks flat from a second half perspective but there's always a possibility based on the traction and the conversion to go beyond that.

And then just as a quick follow-up, you guys talked about the travel and leisure, obviously some softness expected in third quarter. But can you maybe talk about some of the drivers of sort of that segment growth over the past couple of quarters. I think we've seen a little bit of a moderation there, maybe just some of the puts and takes.

Sure. In terms of the travel sector, we definitely see far more volatility quarter-to-quarter in that sector because of the impact of volumes. We had a nice healthy second quarter and Keshav kind of alluded to it as well as Sanjay in terms of some of the things that help drive incremental volumes in Q2 and some of that came from the travel sector. Some of it came from the Insurance sector in terms of things like hurricanes that helped us out a little bit. But because there is a healthy amount of volume-based business within our travel component, and this comes from both the airlines and the OTA's, we do tend to see a little bit more volatility in that business, not just in terms of kind of the expected seasonality from fiscal Q2 to fiscal Q3, but on a quarter-to-quarter basis. But overall, we continue to add new logos into the travel vertical, we continue to have great relationships and to overall expand those relationships. And feel very good about how we're positioned and what the traction looks like within the travel vertical.

Our next question comes from Brian Kinstlinger from Maxim Group.

When I look at where the organic growth is coming from, it's coming from areas that you've diversified to a few years ago. You talked about Utilities, manufacturing, retail and consumer products are growing much faster, and so is Banking & Financial Services. So for each of those, is that a handful of customers that you've added maybe 2 years ago that are starting to ramp up significantly? Is that much more volume? Or is that bigger trends you think that will continue to drive that heightened growth that we haven't typically seen from those 3 segments?

Yes, let me take that, Brian. I think your observation is correct and it's something we've been talking about for a couple of years now, that the investments that we've made into some of the emerging verticals, like Healthcare, like Utilities, like Shipping and Logistics, we're trying to position ourselves as industry leaders in verticals that traditionally have not been aggressive users of process outsourcing. So as we do add new customers and as we do grow those existing relationships, based on the fact that the underlying base in terms of percentage of revenue is relatively low to start with, it makes perfect sense that these verticals are growing faster in terms of the percentage contribution every quarter and every year. That being said, if you look at kind of our core businesses, Insurance year-to-date is up 19%. Banking year-to-date is up 32%. So -- manufacturing retail is up 28%, so it's really is, as Keshav mentioned, broad based. But yes, you're going to see some very, very large numbers in some of the smaller verticals as we continue to make traction and we continue to build out our capabilities in those areas.

Also, just to say something more here. This is Keshav. In terms of the pipeline as well as the success we're having across the verticals, I'm actually seeing -- we've been speaking about it for some time but I'm actually seeing much larger deals, much more complex deals, not just with our traditional verticals but across even some of these newer emerging verticals as we defined earlier. And I think that will actually have a positive salutary effect over the next few years for the company. So it's very positive. In some cases, we're also seeing WNS actually start a journey with a large customer or a large project through technology transformation projects and then driving operational efficiency. So it's very interesting in terms of how the model is evolving, how we are helping solve customers' business problems and how we are being rewarded for some of the investments and the impact that we made over the last few years.

Great. That's helpful. And then with automation continuing to progress, as you talked about, Keshav, can you talk about how this is going to impact revenue per head and change your hiring plans? And then is this ultimately going to help offset the typical 5% efficiencies that are a headwind every year you and the customers look to gain on renewals?

Yes, let me start, and I'm sure the rest will also add on. First and foremost, I must say that this is an evolutionary kind of program. So I know there's been a quite a bit of buzz about all of this, from a sector point of view, I would like to say that WNS has actually led the industry in terms of really investing in the area of technology, talking about nonlinear models and really driving that model of growth across the company. And to some of some extent, leading it in the sector. But having said that, as I pointed out in the early part of my remarks, in order for technology to drive the kind of impact that you're probably alluding to, you need to have access to an end-to-end kind of a process. You need to be solving everything end to end and that means tremendous complexity from a client point of view. I think the more mature clients are moving down the path and we are leading them in the form of consulting arrangements and then driving them to a different model. In the case of newer clients, it will take a little longer but having said that, we are using some of these technology assets to drive more efficiency internally and with the more aggressive clients that we've been partners with for a longer time, we are driving them externally as well. What happens as a result in terms of (inaudible) is that large parts of the talent need to be reskilled, retrained and need to actually move down this exciting journey of understanding these new areas and then really elevating the cash carriers with WNS. And I think that's one of the most exacting things for our people, which they love.

