WNS (Holdings) Ltd (WNS) 2019 Q1 法說會逐字稿

Good morning, and welcome to the WNS Holdings Fiscal 2019 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' Corporate Senior Vice President of Finance and Head of Investor Relations. David?

Thank you, and welcome to our fiscal 2019 first quarter earnings call. With me today on the call, I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our COO, Ron Gillette. A press release detailing our financial results was issued earlier today. This release is also available on the investor relations section of our website at www.wns.com. Today's remarks will focus on the results for the fiscal first quarter ended June 30, 2018.

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 GAAP -- 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 impairment. 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' CEO, Keshav Murugesh. Keshav?

Thank you, David, and good morning, everyone. Fiscal first quarter financial results were once again solid. Net revenue came in at $196 million, representing a year-over-year increase of 12% on a reported basis and over 10% constant currency. All of this quarter's revenue growth was organic, as our acquisitions have now anniversaried. In the first quarter, WNS added 6 new clients, expanded 16 existing relationships and renewed 20 contracts. Operating margins and profitability were healthy in what is typically a seasonally soft quarter. And we continued to deploy our capital in a balanced, disciplined fashion. Sanjay will discuss the details of our Q1 financial performance in his prepared remarks.

This morning, I would like to spend a few minutes reviewing WNS' progress in leveraging technology and automation, including robotic process automation and intelligent automation, in our solutions. Across the company, we continue to see steady growth in the deployment of technology-enabled solutions and platforms into our existing customer base. While most of this effort has been centered around high-volume, low-complexity functions, clients are increasingly asking us to leverage automation in higher-value, industry-specific processes which were previously managed in house. As a result, technology is proving to be a catalyst for our existing clients to expand their business relationships, creating incremental revenue opportunities for WNS. In addition, we are also seeing accelerated interest in upfront transformation leveraging digital solutions in our sales pipeline and new client relationships. In fact, the large insurance client win which we discussed last quarter has followed this path. WNS is addressing our technology requirements with a combination of third-party capabilities and proprietary WNS-developed solutions.

Automation partners include companies such as Blue Prism, WorkFusion, Automation Anywhere, UiPath, Microsoft and Amazon cloud services. We are also working with a host of emerging companies such as Alice AI and AlgonoX, who are focused on cognitive and AI-based solutions. Our package-agnostic approach to technology ensures our clients get the ideal solution for their specific requirements. In addition, under our TRAC umbrella, WNS continues to incubate, create and deploy unique proprietary solutions designed to address specific vertical and horizontal process requirements. These solutions are unique to WNS and combine our deep domain expertise and 20-plus years of process experience with state-of-the-art technologies, including RPA, natural language processing, cognitive computing, machine learning and artificial intelligence.

As a result of our efforts to date, WNS has deployed RPA and intelligent automation in 10 of our top 25 accounts. And we currently have another 5 clients in pilot stages. Our progress in automation has not gone unnoticed, and just a few weeks ago, NelsonHall validated our market positioning by rating WNS as a leader in their 2018 vendor evaluation for business process transformation through RPA and AI. WNS was named a leader in the overall category; as well as in the Insurance, Healthcare, Travel, transportation, Logistics and energy, utilities verticals. We were also rated a top 3 provider in terms of capability to meet future client requirements; and cited for our unique differentiation in combining domain centricity, deep process expertise and development of industrialized RPA and AI assets.

One significant byproduct of increased technology usage is the need to gradually transition the skill set mix of our global employee base. As automation replaces certain labor-based tasks, the need for higher-level, specialized resources in BPM will only accelerate. WNS has been proactively addressing this trend for the past few years by evolving the way we attract, retain and retrain our employees. In its second year, WNS' joint MBA in business analytics with NIIT University has now instructed over 100 students, helping to create our next wave of data scientists, big data analysts, data modelers and domain-based analytics experts. We have plans to scale this program in the coming years and look forward to sharing these details with you. Our domain universities which provide WNS employees with industry-specific training designed to increase domain specialization are up and running in 7 different verticals. The program currently has over 250 unique training modules across the company. And to date, almost half of our eligible global workforce has received certification in one or more areas. In addition to these programs, WNS recently rolled out a new initiative designed specifically to address the industry shift towards technology. This program, called WNS Education, is a learning academy that provides our employees the opportunity to receive formal digital and business process management certifications. The WNS Education curriculum, developed in conjunction with MindMap Consulting as our partner, is geared towards creating a digital-ready workforce capable of operating at the intersection of technology, domain and process. This program with several modules specifically geared towards nontechnical backgrounds will enable our employees to adapt their skill sets to the changing BPM landscape and stay relevant in the marketplace. In addition, we have also rolled out internal HR programs designed to develop leadership skills, [aspire]; foster workplace diversity, project Centurion; leverage and empower our young workforce, what we call our millennial council; and manage the entire hire-to-retire talent management process with a state-of-the-art performance engagement platform which we call TalentTurf. In fact, WNS' human resource management capability has now been globally recognized by organizations such as AEON, Businessworld, Golden Peacock and the society for human resources management.

As a result of our unique HR approach, today WNS has better brand awareness in key geographies, increasing our access to talent, improved employee satisfaction and career opportunities, reduced attrition levels and a global workforce ready to meet the evolving digital operations and domain requirements of our clients.

In summary. The company remains well positioned to outperform in the evolving and growing BPM industry. We believe that WNS delivers a truly differentiated combination of domain expertise, advanced analytics, process excellence, technology-enabled capabilities and client centricity. This approach has helped us add new transformational clients, expand existing relationships and drive premium industry growth. That being said, we cannot rest on our successes. The industry is rapidly changing, driven by disruption in our clients' business models and technological advances. We must continue to strategically invest for the future and focus on the execution in order to create long-term value for our clients, employees and shareholders.

