WNS (Holdings) Ltd (WNS) 2019 Q2 法說會逐字稿

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

Thank you, and welcome to our fiscal 2019 second 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 second quarter ended September 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 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. In the fiscal second quarter, WNS once again posted solid financial results across revenue growth, margins and profitability. Net revenue came in at $195.5 million, representing a year-over-year increase of 7% on a reported basis and 11%, organic constant currency.

In the second quarter, WNS added 7 new clients, expanded 13 existing relationships and renewed 12 contracts. Adjusted operating margin in Q2 expanded to 21% and adjusted EPS grew 23% versus the second quarter of last year. Sanjay will discuss the details of our second quarter financial performance in his prepared remarks.

Over the past several quarters, we have highlighted WNS' growing capabilities across domain expertise, process excellence, advanced analytics and technology and automation. Today, I would like to provide you with the recent example of how WNS has combined these critical components to help one of our clients solve unique business problems, improve competitive positioning and drive true business transformation. Our client is a global leader in the container shipping industry dealing with both industry-wide and company-specific issues. Some of their key challenges included the need to centralize and standardize systems and processes resulting from industry consolidation, streamline the order-to-cash cycle, improve the end customer experience and reduce cost. Based on WNS' deep experience in the container shipping space, the client selected us as their strategic partner to cocreate a target operating model for their business. The solution involved the creation of a shared services model leveraging multiple delivery locations, proprietary WNS frameworks and technology assets, third-party products and advanced analytics. Over the past year, we have made solid progress together along our joint transformation road map. Today, WNS delivers service for this client from 3 different countries in Asia supporting their operations, which are located in more than 50 countries throughout North America, Europe and Asia Pacific.

We currently manage over 30 processes and 60 subprocesses across their front, middle and back office. These include several mission-critical, complex and domain-centric processes such as bookings, export documentation, vessel scheduling, equipment control, rig agreements, service contracts and detention and demurrage.

We are also supporting the CFO's office with Finance & Accounting services, including accounts payable, accounts receivable, reconciliations, cash management and treasury. WNS has created a framework of KPIs and dashboards for the entire shared services organization and have implemented a Lean Six Sigma global quality support program. We've deployed technology and automation across processes, including WNS proprietary shipping platforms and robotic process automation tools. We are also leveraging our analytics capabilities, including dedicated data scientists and WNS developed advanced analytics tools, which have been customized for the container shipping business. As a result of these efforts, WNS has been able to create significant tangible business value for our client.

Through process redesign and transformation, global delivery, analytics and technology, we've been able to impact cost, quality and the customer experience by delivering the following outcomes: one, we have reduced the amount of time it takes to confirm bookings and allocate a shipping contract for in-scope transactions by up to 50%, helping create a competitive advantage; two, WNS has delivered a 30% improvement in turnaround time for translating shipping instructions into bills of lading leveraging advanced analytics and automation tools; three, we are currently delivering 99.7% accuracy in bookings and bills of lading processes and improvement from 97.7% at the time of transition; four, WNS has reduced average outstanding freight collections by 87%, improving working capital and reducing write-off risk; five, we have reduced the amount of manual efforts across the quality assurance function by 30%, while improving quality metrics; finally, WNS has generated an overall cost savings to the client in excess of 50% for processes outsourced.

The most exciting part of this relationship is that the journey is still in its early days. Today, WNS manages only 25% of the client's shared services work. We fully anticipate expanding both the scope and the scale of our relationship in the coming years as we move along the transition road map.

WNS' approach based on domain-less cocreation is clearly helping us demonstrate and deliver value, enabling us to expand existing relationships and add new strategic clients. In the second quarter alone, WNS added 7 new strategic logos across verticals and service offerings. These included an operations management win for a cruise line, an analytics win featuring our SocioSEER platform for a large retailer and order management win for our digital high-tech firm and the new logo for HealthHelp in the Healthcare specialty benefits management space.

In conclusion, we believe that WNS remains extremely well positioned in a healthy, growing BPM market. Our investments over the past several years have helped us deliver industry-leading financial performance, and we continue to build out our capabilities in areas such as technology, domain and analytics to ensure we are prepared for the future. Our goal of creating long-term sustainable business value for our clients, investors and employees remains unchanged.

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 second quarter financials, net revenue came in at $195.5 million, up 7.2% from $182.3 million posted in the same quarter of last year, and up 11% on a constant-currency basis. By vertical, revenue growth was broad-based with the Shipping and Logistics, auto claims, Consulting and Professional Services, Insurance 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 and technology services.