And just add to that, Brian, I think to Keshav's point, we do expect to see that nonlinear growth showing up in terms of steady acceleration in terms of revenue per employee. I think you've seen that with WNS over the last couple of years, especially on a constant currency basis. What we want to see is that, that revenue per employee is going up. We want to see that the percentage of business overall that's allocated to transaction and outcome is going up. And if we're successful in doing this, while this is today helping us to manage the productivity improvements that we agreed to with our clients, longer-term, we think it does provide the opportunity for margin uplift.

Our next question comes from Ed Caso from Wells Fargo.

It's Rick Eskelsen on for Ed. Keshav, you mentioned -- when you were talking earlier in the prepared remarks about automation, how some of the buzz is adding new client interest. I'm just curious, these new clients that are coming in because they're hearing a lot more about technology, do they come in with a different sort of profile than they used to come in? Do they have different expectations of WNS? Maybe if you could just expand on that a little bit.

Yes. So actually it's interesting. I think a lot of them really want business problems to be solved, Rick. And I think that's really the fundamental reason that they look at having a strategic partner in. But having -- but at the same time, from their perspective, when companies like us have invested so much in the areas of automation, robotics, artificial intelligence and analytics, it really makes much more sense for them to then choose a company like us as opposed to many other companies in the space. And if they are first-time adopters to the model, then it really makes a lot of sense for them to work with someone who understands the business domain extremely well. And I think that's where WNS fits in perfectly. We understand the business very well. We understand their sub-vertical levels of business very well. We know the process extremely well. We know -- we have a view on where their industry is headed. We have invested significantly in each one of those areas and, therefore, from their point of view, to secure an approval internally, quickly, it's much easier by working with us. And that's what I meant when I said that -- made that statement earlier.

That's really helpful. Just a quick follow-up. I'm wondering if you could talk a little bit about the Denali acquisition, how that's been going. I know you mentioned something about revenue synergy possibilities there. So maybe any update there would be helpful.

Sure, just start and again I'll have Sanjay and others add on, but I'm telling you, we're very pleased with that acquisition because some of the large deals coming in also are coming in as a result of that acquisition. At this point in time, the integration has taken place very well. We have an outstanding team that has come in with -- not just the Denali acquisition but the others as well, but specific to Denali, I must say that the whole procurement area, the category management area, is something that is growing very fast for us, and I'm really delighted that the business case has worked out and in fact we think it will actually be ahead of where we expected it to be.

Just add to that a little bit, Rick, I think that's part of what you see you in terms of the contribution, obviously, we've had some large deals as well. But if you look at from a horizontal perspective, our Finance & Accounting sector, which includes procurement and the high-end procurement that -- that Denali brings to the table. In the second quarter, Finance & Accounting was up 40% year-over-year and year-to-date, Finance & Accounting was up 33% year-over-year. So I think to Keshav's point, we've definitely seen good, solid traction with being able to both lead with a high-value offering as well as to cross-sell that capability into our existing customer base.

Our next question comes from Frank Atkins from SunTrust.

I wanted to follow-up on that last question. On Finance & Accounting, some nice strengths there. Can you point to areas that are driving that demand specifically? And then two, do you think you're kind of punching above your weight in terms of your market share gains?