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 $196 million, up 11.8% from $175.3 million posted in the same quarter of last year and up 10.3% on a constant currency basis. By vertical, revenue growth was broad based, with the Shipping and Logistics, Insurance, auto claims, Consulting and Professional Services and Healthcare verticals each growing more than 10% 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 decreased by 1.1% on a reported basis but increased 0.6% on a constant currency basis. Quarter-over-quarter revenue improvement was driven by both new client ramps and scope expansion with existing clients. These benefits were more than offset by the impact of contractual client productivity commitments; and currency movements, net of hedging.

In fiscal quarter 1, WNS recorded approximately $2 million of short-term revenue, which is not expected to continue in quarter 2. This amount is down from $5 million we reported last quarter.

Adjusted operating margin in quarter 1 was 18.8% and compared to 17.1% reported in the same quarter of fiscal 2018 and 20.4% last quarter. On a year-over-year basis, adjusted operating margin increased as a result of improved productivity; operating leverage on higher volumes; and currency benefits, net of hedging. These benefits more than offset the impact of our annual wage increases and lower seat utilization. Sequentially, adjusted operating margins decreased as a result of annual wage increases and advanced hiring and infrastructure build-out for project ramps. These headwinds more than offset favorable currency movements, net of hedging. As we have discussed in the past, on a quarter-to-quarter basis there will be trade-offs between seat utilization and productivity metrics.

The company's net other income expense was $2.5 million in the first quarter, up from $1.7 million reported in quarter 1 of fiscal 2018 and up from $2.5 million last quarter. Year-over-year favorability was a result of increased interest income driven by higher cash balances and low interest expense resulting from scheduled debt payments. WNS' effective tax rate for quarter 1 came in at 21.5%, down from 25.7% last year and down from 23% last quarter. In the first quarter, we received a tax benefit of $0.9 million resulting from a onetime tax reversal. Our changes in the quarterly tax rate are primarily due to mix of profits between geographies. On a going-forward basis, we expect WNS' effective corporate tax rate to be approximately 25%.

The company's adjusted net income for quarter 1 was $30.9 million compared with $23.6 million in the same quarter of fiscal 2018 and $33 million last quarter.

Adjusted diluted earnings were $0.59 per share in quarter 1 versus $0.45 in the first quarter of last year and $0.63 last quarter.

As of June 30, 2018, WNS' balances in cash and investments totaled $193.3 million, and the company had $89.2 million of debt. The company generated $14.7 million of cash from operating activities this quarter and free cash flow of $5.4 million after accounting for $9.2 million in capital expenditures. During the quarter, WNS repurchased 450,300 shares of stock at an average price of $51.82, impacting quarter 1 cash by $23 million. DSO in the first quarter came in at 31 days, as compared to 30 days last year and 30 days last quarter.

With respect to our other key operating metrics, total headcount at the end of the quarter was 38,227. The sequential increase is a result of advanced hiring for committed project ramps in quarter 2 and quarter 3. Our attrition rate in the first quarter was 31%, as compared to 32% reported in quarter 1 of last year and 31% in the previous quarter. Global billed seat capacity at the end of the first quarter increased to 31,794, and average billed seat utilization remains steady at 1.20. The additional infrastructure added this quarter was also in support of the upcoming committed project ramps.

In our press release issued earlier today, WNS provided updated guidance for fiscal 2019. Based on the company's current visibility levels, we expect net revenue to be in the range of $777 million to $821 million, representing year-over-year revenue growth of 5% to 11%. Revenue guidance assumes an average British pound-to-U. S. dollar exchange rate of $1.32 for the remainder of fiscal 2019. Excluding exchange rate impacts, revenue guidance represents constant currency growth of 7% to 13%, all of which is organic. 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 $118 million to $128 million based on a INR 68.5 to U.S. dollar exchange rate for the remainder of fiscal 2019. This implies adjusted EPS of $2.23 to $2.42, assuming a diluted share count of approximately 52.8 million shares. With respect to capital expenditures, WNS currently expects our requirements for fiscal 2019 to be approximately $32 million.

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

(Operator Instructions) Our first question comes from the line of Maggie Nolan with William Blair.

I wanted to talk about the headcount additions. You said you added significant headcount in anticipation of future work. Can you give us a sense of the mix of what type of employees you added? So how many were sales? Were there specific skill sets you were targeting? Any details on that would be great.

We've added employees across a wide range of services. Our sales organization was already at full strength, so this was all focused on client service to match our growing demand and the new clients that we signed. You may have heard in the prepared remarks that we added some infrastructure to expand for this, and so these were going hand in glove.

And if you look geographically at where the additions were this quarter, what you'll see is that where we've been adding the bulk is both India and the Philippines. So for the immediate requirements that we have for some of these larger transformational deals, this provides us with the right mix of skill sets and having the people in training to be ready for these projects as they kind of come online here over the next 2 to 3 quarters.

And then how has your traction been with the clients that are new to outsourcing? Are you seeing a lot of clients of late that are considering using WNS or BPO partners for the first time?

Yes, let me take that. As I mentioned in my prepared remarks, we actually see the demand for our services continue to be very strong. So we're seeing a lot of client visits. We're seeing a lot of interaction with prospects. We're seeing a lot of travel up and down between the client geographies as well as all our delivery centers. And it means that business process and just delivering outstanding certainty to clients is now an accepted model. So at this point in time, I must say that our sales pipeline looks extremely strong. And this is combined -- this is a combination of existing clients as well as a number of new clients. The majority of some of the discussions that we are having in terms of complexity of deals is far different -- or far higher than what we have seen in the past; as well as the potential for us to convert these into several multimillion-dollar, multiyear deals is very high. So very positive in terms of the demand trends.