Sequentially, net revenue decreased by 0.3% on a reported basis but increased 3.4% on a constant-currency basis. Quarter-over-quarter, revenue improvement was driven by both new client ramps and expansion of existing relationships. These benefits were more than offset by the impact of currency movements and losses on hedging positions.

As you'll recall, our cash flow hedging gains and losses are now reported on the revenue line as a result of IFRS 9. The quarter 2 depreciation in the Indian rupee helped reduce our operating costs, but the offset hedging loss was reported on the revenue line. The net impact of this movement remains favorable for both margin and profits.

In the second quarter, WNS recorded approximately $2 million of short-term revenue, which is not expected to continue in quarter 3. This amount is the same as reported last quarter. Adjusted operating margin in quarter 2 was 21% as compared to 18.5% reported in the same quarter of fiscal 2018, and 18.8% 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 movements, net of hedging. These benefits more than offset the impact of our annual rate increases and lower seat utilization.

Sequentially, adjusted operating margins increased as a result of improved productivity, currency net of hedging and operating leverage on higher volumes. These benefits more than offset headwinds associated with our annual wage increases.

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 $2.2 million in the second quarter, up from $1.4 million reported in quarter 2 of fiscal 2018, and down from $2.5 million last quarter. Year-over-year, favorability was a result of increased interest income driven by better rates on our liquid mutual funds and lower interest expense, resulting from scheduled debt repayments. Sequentially, interest income was down based on lower cash balances resulting from share repurchases and debt repayments.

WNS' effective tax rate for quarter 2 came in at 21.8%, up from 21% last year and up from 21.5% last quarter. Quarter 2 of fiscal 2018 had $1.7 million of tax reversals and quarter 1 of fiscal 2019 had $0.9 million. While these favorable items were not present in fiscal quarter 2 of this year, we have been able to reduce our effective tax rate by delivering volume growth from new tax-exempt facilities in certain geographies.

Other changes in the quarterly tax rate are primarily due to the mix of profits between geographies. As a result of our efforts, on a going-forward basis, we now expect WNS' effective corporate tax rate to be approximately 23% instead of the 25% we discussed last quarter.

The company's existing net income for quarter 2 was $23.7 million compared with $27.7 million in the same quarter of fiscal 2018, and $30.9 million last quarter. Adjusted diluted earnings were $0.65 per share in quarter 2 versus $0.53 in the second quarter of last year and $0.59 last quarter. This represents growth in EPS of 23% year-over-year and 11% sequentially.

As of September 30, 2018, WNS' balances in cash and investments totaled $158.1 million, and the company had $75.3 million of debt. The company generated $30.6 million of cash from operating activities this quarter and free cash flow of $19.8 million after accounting for $10.7 million in capital expenditures.

During the quarter, company repurchased 649,700 shares of stock at an average price of $50.73. Share repurchases impacted quarter 2 cash by $33.3 million. The company also paid scheduled debt payment of $14.1 million. DSO in the second quarter came in at 35 days as compared to 30 days last year and 31 days last quarter.

With respect to other key operating metrics. Total headcount at the end of the quarter was 38,516. Our attrition rate in the second quarter was 32% as compared to 30% reported in quarter 2 of last year and 31% in the previous quarter. Global billed seat capacity at the end of the second quarter was 31,798 and average billed seat utilization was 1.21. In the second quarter, WNS was able to leverage the headcount and infrastructure that was added in quarter 1 to support committed project ramps.

In our press release issued earlier today, WNS provided updated guidance for fiscal 2019. Based on the company's current visibility level, we expect net revenue to be in the range of $775 million to $801 million, representing year-over-year revenue growth of 5% to 8%. Revenue guidance assumes an average British pound to U.S. dollar exchange rate of $1.31 for the remainder fiscal of 2019. Excluding exchange rate impacts, revenue guidance represents constant-currency growth of 8% to 12%, all of which is organic.

We currently have 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 $127 million to $135 million based on a INR 74 to U.S. dollar exchange rate for the remainder of fiscal 2019. This implies adjusted EPS of $2.42 to $2.58, assuming a diluted share count of approximately 52.4 million shares. With respect to capital expenditures, WNS currently expects our requirement for fiscal 2019 to be up to $35 million.

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

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

I'm wondering if you can break down the year-over-year margin expansion in a more detail between foreign currency and productivity and other factors. And then where do you expect the full year margins to come in relative to your long-term goals, operating margins in the high teens, just given that you've had strong margins in the first half of the year?

Sure, let me take that, Maggie. In terms of the year-over-year margins, obviously, if you look at what's implied in our guidance, we're looking at for fiscal 2019 now, a 20% operating margin for the full year, which is in comparison to a 19% adjusted operating margin that we did last year. So we're actually planning for fiscal '19 to be 100 basis points, slightly over 100 basis points better on the adjusted operating margin year-over-year. Safe to assume that based on our current visibility and in the current exchange assumptions, about half of that increase is going to be related to FX, net of hedging, and half of that increase is going to be operational and related to increased volume and leverage on our business.