Let me take the first question, Frank -- and relative to F&A. And certainly, as I mentioned, part of the growth and part of the health in that space is having that high-end procurement offering in our toolkit, which allows us to grow with an existing client, which is a very quick and easy sell to be honest with you, but it's also helped us open new doors, which is really exciting as well. And allowed us to kind of sell all the other Finance & Accounting services around it. So having an end-to-end F&A offering is something that was very important us. It's part of the reason that we moved forward with the Denali acquisition, and I think we're seeing those benefits. In addition, what we see in a lot of cases is that clients that are relatively new to process outsourcing tend to start either on the front-end or back-end. So it's not unusual as we continue to get new clients and continue to get a certain level of maturity, to see either the contact center vertical or the Finance & Accounting vertical drive that growth. So I think this quarter and last quarter, and I think we're going on the third consecutive quarter now, F&A has been an outperformer. But if you go back a year or so ago, we saw that contact center, or customer interaction services, was the healthy performer for us. So not surprised to see that, that we'll lead in with the front or the back office and then the long-term growth within those client accounts moving into middle office and core operations.

Yes. And maybe just to add a little there, with the acquisition of Denali and where they have their clients' wealth, it was a little weighted -- the high-end transitional services. With the WNS capability now we are able to go and cross-sell all those clients, the transitional or the other part of the services what you are having, and that's an exciting opportunity over there. And similarly with WNS clients where we used to sell traditional piece, now we're able to upsell the category management and other procurement services, with the capability we acquired to Denali.

Okay. Great. That's helpful. And then for my follow-up, I just wanted to ask, can you give us a quick update and the terms of relationship with your top customer? Any changes or trends in demand or volume there? How much of that is currency? Just an update on the top customer.

Well, terms of relationship, relationship continues to be very solid. We are very strategic to them and from our perspective, we continue to see a decent momentum. We continue to see great [conversations,] and we continue to help them solve critical business problems of theirs.

And just to add a little bit to that, Frank. I think it's clearly one of the areas where, when you do everything for a client, you struggle to find new areas to outsource. The trend with our largest client over the last 5 or 6 years, it's been a slow, steady decline and part of that is because we're helping them run their business better. We are automating certain parts of the services that we provide for them. It's part of that normal 5% headwind that we expect. But this last quarter, our largest client actually was below 7% of company revenue. So this is a good thing for them because we continue to drive savings. We continue to service them. They continue to be a very referenceable account, and very helpful in terms of helping us position the company with other large insurers and from a long-term company diversification strategy, this is obviously a very good thing for us as well. So minor slow, steady decline on the volume side, which is really business as usual with our largest client.

Our next question comes from Joseph Foresi from Cantor Fitzgerald.

So any crossover or large wins you can point to from the acquisitions? And how important are they to you in getting on the larger deals?

Sure, let me take that, Joe. In terms of large deals within the acquisitions that we've done, I don't think we expect to see that, at least especially within Denali or within Value Edge. These are really complementary services, and I think the true impact really comes in terms of, as I mentioned earlier, both the ability to sell those services and those capabilities into existing clients. But probably more importantly, having that high-end high-value offering to kind of use as the front-end to get our foot in the door with new customers. So while, for example, Denali and the procurement services on a stand-alone basis will never be very, very large engagements, the real important thing there is that they're a very key and integral part to what could be a very large F&A relationship or what could be a very large end-to-end corporate relationship. So I don't expect to see any of these clients at least in the short run here -- any of these requisitions, I'm sorry, generating large clients on a stand-alone basis, but more how they complement with the existing WNS services.

So they expand...

And I'll just add, Joe, I'll just add that what is really exciting also is the fact that some of these offerings allow us a point of contact into some of the very fast-growing digital attackers, right? Because we are servicing some of them from a Denali point of view and, therefore, our ability to bring the rest of WNS in, have these kind of conversations and then convert that into a large deal at a customer level, as Dave mentioned, is very high. And I think that's the kind of potential that we're very excited about, while we're also solving standard traditional business problems through some of these offerings.

Got it. And then on automation, I was wondering if you see it as a long-term threat? And how much of it, if you could parse out, is hype versus reality? And do you think you'll start to replace FTEs with it?