Our next question comes from Bryan Bergin with Cowen.

I wanted to dig in on the margin optimization levers during the quarter. Can you provide some more color on the drivers across productivity, currency and other factors there? And then does the growing component of tech-led delivery and the automation change your fiscal '19 or your medium-term view on operating margin?

Sure, let me take a crack at that. And then Sanjay and Keshav can add some color as well. Obviously we were pleased with what happened in the first quarter relative to margin probably a little bit above where we would have anticipated them coming in. A healthy amount of that had to do with currency. So you look at what drove it. Obviously we talked a little bit about productivity, about currency, but we think, as you kind of look forward, this does set us up to be favorable for the full year slightly to where we were before. Obviously we've got to go ahead and digest some of these issues, but the reality is we did come a little bit ahead of where we wanted to be in Q1 in terms of margins. And yes, I think you see that in terms of what we've rolled through to the full year.

Okay. And then on large deals, can you comment on the ramp-up of the two you noted last quarter; and then just the pipeline, any potential new ones near the cusp?

I can start with that. And I think both Keshav and Ron can add some color on that, but when you look at the revenues this quarter, we did have a small impact to revenue from the new large insurance client. And we continued to see a very healthy ramp from the new Travel and -- Shipping and Logistics clients. So when you look at the metrics that we provided and look at the growth in the relative verticals, you will see both of those show up. I think we're happy with how these relationships are progressing, but I think both Keshav and Ron can add some color here.

Yes. So I will just say that we are delighted with the progress that we are making. And obviously there are various milestones that we have to hit along the journey, and we're really happy to say that we are making good progress on both the deals in terms of some of those milestones. So while there has been acceleration in one deal based on the fact that it is still ramping, the other one is stabilizing in terms of its first milestone. And then it will again continue its ramp, but having said that, I must say that what is really pleasing is the fact that all these really are the first phases of growth with some of these large clients. And therefore, potential for multiyear growth across these areas as well as completely new areas as the market changes and as the client looks at us as really leading the charge for their growth is very, very positive from our perspective. So very happy to see how the team has delivered on the promise.

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

Keshav, appreciate all the details around the RPA impact, but is there a way to maybe size the revenue that could be potentially at risk for WNS from the RPA trend? And also, on the flip side, if you can maybe provide some metrics maybe that helps us quantify what the opportunity is in terms of expansion of clients' interest in higher-value services from this automation trend.

Right. So Mayank, that's an excellent question, but I think at this point in time and at least for the foreseeable future, the kind of disruption that is being seen, first and foremost, in the clients' own business models; and the kind of competition that they're seeing with completely new kind of players getting into the mix, whether they're the digital attackers, whether they're start-ups coming from a completely new location or from a player coming from a -- traditionally a completely different vertical but that has now started going into a new vertical, is where all the attention of the clients and the action really is. From our perspective, I think what we are seeing is clients wanting to make sure that, rather than they spending time on some of these things that we spoke about, they're actually aligning with a strong business partner who, first and foremost, has superior domain specialism; who understands their business, understands the pain they are going through, more importantly understands potentially the business opportunity that exists in their side of the business as disruption faces them. And at the back end is investing in each of these areas. So for us, as we look at it, what we are looking at doing really is and our experience has been that, as we introduce more and more of some of these tools and technologies, all that we are doing at this point in time, again for quite a while -- because really this is going to unfold over the next few years. It's not going to happen in short order, if you ask me. What we are doing is really pushing very traditional, basic processes that can be automated into that area; and moving people into that next level of maturity and work, if you ask me. And along with this, what we are also seeing and saying is the market is expanding for our services. So the reality is, while we may cannibalize a little bit of our existing business, it's an investment we are making in a business that is expanding and fueling new growth opportunities for us which is truly global in nature.

And I think, just to add a little bit to that, Mayank, we're obviously comfortable and have been operating in a situation where our clients expect us to deliver year-over-year productivity. RPA and artificial intelligence and other tools and platforms are a means of delivering it. So this is really nothing new. The one thing I do think it's doing, though, is it's really opening a lot of clients' eyes to just how complex it is to adjust skill sets and change how you manage business to account for how technology gets deployed. And what's happening is they're seeing this, and as a result, they're realizing that probably they don't want to be deploying this technology themselves. And what they're doing is they're looking to us and looking to their partners to try and use this to move into new areas. So I do think the whole shift that we've seen in terms of technology has had a minimal impact on the cannibalization of our -- to our business but has been a huge benefit in terms of opening clients' eyes to the difficulty in actually deploying some of these tools and some of these platforms. And as result, they're looking to partners like us to help them do that.

That's very helpful color. A quick follow-up: In terms of the clients mix, the 6 clients that you added, how many of those will you consider strategic? And then also, if I missed this, I apologize. What is the mix of the clients that you added by vertical?

Yes, we did not provide the mix of the clients that we added. We typically don't, but I think, if you look at where the new clients came from this quarter, they came across at least 3 different geographies. They came in the Travel vertical. They came in the Consulting and Professional Services vertical, and I believe they also came in the Insurance vertical this quarter. In terms of strategic clients added this quarter, I think, of the 6, I would consider at this point in time 1 to be a strategic client.

Our next question comes from Ashwin Shirvaikar with Citi.