Okay, great. Very helpful. And then can you share any updated thoughts that you guys have on the potential impact of Brexit? And are you seeing any impact on the business yet?

Yes, I'll take that. So Brexit has been discussed for such a long time and as we have been reminding all of you over the past few quarters, we have actually not seen any significant impact from Brexit particularly around the pipeline of business, the need for clients to continue to move ahead with their strategic programs. And at this point in time, as we interact with clients and prospects, we haven't seen any letup in their need to save money, become more efficient and also transform their businesses. So at this point in time, no impact.

And our next question comes from the line of Moshe Katri of Wedbush.

Just to verify here, you mentioned, in terms of your guide, there was a constant currency for the year, for the fiscal year. Is that also organic constant currency? The 12% number that you gave? And then can you remind us what were the prior expectations for the FX impact on the grants that you had last quarter?

Sure, so let me take that. Yes, the short answer to your first question is that the entire growth for fiscal 2019 is going to be organic. So when you look at the guidance that we've provided for this fiscal year from a revenue perspective, which currently sits at $775 million to $801million, we are looking at 5% to 8% on a recorded basis and 8% to 12% on a constant-currency basis. The comparable numbers from last quarter's guidance were $777 million to $821 million from a revenue perspective, which represented 7% to 13% organic constant currency. So essentially, in the last 3 months, what we've done is we've increased the low end of the range by 1%. We've decreased the high end of the range by 1%, and the midpoint remains consistent with a 98% visibility instead of a 95% visibility.

Understood, that is helpful. And then can we get an update -- you made a brief comment on Brexit, but what are you seeing in terms of the pipeline and the deal activity in U.K? And then maybe also get an update on your legacy client, Aviva, in terms of where they are?

I'm sorry. A little bit hard to understand you, Moshe. I believe the first part of your question was about the U.K. pipeline, is that correct?

Yes, deal activity in the U.K. and then just an update on Aviva, your idea...

Yes. Overall, activity in the U.K. remains healthy. We still continue to see both expansions with existing clients, we continue to see large and small deal opportunities within the U.K. I think as Keshav mentioned, we are seeing what I would consider to be normal activities in the U.K. both in terms of existing client behavior as well as the pipeline for new opportunity. So no real impact at this point in terms of Brexit, and I think some of the pressures that we've talked about historically from a business perspective, the need to leverage technology, the need to improve the customer experience, the need to reduce cost, all of these things are still important to clients in the U.K., similar to what we're seeing in both the U.S. and Asia. So that remains the same. You asked for an update for Aviva. Aviva, the relationship continues to be healthy. They continue to be a top-5 client for us. Obviously, as we've discussed over the past several years, because we tend to do everything today for this client, it's a client that from a revenue perspective has been under constant pressure for us as we continue to become more efficient and deliver productivity improvements for the client, and in addition to that, from a contribution perspective obviously, it's been impacted by the depreciation in the British pound. So continues to be a great relationship, but also continues to be a little bit of a headwind from an overall business perspective.

And our next question comes from the line of Bryan Bergin of Cowen.

Can you comment on the overall demand environment outside of U.K. as far as what you're seeing any changes in client behavior due to macro volatility? And I'm curious on a tightened constant-currency revenue guidance, anything specific that took the top end off the table?

Let me address the revenue momentum. Again, I feel very, very comfortable with the pipeline, with the kind of digits we are seeing. With the need for transformation that clients continue to talk about, with the kind of deals that are now currently in the pipeline, these are dispersed across the entire globe. So it's not just limited to the U.K. or Europe, but it's in North America, it's in the Asia Pac markets, and therefore, feel very, very confident about the pipeline. The scale of deals, the impact of these deals, the complexity of the deals that we are working on, the fact that many of them are now led by technology transformation with services following, so that's one. We're also seeing a few clients actually work on some interesting structures with us, including car mounts and things like that. So clearly in terms of demand, the overall messaging from the company in terms of being a transformation agent is resonating very well. The fact that we understand clients' businesses extremely well, again, it's resonating very well. The fact that all the areas that traditionally have caused disruption in the minds of customers are actually invested in by WNS, again, it's playing out quite well. So very happy with this stage of the pipeline.

And maybe just to add on the top end of the guidance, the visibility. Right now, it's 98%. And accordingly, it all depends from an early closure and a faster ramp-up based on some of the closed what we'll have. And also, if you'll observe, last year, we had a nonrecurring revenue in the second half itself of $8 million to $9 million, but it's not baked into the guidance based on -- as we don't have a visibility right now. But in the first half itself, we have seen $4 million of the nonrecurring revenue, which we'll have to just wait and watch as we progress during the quarters.