Yes. So you know what, I think automation is just one more tool that you need to use in order to get work done to make your client more efficient and make yourself more efficient, more profitable as well. But I think strategically, it's a tool that actually creates a very sticky relationship and revenue stream for WNS. So that's how we're looking at it in terms of the long term. In terms of what it will do to replace employees, I'm a big believer that automation and all of these other disruptive trends that we leveraged so well will actually result in market expansion. Just as we saw with agricultural revolution or that industrial revolution or for that matter, the old IT revolution as well, it will actually result in market expansion. It will build and create much more confidence for some of the naysayers to actually adopt the model, and we're actually seeing it in terms of our growth rates. So -- but again, I must say it's early days. I think there's a significant time frame for clients to resolve some of their own structural issues on the other side in order to get the full benefits of automation. And in the meantime, there's solid business momentum for us during that time frame.

Our next question comes from Joseph Vafi from Loop Capital.

Good results. I was wondering if we could get some commentary on Healthcare in the payer vertical and Healthcare specifically. I know it's been a little slow to rebound for IT and BPO. So some commentary on that to begin with would be great.

Sure, Joe. When you look at our Healthcare verticals it really today is comprised of 2 major areas. The first being that the company's traditional capabilities in the pharmaceutical space and then recently with the acquisition of HealthHelp, our capabilities and differentiated positions on the payer side of the business. So different things that we're seeing in each, but I think when you look overall at our healthcare business, we've seen good growth. We've seen health in both sides of the business. The opportunity remains extremely large for us over time, not only to further penetrate these sub-verticals, but also to get more into the device side of the business and to get more into the health care provider side of the business as well. One of the things that we want to leverage going forward is the data asset that came with HealthHelp and the knowledge that they have that can certainly be of great use to not only other payer organizations but organizations on the provider side and the pharma side. So it's been a little slow, I think just in terms of the fact that traditionally health care users and especially very large health care users have not been aggressive adopters of process outsourcing. But we definitely have seen good, healthy growth and expect that to be a strong performer for us over time.

Okay. And then on the growth in -- or the new client adds this quarter. Any change in the mix there between kind of pure growth companies versus perhaps kind of heritage or cost takeout companies that -- were there looking for that value proposition?

Yes. Let me take this, Joe. We added 7 clients this quarter. The same as what we added last quarter. We're up 14 customers year-to-date, which, by the way, compares to 12 customers that we had added through the first half of last year, so on pace to grow that. In terms of the 7 that were added this quarter, again, we've seen a nice healthy mix across different verticals, a nice healthy mix across different service offerings. And to your point, a combination of the traditional companies looking for cost reduction, companies looking for transformation and dramatic business change as well as one opportunity in the digital space, where one of the disruptive companies has come to us looking for some help. So again, kind of similar to Keshav's commentary in his prepared remarks, good, healthy broad-based representation across the various sectors that you manage -- that you mentioned.

Our next question comes from Bryan Bergin from Cowen.

On pipeline, can you provide color as far as how that new deal scale is comparing to your past large deals and then composition across service lines?

Yes, I will probably just start and answer and have Dave and the others to talk a little more. But I think, first and foremost, I must underline the fact that the deal pipeline is very healthy. Large deals are significant in terms of some of the deals that we're running, some of the deals that are in the pipeline close to closure at this point in time. Like I said, some of these are being driven by technology transformation from our side and in many of them, analytics is being embedded as part of these solutions, so overall healthy mix, I think compared to the past, this is probably the healthiest sales mix or pipeline mix that I've seen. Dave, you want to go over the rest?

Yes, just to give you a little color too. When you look at the large deals, I think one of the things that's interesting is there's really 2 different types of large deals that are out there. One is a couple of processes or a couple of areas targeted by very, very large companies, which is always interesting and exciting for the long term. The second is what I would call end-to-end transformational types of deals with midsize companies. So I think what's really exciting is that, as Keshav mentioned, the overall deal size is up but it's really coming from 2 different types of customer, and that's somewhat different than what we've seen in the past.

Okay. That's interesting. And then on the $4 million, the nonrecurring items this quarter, can you just go into further detail, it sounded similar to the 1Q items. So I'm curious what are these items are becoming more normal course of just business benefit?