I wanted to just ask about the impact of FX. Obviously on revenues it's clear. You said it, but can you clarify? Can you sort of walk through the impact on the rest of the P&L? And does Brexit uncertainty come up in your client discussions a little more now given all of the headlines that are coming back? Or are clients basically decided on their approach regardless of what specific policy fix might happen?

I guess let me -- before we answer the question, Ashwin, just to give a little bit of clarification: When you kind of talk about the currency impacts, are you talking about the quarter or the year? And are you talking about -- relative to what reference point. So we're happy to kind of help you understand that, but we need to know what part you're looking at.

No, I was looking at basically the quarter.

Okay. So obviously from a top line perspective in the quarter, we've got -- and again, you're going to get very different answers whether you're talking about quarter-over-quarter or year-over-year. So obviously we've got the pound that's in a very, very different place than where it was a quarter ago. It's also in a very different place from where it was a year ago. So year-over-year the pound is favorable. You look quarter-over-quarter. The pound is unfavorable. So I think the one thing that we can certainly state is that, when the dust settles, our hedging programs are working. The reality is that we've been able to mitigate from a bottom line perspective both within the quarter and for the full year the negative impact to earnings. Obviously there's not a lot that we can do about the [off-ticks] given the fact that IFRS 9 requires us to report our cash flow hedges on the top line, so essentially what we used to see, by and large, sitting on the FX line of our P&L now sits, for the most part, embedded in the revenue line, which makes it a little bit difficult. Obviously we can pull that apart, but you've got multiple moving pieces within the hedging gain and loss position now. But I think the one thing both analysts and investors should take comfort in is that we are getting adequate protection with our hedging programs and not only protection but protection where we've significantly mitigated risk to the downside. And we've managed to make sure that we're able to capture a little bit of upside when things go the right away, yes.

And maybe, Ashwin, to just add, as Dave also earlier mentioned, that if you see from a quarter 1 perspective, margin was a little higher than usual. And some of the stuff was driven by the favorability from a currency perspective.

Okay. And the Brexit part of the question...

Yes. So from a Brexit point of view, the reality is we are seeing no let-up in terms of clients taking decisions, being strategic in their approach. In the media we've been reading about many companies wanting to [work] with their feet, but very frankly, if you look at it from our perspective as a truly global company that understands business domains, that is present all over and that can add tremendous value to these clients, irrespective of how some of these companies finally behave, they are all business opportunities for us. With our existing client base, there is no let-up, no change in terms of thinking or strategy. All of this is now a way of life across the globe.

Got it. And then you said, I think, Keshav, in your prepared remarks 10 of the top 25 clients using RPA. Is that a penetration metric you can share? So are these clients sort of 5% penetrated, 10%? Is it even possible to provide, I think, a penetration metric? And to what extent are these external software, like Blue Prism, versus your own technology that you're putting in?

I think, even before Dave attempts to give some color on that aspect, I can only say as the person in charge of this company that every one of these clients has huge potential for growth for WNS, right? And it is not just for us. I think this is the third wave of the evolution of the BPM industry. We started with cost arbitrage. We went to value beyond cost. Now we are actually transforming these clients with the help of, like I said, domain, process, people, technology, things like that. And I think there is a buzz and an excitement in the minds of the client that a company like WNS who understands business domains so well and has invested in the back end in all these models can not only help them in terms of their existing processes but can actually get up to completely new processes. For me, therefore, there is huge opportunity. And the canvas is really unpainted in terms of getting after completely new processes that traditionally the industry as well as the company did not see before. So to try and track how much of this is going to be consumed by a specific technology, I will say, is beyond me at this point in time. But Dave is a smart guy. He'd probably know a little more actually.

No. Actually Keshav made it easy on me because the reality is we don't have specific targets. We don't have specific numbers. Obviously we have productivity commitments that we've committed to clients. And we're certainly working against those, but the reality is the technologies are changing rapidly, which changes what can be automated, what can be outsourced. The overall addressable market, as Keshav said in the -- in his prepared remarks as well as the number of services that we manage for our clients, is expanding, which means while individual processes may be getting more and more automated, the overall addressable market is expanding, making that percentage of penetration increasingly difficult. We've got 3 or 4 moving variables is the reality, and it's going to be extremely difficult to track penetration. I think the reality is, as Keshav mentioned, when you look at what's going to happen, you're going to see a slow, steady, consistent deployment of technology across our client base, across the services we provide. And it's going to be something that we are actively working towards over the next 2, 3, 4, 5 years.

Our next question comes from Joseph Foresi with Cantor Fitzgerald.

I wanted to stick with the RPA topic, if I could. You talked about some cannibalization of revenues. Is there a way to quantify the cannibalization? Or can you give us an example of how you're implementing the RPA within your top 10 clients so we can get an understanding of what the impact is?

So this is Ron. So we bring RPA and other automations to all of our clients. In our top clients many of the large clients have an active program where they're looking to deploy RPA suites enterprise wide, so sometimes within the services we're providing and also outside of those services. So we align with our clients around that. The -- and so that's why you heard in the opening remarks that we use a wide range of products, some we bring to clients and introduce because we see the fit, others the clients have done a study and already made a choice. We align with them and carry the project forward with them and for them. As far as the impact, though, it's difficult to measure. Most RPA tends to be very small spot implementations. It does add up. So we see overall our revenue just from clients doing automation changes in their environment and processes having a cannibalization effect of -- on it, and it's difficult to quantify. So I will just say that it's something that we see and have seen for years and we'll continue to see. It's a natural evolution of a client environment as they improve their processes, improve their systems.