That makes sense. And just on margins, is the rupee depreciation impacting any client pricing conversations? Or are you seeing anything from change in behavior by competitors on the pricing side because of that reduction in cost?

No. Nothing for any of our existing relationship or the contract coming for renewal. And even from a new client perspective, it's a usual primary behavior, but we are not seeing any pressure due to the rupee as of now.

And our next question comes from the line of Mayank Tandon of Needham & Company.

Maybe for Keshav or Dave, I just wanted to get your thoughts on how we should think about revenue growth going forward as the model shifts more to maybe outcome-based or transaction-based revenue in terms of headcount growth versus pricing leverage? Any potential for seat utilization expansion as well?

Sure, let me take that, Mayank. I think as we've kind of talked about in the past, there's always going to be trade-offs in our business between productivity and headcount seat utilization. Our objective certainly is, over the long run, to continue to kind of nudge our seat utilization metric up to effectively and efficiently deploy our infrastructure, but more importantly, make sure that we're driving that revenue per employee number up. And I think we've done a pretty good job at that over the last several years. If you look at kind of what's embedded in this year's guidance, what we're looking at on a constant-currency basis, once again, improving revenue per employee by about 2% to 3%. So I think this is reflective of not only kind of the efficiency in which we operate, but also kind of the trends in the industry and where the business is headed. So we're certainly excited to see that over time, we do believe that interestingly growth in revenue and growth in headcount will be delinked but, obviously, when we look at the seat utilization side, we do tend to see quarter-to-quarter quite a bit of volatility. And we've also kind of seen over the last several years a shift in where we're delivering service from. So obviously, seat utilization is somewhat impacted by whether you're delivering from locations that can run 2 or 3 shifts versus locations that can run single shift. And these are all kind of part of mix, but at the end of the day, if directionally they're both headed the right way then we're probably doing the right things for our clients.

Right, that's helpful. And then just a quick follow up on M&A. I think the company's been relatively quiet versus your peers, especially since I think you did the last deal was the HealthHelp back last year. Any commentary on the M&A pipeline? Expectations in the market on acquisitions and where you might be headed in terms of the direction on the M&A?

Sure. Thanks a lot. So let me first, complete the earlier answer and just give you a sense also that from our perspective in terms of the business model itself, we're quite positive about how transformation is impacting client at this point in time. So clearly, the areas we invested in, which is domain, technology, analytics, which Dave spoke about is critical but we're also seeing that the change in the conversation that is taking place and the comfort that is being built with clients and prospects, clients -- the conversation is moving much more away from efficiency and productivity to much more customer experience. I think that's very comforting for clients and for them to want to actually do more business with companies like WNS that are invested in this model. So I'm very comfortable with the longer-term momentum and the fact that every existing clients can potentially have 3 separate revenue streams like as I've in the past, existing, transformational as well as transitional moving from one model to the other. On the M&A front, so while with this as a background, clearly, the company has limited time and ability to create all the kind of capabilities that we have, that we need, in order to be impactful in the marketplace. So I must say that while we've done 2 or 3 M&A transactions in the past, maybe 2, 2.5 years ago, we are constantly on the lookout. We have a very active M&A pipeline. We have a team that is constantly covering the market. We're interacting with a number of potential kind of prospects on the other side. And we are comfortable and confident that as and when we have something in place, we will be in the position to make announcements. But the focus is around the right capability, the right valuation and, obviously, the right time.

And our next question comes from the line of Frank Atkins with SunTrust.

Wanted to ask a little bit by service line. Can you talk a little bit about the demand environment and client interest in both Finance & Accounting and Analytics? And where you see that going over time?

Sure, let me to take a crack at that.

So in my views, those are 2 of the most exciting growth areas for the company. So obviously, domain specialism along with a deep understanding of data analytics is something that every client is focused on. And then leveraging that to deliver actionable insight is what WNS is great at. So both the Finance & Accounting pipeline and the research and analytics pipeline that we are focused on are probably the hottest growth area for the company longer term. And what's more interesting is that while some of this has been introduced in many of our existing clients, a lot of the new pipeline that is being generated with clients, of which potentially larger deals are starting with F&A and are R&A, and then going into the traditional domain area. So very comfortable with the fact that that's the big growth area for the company. We have a very strong leadership pipeline in place. We have very strong training programs in place. And the pipeline for bringing in top-quality talent in this area is where we're investing in very strongly. And as we've reminded you on previous calls, a number of our new offerings are really around Finance & Accounting analytics.