Yes, it's a great question, Bryan, and I think it's one that we wrestled a little bit with here. At what point when you have kind of nonrecurring revenue items or unique items in a quarter, when you have it 3 quarters in a row, does it become a trend? But when you dive a little bit deeper into, for example, this quarter's $4 million, what you'll actually see is the types of reasons are somewhat different than what they were last quarter. So this quarter, we did have a benefit from incremental volumes with some of our Travel and Insurance clients from hurricanes. Last quarter, we did have some incremental volume from one of our Travel customers because of a power outage. So between that and the fact that we do have some volatility in terms of when gain shares and outcome-based revenues are recognized and the fact that we do have some clients that want project work done from time to time, I do think we're going to see a little bit of this project volatility quarter-to-quarter. I think the important thing for the analysts and for our investors to remember is that when we guide, we guide visibility-based. And the reality is, the reason we talk about this $4 million as nonrecurring in nature is because we don't have visibility to it continuing into Q3. So it's more about letting you guys know the fact that this is a potential drop-off for us. It doesn't mean that we can't pick up volume from somewhere else. It doesn't mean that a client won't come to us with a new project. But the reality is, as we sit here today and look at the third quarter, we don't have visibility to that happening. So I think it's more about the company's approach to guidance and to visibility than anything else, and making sure that you guys are aware that this is a potential change to the revenue profile moving from Q2 to Q3.

Our next question comes from Mayank Tandon from Needham & Company.

Keshav, I wanted to get your thoughts on just competition. Clearly, you guys are executing well and growing above the market consistently quarter after quarter. But just maybe some high-level thoughts on what you're seeing on the competitive side. And also if you could comment on your appetite for M&A once you've integrated Denali and HealthHelp in terms of what areas you might be looking to add over time.

Right. I think the -- as I said, Mayank, the market for our services is very strong. And I think the demand trends still show underpenetration, and therefore, from a competitor perspective, it's really good to see some of us continue to do very well and execute very well from an industry point of view because that's salutary for -- to each one of us. Having said that, in terms of some of the specific deals that we are in, we are seeing, I think the traditional competition based on what kind of deal it is, right? And every now and then we will see one of the pure plays. We will see one of the systems integrators and now and then, we will also see, but not very often, an IT offshore player which also has a BPO arm. So nothing much has changed from that perspective. I must also add, however, that clients have become far more discerning in terms of how they make their decisions, particularly around business process and strategic management of these kinds of assets. And where it is a strategic kind of decision that they want to make around not just reducing costs, but more importantly, around helping them navigate the uncertainties in terms of their own business models, they would rather come to somebody like us, who understands business, who has the right investments in place and who is willing to earn every dollar of revenue for the long term. So that's how I see it at this point in time, and I don't see that changing for some time to come.

Great. Also if you could comment on the appetite for future M&A and what areas you might be targeting?

Sure. So obviously, we're very happy with the acquisitions that we did. They kind of impacted to be accretive in terms of both capability as well as the relationships that we have brought in. The fact that there's so much of opportunity still to leverage these assets. Having said that, we continue to be very opportunistic in terms of future M&A and this will again be niche tuck-in capability-led kind of acquisitions. So it could be around technology, it could be financial accounting, it could be around one of the core kind of business domains and -- automation tools, digital capabilities, these are the areas that we're looking at, and we'll keep you updated as we make progress.

And just one point of clarification on margins, maybe Sanjay or Dave, if you could just answer this. What is the expectation for the second half margin trend? And what is your full year guidance on operating margin? I think I missed that when you gave that in your prepared remarks.

So from a second half perspective, we believe the operating margin could be better than the first half because usually you'll see, quarter-over-quarter the margin improve because the first quarter is where we have our rate inflation, and those are -- other impacts, and [okay] gradually keeps on improving every quarter. And that's how it's going to be for the second half. And for the full year, we expect operating margin to be in the range of 19% right now, and that's what we guided, and that's what we incorporate from a guidance perspective.

Our next question comes from Ashwin Shirvaikar from Citi.