And the reality is in most cases, Joe, what we're doing is we're deploying technology and automation into environments where we've committed to productivity improvements for the clients. So when you look at cannibalization, there's 2 ways to look at it. One is what does it do in terms of the amount of effort required. The second is what does it do in terms of the amount of revenue. So we may go ahead and deploy technology that as a result cannibalizes revenue 5%, but it may reduce our costs by 10% or 15%. So the reality is, when we look at these tools, we're doing that in terms of what delivers the best possible outcomes for our client. We're doing it in terms of making sure that we're driving the right types of solutions for our customers. And what we're seeing is that not only has it allowed us to deliver higher margins in transaction- and outcome-based models, especially transaction- and outcome-based models where we deploy technology, but it's also, as Keshav mentioned, allowing us to expand our relationship into new areas.

Got it. And just to build on that, I mean, it sounds a little bit like systems integrations, so I just wanted to be clear about how this is going about or how you're going about this. So who owns the actual RPA technology? How are the productivity gains distributed? Is it separately priced? And why would you use WNS versus a standard system integrator or a direct buy from vendor?

So to answer your question. It's all of the above. So the arrangements vary from client to client. In many cases, as we alluded to, with new clients where we've committed productivity it's just a means to the end and we'll be bringing the technology. I would differentiate it from systems integration in that the domain expertise is very important to make the right fit in places where the outcomes can be optimized. So our domain expertise is one of the things that's attractive to the clients. And also, now our broad base of experience across clients within the industry and cross-industry has made us a preferred provider to the clients to work with them on these projects and in many cases lead these projects for the client from the design phase forward.

Yes, but I think it is safe to say, Joe, that where we are responsible for delivering productivity, in those situations, the solutions that we deploy for clients tend to be ones where we combine not only WNS technology, third-party technology, our skill sets, our expertise, but we do that in such a way that the client really doesn't have specific input into that. So the reality is in those situations we are the ones responsible for managing the technology, and the client is holding us accountable to productivity and service level.

Our next question comes from Joseph Vafi with Loop Capital.

If maybe we could just focus a little bit on the productivity sharing with clients this quarter. It sounds like that headwind was a little bit less than normal. Was there anything specific going on there, maybe perhaps higher volumes or other factors that mitigated that headwind a little bit this quarter?

You're talking about the headwind, Joe, from the short-term revenues.

Just from this quarter being a little bit seasonally light with maybe some -- as you renew contracts and the like with clients.

Okay, so you're talking about committed productivity improvements from a revenue...

Yes, yes.

Yes. No, I think they were similar to what we expected. I think, when you look at why we had a stronger quarter than maybe some people had felt, obviously we believe that we had an extra $2 million of the short-term revenues that wouldn't have been baked into our guidance or into our forecast. That's down from where it was a quarter ago, but again it is on a net basis $2 million higher than what we had expected. And from a -- just a growth and an acceleration standpoint, we did have a nice, healthy quarter again. As we mentioned, our large transformational Insurance client began to throw revenue. Our large Shipping and Logistics client continued to expand services with us. So we did have a nice, healthy quarter obviously offset by what I would say were normal productivity improvements and a little bit of currency.

Okay, great. And then just obviously on the RPA side of things, do you expect to see higher R&D costs or even capitalized software as you kind of continue to go down this path? Or are you going to rely mostly on the vendors for the technology?

So from an [R&D] capitalization or the software capitalization perspective, it's going to be stable, as we have seen earlier years, because we have been continuously investing in those programs, as we did. And also, a lot of partnership, what we do with the third-party partners and the providers over there, that continues to remain as and when we see new disruptors or the technology come into the space.

Our next question comes from Edward Caso with Wells Fargo.

It's Rick Eskelsen on for Ed. Keshav, I wanted to go back to your initial comments, your prepared remarks where you talked about sort of the changing hiring and labor model that you're looking for. Just wondering if you could talk a little bit more about that and in particular how it could be changing maybe at this point below the cover some of the employee metrics. And what are the employee metrics and the changes that you guys are monitoring as the talent model shifts?

Sure. So as I mentioned earlier, I think there is so much of excitement in terms of opportunities now being created by disruption being seen on the client's end that all of them are now clamoring for strategic partners like WNS to really help them in their journeys around many things. So it's no more just a discussion around domain alone. Because domain specialism is really what gets us in the door. And it is still our most unique differentiator, but along with that now comes the opportunity around technology, around better process, around better risk modeling, around better governance standards and delivering a true global BPM model that is delivered end to end, wing to wing across a global kind of footprint that WNS has. And for all of this to happen, I think the kind of people that need to also be involved with the clients are changing. Now within WNS we have created a model, and we have actually identified what is that DNA of the perfect WNS employee of the future. And we are running programs around all of it. At the same time, we realize that, as we bring new talent into the company, we need to be bringing industry-ready talent. And therefore, on the front end we are doing a number of things with universities that I spoke about that will help us around the higher-level areas, particularly on the analytics side, the data side and potentially the finance and accounting side as well. But at the same time, we are also participating in a large scale in industry kind of [rescaling] efforts in order to make sure that the bulk of our force also can access some of those modules at a lower cost because it has now become an industry platform. So there's a number of things that are happening. And what is unique to WNS is, as we go down this path, our focus around bringing in talent from outside that is industry ready and at the same time not ignoring but investing in the existing talent within the company through WNS Education is where our energy is. All of this really is going to result in much better impact for our clients, in our view. The second thing is far better strategic conversations. Third, it will result in more penetration and radiation inside each of our clients because not many companies are actually doing this at the front end. And finally, it will also be -- it augurs very well for us in a market that is expanding for our services.