And let me just add a little bit to that, Frank. To Keshav's point, we do see both of these areas as extremely hot and impactful in the marketplace today. The interesting thing is though, while we continue to see good acceleration in the pipeline and the opportunities within those segments, we are also seeing large clients come to the table with the transformation journey -- as kind of the lead-in. So just the conversation Keshav had a little bit earlier about the large shipping and logistics client, the large insurance customers we added in Q4. These are relationships that actually start as industry-specific and cut across multiple traditional horizontals. So I think the interesting thing about the BPM space today is because it is relatively immature, you do see clients that come to the table with very, very different perspectives on how they want to start their transformation journey.

Okay, great. That's very helpful. And then given recent kind of market volatility, can you just remind us of your philosophy on buybacks?

Sure. Let me take a crack at that, Frank, and Sanjay can jump in as well. When we look at the WNS share repurchase programs, we're taking a long-term view to our business. We believe the company is well positioned. We believe the space is relatively immature. We believe in the long-term health and the long-term value of what we deliver for clients. So we're going to continue to buy back our shares on an annual basis. It's part of our capital deployment program. And we certainly feel that when you look at, historically, our ability to generate healthy returns on these investments and in these repurchases, the proof shows up in the numbers.

Yes, and just to add and to recall that we already have a 3.3 million approval out of which we have executed 1.1 million. So at the right time, we have an ability to execute another 2.2 million shares from a buyback-program perspective.

Yes. And just to add one more thing, I'm sorry, Sanjay, to add one more thing. I think the other thing that's important to note is that Keshav mentioned that, when we talked about M&A that we do take a balanced, disciplined approach to our capital allocation programs, and that these share repurchases are not at the expense of M&A and things that are strategic in terms of driving long-term growth in our business.

And our next question comes from the line of Joseph Foresi of Cantor Fitzgerald.

I was wondering if you could talk about maybe your expectations for the strength of the different verticals given how strong transport was. And any changes you can talk about from a vertical perspective or otherwise in your top 10.

Sure. I mean, obviously, we've got several large verticals, and depending on whether we're looking at a quarter or a year, we're going to get very, very different views to this. But what you've seen over the last several quarters from WNS is that, by and large, most of our key strategic verticals being Travel, Insurance, Healthcare, Utilities, Manufacturing, Retail, CPG, Shipping and Logistics, these have all grown at a relatively healthy clip. So the pipeline is good, the approach has been well received by clients, and we think we've been able to create differentiated value in these areas. The one place from a vertical perspective that's been a little soft for us over the last couple of quarters has been the utility space and this was something unexpected coming into the year in terms of understanding where we had known ramp downs and volume impacts. So overall, we continue to see the business as being extremely healthy broad-based across verticals.

Okay. And then just on margins. I think in your earlier remarks, you talked about half of the margin improvement being operational. Is that sustainable? And are we looking at a 20% margin next year and maybe 50 basis points from operational improvement on an annual basis? I'm just wondering how sustainable this step-up is? And what we should be thinking about for the out-years?

Directionally, we have always mentioned that in a long-term perspective, we believe high teens is a sustainable margin. And accordingly, what we have a visibilty for this year, based on where the currency is, it's a 20% operating margin, what we're able to guide as per our guidance. But there is a lot of currency volatility, and it depends where we land and when we start our next year. But having said that, directionally, on the long-term, high teens is a sustainable margin for us.

Yes, I think the long and the short of it, Joe, is that if we don't see any changes to our business from an industry perspective, from a currency perspective, then the short answer is, yes, we should be able to sustain these margins. The flip side to that is we don't see, at this point in time, much of an opportunity to move beyond these 20% levels going forward, as we know we're going to have continue to reinvest in our business and continue to change our business dynamically with an industry that's adapting and adjusting very quickly to a lot of changes. So we feel that operating at this high teens, and then obviously for this year, 20% is certainly a good place to be, it allows us to balance investment with putting good numbers up. It also, I think as everyone is aware, is the significant premium to where others in this space are operating.

And our next question comes from the line of Ashwin Shirvaikar of Citi.

So Keshav, just going back to the hunter versus farmer discussion from before. I've being seeing each quarter steady level of contract expansions that you guys announced, I mean, obviously there's a steady level of new logos but also contract expansions. So the question is really about the sort of the relationship management side of your sales force, any comments on that, the penetration and also the nature of the expansions. Is the size of the expansion is getting bigger? Are clients beginning to outsource more faster once you set up the relationship? Can you talk about that?