Good quarter, guys. Obviously, a lot of questions on revenues. That's all good. I wanted to talk about headcount, and on a year-over-year basis. And then just a couple of things. One is your attrition rate, I think it's the lowest it's been in 5, 6, 7 years. So is that related to mix or something WNS is doing? Automation? If you could comment on that. The other thing with headcount I noticed was it seems like, obviously, year-over-year the U.S. has tripled, from a smaller base, but it's tripled in a year. And it's really the older clients or older locations that are kind of coming down in headcount. So anything to comment there? Or am I reading too much into it?

Well, I think there's a just couple of things that are going on there, Ashwin. One, obviously, we deploy technology and automation increasingly into our environment, the focus on finding the right skills and the right resources in the right geographies continues to increase. When you look at the business as a whole, and Keshav did touch on it in his remarks, revenue per employee is up, and that's a focus for WNS because it is a -- it's one of the measures of productivity that we continue to watch. As we move clients to nonlinear models, and -- this is how we're going to be able to manage and long-term try and improve the margin profile of the company. So it is a focus area for the company. When you look at, for example, the attrition rate in the second quarter, I don't know that there's anything specifically to read into that. Longer-term, we had been trying to drive the attrition rate down. It's been as low as 30 this quarter. It's been as high as 35 over the last several quarters, but we've been averaging right around 32%, 33%. If this is systemic, then it'd be great but again I don't think 1 quarter makes a trend. So I don't think there's really much anything to read into the attrition rate. Overall, in terms of the geographic presence of our resources, obviously, the acquisitions of Denali and HealthHelp had a lot to do with the growth within the U.S. In addition to that, we have been growing at our other traditional locations as well as our clients look for higher value services and breadth of capability as well. So not only has it been growing through acquisitions, but it has been growing organically as well. And obviously, I think as people would expect, when you look at the impacts of automation, and we talked about it earlier in terms of how it affects front-end, CIS and how it affects back-end F&A, the lower value repetitive tasks are the ones that are going to be the most automated so the heavy offshore usage locations would be the ones that would be most impacted by that. So I think there are some very subtle underlying trends in the headcount metrics. I don't know that I'd read too much into them at this point.

Okay. And you guys have mentioned, during the course of this call, I think a couple of times at least, size and complexity of contracts increasing. And I guess the question there is, obviously, you guys have been investing for it, but is there, as you look forward, these bigger contracts come through -- or the more complex contracts come through, is there a step-up investment you have to continue to make? Is there a higher CapEx level? Anything to call out on the -- on that?

Yes, Ashwin, I'll take that. So yes, you're right. I think in terms of what I said was the complexity of deals is increasing. But actually that's playing an extremely well to WNS's favor because I think as we [play in] some of these deals, I think prospects quickly realized that we are quite differentiated, not just in terms of domain and technology, but also in terms of how we contract, how we provide different kind of models to make the relationship more successful. And I think from that perspective, we are seeing more wins. Having said that, I think in terms of the investments, in particular, yes, we'll continue to invest very solidly in terms of sales, marketing, the whole technology area, analytics and things like that. From a CapEx point of view, I don't see at this point in time significant change in terms of the kind of numbers that Sanjay and the others have traditionally spoken about. But investments and direction of investments will be much more focused also on things like automation, automation tools, digital capabilities, including the kind of M&A pipeline that we spoke about earlier.

And maybe just to add. This investment of the CapEx, what Dave and Keshav spoke about, those investments are always ahead of the curve. So as we keep on growing, and we're talking about a double-digit growth year-over-year, those are always [are always beginning,] including some of the large deals, because in our business, investments have to be earned.

Got it. One clarification question, if I can sneak that in. When doing a buyback, I didn't see share count shrinkage. So is that buyback timing or is it just the stock has gone up and it offsets what we see on the diluted share line?

No, I'll take that. I'll take that. Because from a buyback perspective, we did start it a little bit late and it's also a factor of the share price, where those buybacks are getting back into -- because of the -- position in the share price. So it has been there and that's the overall -- the factor what you will see from a quarter 3 and quarter 4 perspective because it's happening in the late part of the quarter 2.

Our next question comes from Puneet Jain from JPMorgan.

Just question on FX. Did you share your expectations of FX gains this quarter? And as FX gains roll off over the next few quarters, what other levers do you have to keep margins in high teens or at current levels?