Yes. And I think, just to add to that a little bit, Rick. When you look at how it's changing and the types of skills as we move up the value chain, as we automate lower-level repetitive tasks -- Keshav said we've obviously got some things that we're trying to do to make our talent pool ready for that. The flip side to that is we certainly realize as well that certain skill sets need to be hired externally. I mean we need doctors and nurses for what HealthHelp does. We need actuaries for our Insurance business. These are not skill sets that we're going to create through a training program in a year or 2. So the reality is, as our business becomes deeper and deeper and more aligned with our clients, the degree of specialized knowledge is only going to go up. And whether that's vertical specific, like what I just mentioned; or horizontal specific for things like analytics where we need to find data scientists, these are not things that can be created in a year or 2. So yes, there certainly is the focus within the company on finding that type of skill set, that type of resource to continue to drive the business forward. In terms of the metrics, what that means for us is that everything we're doing -- and you've seen it in our metrics the last 2 or 3 years. Everything we're doing should be pointing towards higher revenue per employee and, hopefully, higher profitability per employee. So kind of where you watch the rubber hit the road is with those metrics.

Great. Then just my follow-up: Now that you're a year past the acquisitions that you did, I'm wondering if you could comment at all on your sort of your ability to get into their clients and do some cross-selling of the WNS services as well as bring those acquired skills to some of your existing client base.

Yes. So good question. That has actually worked out well for us across the breadth of all of our clients we've had or all those acquisitions we've had, cross-selling into their client base and been able to use these acquisitions to cross-sell into our existing client base for some of those skills and capabilities. So it's I would say it's worked out well. And we're going to continue to actively work those programs and look for that to continue to be a success for us.

I think it's safe to say that we still view all 3 of those acquisitions as having sizable opportunity for cross-sell going forward. Although, when you look at the growth and the health of these acquisitions over the last year, I think we're very, very pleased with the contribution that all 3 of these had made from both a revenue and a margin perspective.

Yes. And maybe just to add. Given the cross-sell opportunities, we are very pleased to see cross-selling even in those acquired entities' client all the WNS services. And that has really resulted in a better result for [both] measure.

Our next question comes from Frank Atkins with SunTrust.

First one, I wanted to ask. I guess we saw a bit of a tick-up in industry-specific work as well as research and analytics. How sustainable is that trend? And what are you seeing in the pipeline around those industry-specific and analytical work?

Yes. I think, as Keshav mentioned, clearly industry specific is something that we see a very, very bright future for. Domain expertise is increasingly important. Clients are going to want solutions to industry problems, not horizontal skill sets, horizontal capabilities. So we do see a long-term runway for industry-specific BPM. With respect to the first part of your question about the tick-up this quarter, I don't think we ever give too much concern to a specific vertical or a specific service offering within a quarter. More impactful, I would say, is probably year-over-year than quarter-over-quarter, but the reality is we've been pretty well broad based in terms of that. Part of what we're trying to do here, Frank, is -- over time, even where clients start with horizontal services and solutions, is to convert that relationship into an industry-specific solution where it combines domain, horizontal process capability, analytics, technology to deliver outcomes. And if we're able to move that relationship that way, it's going to show up as industry specific because the reality is the charging mechanism is independent of traditional horizontals. And honestly, that's where we see the industry going. Clients are going to want to pay by transaction. They're going to want to pay per outcomes, not input. And if they're doing that, the -- truly the only way to do that is going to be an industry-specific model.

Okay, great. And then the second question is on margins, some strong margins in the quarter. We talked about some of those factors, but as you look out the remainder of the year, could you maybe touch on the seasonality of margins as you see them shaping up?

Yes. So you are right. From a quarter 1 perspective, it was a better margin than usually what we expect in quarter 1, but for the full year, as we were talking about some of the transformational deal that is going to be ramping up in the next few quarters, there's going to be some upfront costs for that. And that has tapered down some of the margin for the full year, but having said that, still the earnings are [bumped up] with the -- yes, with the [fount of] visibility, what we have.

Yes. I mean I think what you're looking at, Frank, is that the margins in the first couple of quarters are going to be very similar, flattish. I mean essentially the only difference to our full year margin expectations is really that just Q1 was a little bit better than we expected. So the reality is I don't know that we're necessarily going to see margins accelerate in Q2 versus where they were in Q1. I will just say margins are more likely to normalize in Q2.

Our next question comes from Dave Koning with Baird.

Just looking through some of the metric files that you provide, one thing I noticed, the U.K. has been a pretty good growth driver for the last several quarters, usually mid-single or high single or low double-digit growth. This quarter, it was down 4% year-over-year on a constant currency basis. I know a little of that was Aviva, but it just seemed a little lighter than usual. Maybe you can just walk through that.

Well, on a constant currency basis our revenues should be fairly similar on a year-over-year basis. So yes, we have a little bit of a headwind. And obviously our Aviva business does take a hit in the first quarter of every year. It is one of the larger accounts that does have productivity improvement, but the Insurance business overall should be fairly healthy. Now we do have a Q4-to-Q1 seasonality with one client, but overall the Q1 performance in the U.K. should be consistent with where we've been in the past.

Yes. So on a constant currency basis, as Dave mentioned, it's pretty much stable. I think it's -- because of the headwind productivity commitments as well as the currency, those maybe from a reported number perspective right now may be looking towards a little lower [on this item], yes.

Okay. No, that's I -- just looked at -- just the numbers just look a little lighter, but that's fine. I guess, the second thing, the Healthcare vertical, this is the first quarter that we have a nice, clean, easy-to-see growth. And it was really good. It's 11% year-over-year. Is that -- so since it is the first quarter, we can't really see a great trend line over time, but is that kind of what you're expecting out of that vertical kind of with these acquisitions going forward?