Sure. I think first and foremost, I would say that I'd give a lot credit to our overall corporate functions in terms of their ability to recruit the right kind of people both as hunters and as farmers. And then over the past few years, and particularly in the past few quarters, keep up upgrading their skills in terms of particularly the new disruptive models, the new technology changes that are taking place in the market, WNS' own kind of programs that are relevant to clients, and therefore, really arming our salespeople both hunters and farmers in terms of being able to deliver strategic messages both with prospects as well as with existing clients. I think what has really happened as a result of this is that clients have become far more comfortable with the notion that WNS really is an extension of their enterprise and while there is so much of disruption out there in the marketplace, it allows them to focus their energies on the external world and really on competition knowing fully well, that at the back end, they've got a very safe pair of hands who understand their business domains, understand and can come with new thinking, new ideas to them and help them with all their strategic programs. And that's what is driving the growth that we're seeing from a farming point of view, that's one. On the hunting side, I must say, I'm very, very excited about the fact that our message itself is so transformational, so different from most others. And the fact that we are providing an end-to-end business solution to clients, which is what is resonating so well in the marketplace. So again, it's a function of the market, where we are in that market, the confidence our sales teams have, and most importantly, the fact that at the back end, our operational leaders are delivering outstanding operational metrics and rigor to clients, which is just allowing us to expand across different areas. Now, as you know, on existing clients, quite often it's a multi-vendor environment. I think this approach is allowing us to use a needle approach to go after new clients who are already outsourcing to other strategic partners who are now able to experience us, understand how different we are and then really allow us to grow with them.

Got it. Understood. Just 2 quick ones, numbers related. One is, I know you guys provided a lot of metrics, so I don't to overstate the importance of any particular one but the used seats went up at a very high pace. So big jump sequentially as well as year-over-year. If you could explain that? And then on IFRS 9, I can understand how the P&L is impacted. I just want to make sure that the intent of the accounting is not making any change to the intent of the hedging.

Yes, Ashwin, from a -- I'll take the latter part first. The IFRS 9 is just a representation from an accounting perspective. No changes from our cash flow hedging program which is more rule-based approach. So just IFRS 9, it's going into the revenue line from a hedging gain/loss perspective. Earlier it was below the line, so that's the only change. And from a seat utilization perspective, if you recall that the last quarter our seat utilization number came down because we invested into some of the infrastructure and where -- for this quarter, for the growth, we were able to leverage that. But having said that, from quarter 3 onwards again, the investment program into the capacity, we keep -- there is a momentum on that.

No, I meant the total number of seats, the used seats, it's like 25,000 to 30,000, you've been at a 22,000 level for some time. So that's [some -- where you begin], please?

Yes, so it's all about the ramps and stops where the people were also into the training rooms, where once they are out of the training room, they get into the production floor and that's where the growth utilization is there because we spoke about some of the transformational deals and there were a lot of associates, which were into the training program and they came out and that's where the seat utilization number went up.

And our next question comes from the line of Puneet Jain of JPMorgan.

So Keshav, when you try and automate like a business process, does that typically also include reengineering or replatforming of the underlying technology and the process? And if macro deteriorates, could some of that work get pushed out?

So let me -- this is Ron Gillette, so let me answer the first part of this here. So absolutely. When we engage with a client, we look at their business processes end-to-end, and there is a reengineering of the process, that's a component to it, and we bring to the table certain investments we've made in technology that we can bolt on to a client's environment that helps automate these solutions and drives efficiency and quality for the client. So clearly, part and parcel to our approach to solving the client's issue. It drives great productivity for the client and for ourselves as well. As Keshav mentioned earlier about our vertical domain, our investment in domain knowledge and technology, those both come to there together to create the right solution for our clients.

And I'm sorry, Puneet. To take the second part of your question about kind of whether there is a macro deterioration, whether or not that could be impactful to this. It's important to remember that the technology investments that we're putting in and the replatforming and the reengineering that we're providing, delivers cost savings for the client at the end of day. So unlike kind of what you typically see on the IT side where changes in technology, changes in infrastructure can have a negative effect from a project or from an incremental expense standpoint, what we're providing gives the client, to Ron's point, not only a better customer experience, not only better efficiency and quality, but also cost reduction. So I don't think the value proposition changes dramatically.

Understood. And what's the FX hedge loss assumed in the revenue guidance for this year? And did you share that number for Q2 as well?

We did not. The revenue loss -- the hedging gain and loss number for this year?

Yes.

Is that what your question is? We're looking at about an $8 million hedging loss on the revenue line in fiscal 2019.

And our next question comes from the line of Vincent Colicchio of Barrington Research.

Keshav, could you characterize the number of large deals in the pipeline now versus, say, 2, 3 quarters ago? And you're feeling good about closing any of them in the near future?