Sure. And just for clarification purposes, are you talking about the FX gain and loss this quarter on the FX line? Is that what you're referring too?

No. For the full year, like what do you expect for FX gain for the full year FY '18?

Yes, we typically don't share that. I mean what we do share is directionally where the operating margin is. So obviously, it -- the movement and the FX gain and loss line has a direct relationship to what's going on in the gross margin and the SG&A line. And as Sanjay mentioned, what you see in our guidance implies is that, a, we expect operating margins to go up every quarter throughout fiscal 2018. We expect the full year to be in that ballpark of 19%, which is where we have been since we started the year and where we were last year as well. In terms of your question around kind of long-term margin, how we manage up throughout the quarters as some of the FX gains roll off. The reality is what we should see is higher gross margin come from the digestion of our wage increases, higher gross margins that come from our ability to be productive, right? So we know in the first quarter, we give our wage increases in the first quarter, we give the vast majority of our productivity improvements to clients. And then we spend the rest of the year executing against that. So we do expect our ability to digest that and the ability to do that even though that the gains on hedging should be rolling off. Again, the offset to some of those gains on hedging rolling off should be just a higher gross margin number from a currency perspective.

And maybe just from a levers perspective, Puneet, apart from the hedging program, what we have, which has been very robust. We have other levers, like when the contract come for renewal from a repricing perspective, and new deal, those all-new numbers have been factored, including the diversification, what we kept on talking even in the last call, then how we have diversified even from a geography perspective, which is -- no? So there are enough levers beyond that to keep on delivering the operating margin, which are in high teens.

Got it. Got it. And BYOB, I like that name. Can you help us understand what WNS' role will be? And will you help build those bots for your clients and they get to keep IP?

The objective is for us to build the bots and for us to own the IP and to be able to leverage and deploy it. But the reality is what we're seeing is that because a lot of the things that our clients need from a technology and automation perspective are very specific to their individual processes or their specific industry that the generic capabilities that are out there from third-party product providers do not meet those needs. So what we're trying to do is solve some of those problems, leveraging our own technology building bots that help them address their specific needs. But then leveraging that knowledge and understanding to help other clients with technology as well. So the goal of building our own bots, if you will, is not to give away that IP.

Our next question comes from Dave Koning from Baird.

My question, I guess, first of all, just on the U.K, revenue was down sequentially by something like 5% constant currency. I think that's fully explained by Aviva was down a touch, but I think it's more Q1 had that nonrecurring revenue that was mostly in the U.K. Is that the right way to think about it? And then I guess the second part of it is, is there anything else going on in the U.K., Brexit related or anything causing any volatility there?

No, nothing operational at all. It's exactly what you said. We've got a couple of onetime items in the U.K. in terms of higher revenues last year -- last quarter and then little bit of a roll-off this quarter in terms of our largest customer. So nothing unusual whatsoever. On a year-over-year basis, the U.K. is up 5% and year-to-date, the U.K. is up 5%. So nothing to see.

And let me just add that some of the new deals that are in the pipeline, the large ones are actually coming from the U.K. So really, we're not seeing impact of Brexit.

Yes. Okay. That's great. And then just one thing on acquisitions. I think you started the year $65 million, $70 million or so was the expectation. And it seems like it's pro rata kind of hitting that each quarter now. Is it fair to think of that in that $17 million or something like that ballpark each quarter? Or is there seasonality to those business?

No real seasonality to the businesses that we acquired. Just a little bit of lumpiness to the Value Edge, but again being the smallest acquisition that we did in terms of $5 million of annualized revenue, nothing that really kind of affects the quarter-over-quarter movement.

Our next question comes from Vincent Colicchio from Barrington Research.

Yes, just could you characterize pricing in the quarter that's really all I have. My others were answered.

Yes, overall, Vince, pricing remains relatively stable. No changes in the terms of client behavior. Obviously, the productivity improvements continue to be something that customers demand on a year-over-year basis as part of the contract, but in terms of kind of where we start the relationship and what unit pricing looks like, no changes to report.

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.