Well, I will say that Healthcare, the whole area of Healthcare, where we've been making all these investments, yes, we are bullish on. And we are actually seeing very solid impact coming from these acquisitions. First and foremost, I must say that we have digested. This company has created the right model to digest these acquisitions. I'm delighted to say that, 1 year, 1.5 years after doing these acquisitions, they have integrated well. They're digested well. The teams are working extremely well together, and there is a solid kind of cross-fertilization of ideas that is taking place across the whole of WNS involving these acquisitions. At the same time, the reason we made these investments was because we saw potential for growth. So we're again saying that we are seeing really strong client kind of visits. We're seeing there's really good conversations taking place. And we are also seeing a number of clients actually convert and take decisions, and that's actually leading to that healthy growth. And again from our perspective, we would expect to see growth in that vertical continue for some time.

Yes. The short answer is yes, David. We should see the Healthcare post strong growth this year.

Okay, great. And just the last one: You moved on the balance sheet. You moved some cash into long-term investments. Should we expect -- was that move created to create a little better yield on some of those investments? Should we expect the interest income line to jump just a little bit over the rest of the year?

Yes, you're absolutely right. It's just from a better yield perspective because, as you know, also the cash are getting [logged] in a particular geography. So [how a better yield can be dealt] around that, so yes, we can expect a better interest income during this year itself. And that's, David, our guidance right now.

Our next question comes from Vincent Colicchio with Barrington Research.

I'm -- I've got a question on the contact center business. It was relatively weak year-over-year. Maybe if you could explain if there was anything going on there and sort of what the outlook is going forward.

Yes. I think part of what we've been trying to do, Vincent, and I kind of alluded to it earlier, is convert some of these stand-alone horizontal relationships into larger-scale industry-specific relationships. So one of the things we're going to be trying to do, and this would go for F&A and R&A as well, is to stop trying to sell on a stand-alone basis those services as we expand the relationship with a client and move towards transaction- and outcome-based models, moving them toward industry-specific. So I do think we do have good underlying growth in the contact center business, but we've also been converting some of those relationships into more end-to-end type of services and solutions where how we charge the client is independent of traditional horizontals.

I think that's an excellent question, and I think I'd just like to add a little more color here. I mean this actually is now defining how the business itself is transforming and changing. The reality is now -- as opposed to the old model where clients were just looking for a contact center solution from a vendor, that today they have the ability to work with companies like WNS to provide them a wing-to-wing, end-to-end kind of solution that incorporates customer interaction services, domain, technology; and deliver an -- a solution- and an outcome-[based] kind of a model. And I think that's where you were seeing the traditional kind of contact center business now getting merged into all of these things. The most exciting aspect of all of this is, as we embed this into CIS and other areas and we embed analytics and other advanced thinking behind it, the ability for us to also create more certainty for our clients and deliver better margins on a sustainable basis while delivering the productivity is also solid. And that's one of the reasons why WNS has consistently been delivering solid margins along with revenue growth.

Yes. I think what we -- the long and short of it, Vince, is that while customer interaction services or finance and accounting or analytics may be an entry point for a lot of clients or the first place we engage with them, the reality is that's not what we view as the end state of the relationship. And then if we're unsuccessful in getting that client into more impactful, middle-office operations types of work and selling those services and solutions end-to-end in transaction- and outcome-based models, I think we'll end up losing some of the stickiness to our business. So where those relationships really get cemented and where the real value is driven is when we can manage a process end-to-end, as opposed to managing a piece.

That clarity is very helpful. And then what needs to happen to reach the high end of your annual revenue guidance?

I think, certainly from one standpoint, we need to continue to generate the short-term revenues that are not included in our guidance. So last year, we did $19 million of short-term revenues that we didn't have visibility to. And again this is project work, volume spikes, gains share, outcome-based revenues. We did $2 million in the first quarter, so for us to get beyond the midpoint, towards the higher end, we need to have healthy short-term revenues again or just upside to where we are, but that would be one. The other is timing. How quickly do our existing clients and new clients sign contracts, add processes and move forward? And that's something that we typically don't have a lot of control over. So for us to get at/or above the high end of guidance, we need both of those things to happen. The good news is, if you look at where we are from a guidance and from a visibility standpoint, we're at the exact same place today that we were a year ago. So if you looked, last year, we were at 7% to 13% with -- constant currency, with 95% visibility, when we spoke to you in July. We're at the same place here today. And last year, we delivered 14% organic constant currency.

And I think I would just like to say here once again that we are really pleased with the kind of pipeline that we have both from a hunting and farming point of view: real solid, broad based across all verticals, all horizontals and all geographies. And therefore, from our perspective, I think the key really is in this era of complexity and disruption, with all these goodies staring clients in the face, how quickly they will vote with actually signing on is actually going to be the key determinator of how revenue will ramp.

Our next question comes from Puneet Jain with JPMorgan.

Can you share qualitative thoughts on second quarter revenue? How should we think about FX impact on revenue? And you'll also have a large deal that you expect to ramp up, I believe, in 2Q.

So based on the current visibility, the quarter 2 right now looks to be a little bit flattish because there is going to be a currency impact. We spoke about a headwind of the 9% earlier. That's also going to continue from our second half -- yes, sorry, from the first half, which is quarter 2; and as well as a nonrecurring revenue, what we had in quarter 1. At this moment, we don't know whether it's going to be higher, lower; or whether it's going to be there. So based on that, right now quarter 2 looked to be more flattish from a revenue perspective.