Right. So the number of large deals continues to amaze me. So compared to -- while we don't provide specific numbers, the reality is, each of these deals are significant in nature. They are complex in nature. They mean that the interaction is happening at CFO level on the other side. They also mean that they are transformational in nature because the client is spending a lot of time, energy, attention and leadership time really in terms of appreciating WNS' entire area of offerings and then really helping us provide to them a solution that is multi-year and creating huge impact across the organization. So all of this is really, really positive from a WNS point of view. And I will say that the number of deals is definitely increasing every quarter in terms of size and scale, and again, it is very well distributed across the globe, it is not coming from one particular geography, but it's coming from all across. So very excited about what's happening there.

And then what needs to happen to hit the high end of your expectations for this fiscal year?

Look, the reality is we have a very, very solid visibility to that midpoint of the range as we have consistently guided. The only thing that needs to happen in order to hit the higher point of our guidance number is really the timing that -- of decisions that clients will take. And that is something that is really not in our control. So what is in our control is really getting after the clients, presenting them with various options, eliminating all competition. But because the deals are larger in nature, complex in nature and involve so many geographies, sometimes a few deals take a little longer. So I would say, the key reason of that -- the key things that must fall in place to reach that higher end of the pipeline is timing of decisions and maybe some decisions that we baked in as happening later, moving earlier in the year. That's it.

Yes, and I would just add to that, Vince. What Sanjay mentioned earlier, which is that important to know that our guidance and our visibility does not include any of the short-term revenues in the second half of the year. So certainly, if we can do $4 million or $5 million like we did last year, what -- we're going to add another percent to our growth. If we do $2 million like we've done in the first half of this year per quarter, we're going to add 0.5% to this number. So this is clearly one or the other ways that we can make up that gap, if you will, between a 10% midpoint and a 12% high end. And we did see last year that we were able to do that, and actually then go beyond what we had guided to in the third quarter. So that opportunity is still definitely on the table for us.

And our next question comes from the line of Joseph Vafi of Loop Capital.

I was wondering if you -- was there any change this quarter to breakdown of new clients between, say, growth clients versus, I guess, cost takeout clients? And then I have a follow-up.

Yes, I don't think there was a major change in the quarter, Joe. I think we continue to see a healthy mix of clients that are coming to the table for business transformation, business change as well as for cost reduction. Sometimes, it's a little bit difficult to figure out kind of what the priority is but we do believe that a healthy, healthy number of these customers today are coming for reasons other than cost, although they all want cost reduction as well. So I think it's more about disruption that's driving the bulk of the opportunity, but there are definitely clients out there that have cost as a #1 objective as well.

Okay. And then just circling back to the beginning of the call and Keshav talking about the large Shipping and Logistics client. It'd be interesting to hear, you did implement some of your own automation tools as part of that first wave of engagement with the client. Any specifics there? Where you were able to automate? When versus when the clients was operating that process before you took over?

Sure. Yes, so the headline news really is that the transformation that we delivered was on the back of technology transformation, creating our own IP, bringing in bolt-on tools, making -- ensuring that the ROI on the technology investments that we already had was positive or much better. But more importantly, just making sure that the overall solution was such that it helped them save money, become far more efficient, impact their collections and things like that. On specific, I have Ron talk a little more about the technology aspect, which I think you're interested in.

So as we're looking at these processes, so we have large domain knowledges we had shared with you, we had experienced with this client to date, so we had insights into the solutions that we could drive around the bill of lading and those tools. So we've made these investments over time. So this was really a good time for us to bring this to the forefront, over our engagement with this client, we've earned their trust, that deep domain knowledge we have is very resonant with them and the opportunity to deploy these technologies that we've planning for some time to deploy across this industry, really met in this client this time. So we'll continue to do that across all of our verticals where we're looking forward to the nature of our clients' business, where we can deploy technologies, and it's broad-based, our approach. This is an isolated incident. So you'll see that in the future, we may talk to you again and give another example of a client at some future date, where we've been driven a large transformation with them and help them achieve really strong and sustainable outcomes.

And I think just to add to that, Joe. As Keshav mentioned, this transformation journey is not done with this client, and kind of as we continue to move down the path to them, not only are we going to get into different areas with this customer, but we do believe the technology will become increasingly pervasive in this account. So it's not kind of a one-stop shop, if you will, where we come in and we deploy technology and we're done. We think this is going to be an evolution over time, and not only in our business as a whole but also with this customer, and this will be part of how we're able to deliver ongoing productivity improvements with this client.

And our next question comes from the line of Korey Marcello of Deutsche Bank.

How much of a revenue synergy benefit are you guys seem from cross-sell success as it relates to recent acquisitions? And you guys mentioned several strategic wins in the quarter, including one for HealthHelp, I believe. So just curious how that cross-sell is kind of contributing to the success.

Sure. Let me take that, Korey. I think, obviously, with the acquisitions that we've done and the 3 that we've done in the last couple of years here, Value Edge, Denali and HealthHelp, if you look at the ability to leverage those assets across both existing customers and then the ability to deploy WNS traditional solutions into those environments, I would say, that the result has been mixed, and that's kind of what we expected going in. Obviously, the reason we partnered with HealthHelp was to give us an asset and a technology asset in the healthcare payer space. And as a result, if you look at it, it's probably the one asset where we have not done, to date, a lot of work in terms of leveraging WNS solutions into their installed base as well as deploying their solutions into ours, because honestly, prior to acquiring HealthHelp, we didn't have anything. The complete opposite to that would be Denali where we've had a lot of success not only going into new accounts with Denali and expanding the services into other WNS areas, but also deploying Denali services into the installed WNS base. So I think it kind of depends on the asset and the type of work that we're doing. But clearly, I think when you look at the success that we've had with these 3 acquisitions, they're all behaving kind of as to plan and, in some cases, better than plan when we completed these acquisitions.

That's helpful. And then I guess on the large Insurance win that started to come on, can you talk about the growth in the verticals and horizontals like Insurance and auto claims? It looks Insurance, from a year-over-year perspective, moderated a bit but auto claims kind of accelerated. Is that just timing of services? Or are there other factors there? Maybe you can just give us a sense of where that relationship is in terms of ramping and kind of outlook going forward.

Yes, sure. I mean, and there's definitely a timing issue and as we've discussed in the past, one of the key benefits of this new large insurance relationship was the ability to sell the auto claims solutions into this client and then to provide kind of end-to-end services. So that's been exciting for us to kind of see that revenue reaccelerating. The flip side to that is this relationship is still early days. We signed the deal in the fourth quarter of last year. We've had just 2 quarters of ramp right now. This is a relationship that we would actually expect to ramp over the next 2 to 3 years in a meaningful way. So hopefully, we can continue to see this account in this relationship ramp and start to drive some accelerated traction into the Insurance vertical.

And our next question comes from the line of Edward Caso of Wells Fargo.

This is Justin Donati on for Ed. Can you talk about your expectations for DSO and cash flow for the remainder of the year? I know you had some kind of working capital build here in the first half.

So from a DSO perspective, we believe that it's going to be around in the range of 30 to 35. And maybe just to add, this quarter, it was a little bit high, primarily driven by some client processes change as well as some client behavior from managing their quarter end, from a balance sheet perspective. Having said that, all those -- money was already collected in first week of October and there was no default on that. But going forward, this is, we believe, as volume we have seen, it will be in the range of 30 to 35. On the cash flow basis perspective, for the full year, pretty much stable what we see based on the guidance from a profitability perspective, what we had provided.

Okay, and last question. Can you provide an update on overall size and growth rate of your total Analytics business? I think in the past you've pegged at it about 20% of revenue?

Sure, let me take that. So yes, we've historically kind of talked about that number bouncing around. What we have seen is growth in our Analytics business as it relates to not only standalone but also the embedded component in our industry specific. So I would say, overall, right now, we're probably still right around 19%, maybe 20% combined Analytics across the organization with 11% showing up as the standalone component. So a little bit larger on the industry-specific side, a little bit smaller on the Analytics side.

And our next question comes from the line of Robert Bamberger of Baird.

It looked like revenue per employee declined around 1% year-over-year in the quarter, which is a little bit weaker than we've recently seen. Can you touch a little bit about the trend that you're seeing there?

Yes, no specific trends in terms of revenue per employee, Robbie. I think when you look at -- our expectation for the year is still that we're probably going to be on a constant-currency basis, 2%. You got to remember that part of what you'll see when you look at Q2 revenue is an FX headwind as well as a hedging headwind. So I think if you adjust the revenue in the second quarter for those nonoperational items, if you will, what you'll see is that there actually was an improvement both sequentially as well as year-over-year on a revenue per employee basis.

Got it. And then in terms of tax rate guidance, you reduced to 23% versus 25% for fiscal 2019. I guess looking past 2019, what are you looking at for a sustainable growth rate because of the new mix shift that you talked about?

So from a tax perspective, we pretty much believe it's an expected sustainable with the situation, and we see as the situation, where we are. It can be a little volatile between the quarters based on the certain mix of the geographies where we deliver for, but from long-term perspective, things doesn't change. It's quite sustainable but as we have seen, there are various regulations keeps on changing year-over-year based on the geography, taxation, so if something impacts it may change but if everything remains the same, sustainable for 23%.

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