And just to add a little further color. Sanjay is absolutely right. When you look at the movements in currency from our guidance to where we were from an actual perspective in the first quarter, obviously a pretty significant depreciation in the British pound. We're looking at sequentially about a $5 million currency headwind Q1 to Q2 right now. We've also got a $2 million falloff in revenue related to the nonrecurring short-term revenues that we saw in Q1. So for us to keep revenue flat in the second quarter, you're actually looking at about $7 million or 3.5% sequential growth, which is healthy, the upside obviously being if things move a little bit faster than we expected or we once again, get the short-term nonvisible revenue that's not included. So kind of combining what we've spoken about from the -- between your question and one of the previous questions, at this point in time we're looking at both revenue and margins being relatively flat Q1 to Q2.

Got it. Yes, that's what I thought too. And can you also comment on pricing environment? Is there a risk that any of your peers could use FX tailwinds or automation gains to lower their price and you might see lower industry-wide pricing over the near term?

I don't think so, Puneet. I think, from a technology and an automation perspective, we're all capable of delivering certain levels of automation. The reality is, if you're successfully executing, if you're delivering value and if you've moved into core mission-critical operation, clients don't want to move their work. And they're not going to move it for an additional 2% or 3%. So we certainly can have discussions and negotiations about productivity improvements and unit pricing with contract renewals and moving relationships forward, but the reality is this is a comfort and confidence business. And if you're exhibiting the right kind of behavior, if you're delivering domain knowledge and value to your customers, people aren't going to take work away from you on pricing.

Our next question comes from Korey Marcello with Deutsche Bank.

I guess, just to follow up a little bit on the FX again. Just for the full year given the IFRS 9 change, is there a way that you guys can help us parse out now what you're expecting, I guess, to show up in the revenue line from the hedging gains; and then maybe also the FX line, I guess, from the balance sheet revaluation?

Yes, I can take that. Right now for the full year in terms of the hedging gains and losses included in the top line from a revenue perspective, you're actually looking at very little. I mean less than $1 million of net hedging gain showing up on the revenue line. And the reason is because while we've got hedging gains coming from the British pound, because these are cash flow hedges, we've got losses coming from the depreciation in the rupee. So net-net, the hedging is relatively neutral to the top line. On the FX gain, loss line above the operating margin line in the P&L, we're probably looking at $2 million to $3 million of hedging gain which is really just balance sheet reval.

That's helpful. I guess most of my questions have been asked, but maybe I'll just touch on the auto claims business. You guys talked about 10% growth in the quarter. Is that mainly due to FX? And any kind of changes in that business? Just understanding it's small, of course, but anything to call out there?

Absolutely. No, the 10% growth from auto claim business is primarily driven by a large transformational Insurance deal, what we spoke about, that also had a component of auto claims in that. So it's around that. [All else is the approach is] opportunistic. And we believe that it's [going] pretty stable from that, but as and when we move on, opportunity keeps on coming, the expectation may be that the growth continues [all year].

Yes. We're excited to be able to leverage our auto claims capability that obviously it's been a challenge for us from a revenue perspective for the last few years. We've very excited that it was a key component of the large transformational Insurance win that we talked about. And that deal will cross multiple towers, auto claims being one of them.

Our next question comes from Moshe Katri with Wedbush Securities.

Just one question. Not too much talk about your M&A activity or M&A pipeline for this year. Obviously your 2 nearest peers have been very active here. What do you see there in terms of pipeline activity? And then are there specific verticals that we're kind of focusing on?

Let me start by once again stating that we are very happy with the way we have integrated the earlier M&A targets. I think we're all working extremely well together. There's huge potential for growth coming as a result of those acquisitions. So that's one. Having said that, with the kind of revenue momentum that we are seeing and we are likely to see as well as the interest in BPM services that we are seeing across a completely new range of prospects that are now interacting with us, obviously we will not have time to build out certain capabilities in certain areas which are more focused on creating new capabilities. And in order therefore to make sure that we are faster to market wherever we have gaps in capability areas, we are generating and dealing with a significant pipeline of opportunities on the M&A side. Having said that, as a company we are very, very clear that we will not do M&A just for the sake of doing it. We are very measured in how we do it. We have a solid pipeline. And as and when some of these interactions that we are having [fractify] into something that is of value to all our stakeholders, we will then execute. So quite pleased with the kind of activity that is taking place and the potential in that area as well. And frankly, from our perspective based on experience we have had of all of these new M&As that we did recently, even if something transformational came up, we will be opportunistic in looking at that as well.

I think the approach remains the same, Moshe. I think we're looking for assets that will plug holes in our capability, and then we'll do so with the right cultural fit as well as at the right price point. So we certainly want to continue to build out, round out our capability, but kind of given where we are especially in some of our stronger areas, whether that's horizontal strength in areas like analytics, whether that's vertical strengths in places like Travel and Insurance, we continue to look for assets to plug holes, but the reality is we want to make sure that we're taking a balanced, disciplined approach to M&A so that we don't have to come back to you guys in 6 months or a year and explain why a deal that we did that was supposed to be accretive wasn't or that a deal that we did that was supposed to generate growth didn't. So I think we want to continue to make sure that we're applying that right internal process and financial rigor to these deals.

Great. And just as a follow-up in the context of the discussion on margins that actually came in better than expected this quarter, any specific concerns about wage inflation specifically in some of the higher-growth areas in your business?

No. At a macro global level, absolutely not. Certainly we, I think, like everyone, would expect to see pressure for scarce skills. The more you want to hire high-value people, the more difficult and expensive it gets, but the flip side to that is that some of the wage pressure at the lower end of the delivery pyramid, where we have the majority of resource, is a little bit less. So I think all you're seeing is that the wage increases are kind of shifting across the talent pool more than anything else.

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