WNS (Holdings) Ltd (WNS) 2024 Q3 法說會逐字稿

Good morning and welcome to the WNS Holdings fiscal 2024 third-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 Executive Vice President of Finance and Head of Investor Relations. Please go ahead.

Thank you, and welcome to our fiscal 2024 third-quarter earnings call. With me today on the call, I have WNS' CEO, Keshav Murugesh; and WNS' CFO, Sanjay Puria. 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 third quarter ended December 31, 2023. 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 today's 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, acquisition-related expenses or benefits, and goodwill impairment. Adjusted net income or ANI is defined as profit, excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, goodwill impairment, and all associated tax. 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 third quarter, WNS' financial results were largely in line with our expectations.

The company posted third-quarter net revenue of $315.9 million, representing a year-over-year increase of 7.8% on a reported basis and 5.9% constant currency. Sequentially, net revenue decreased by 2.8% on a reported basis and 2.3% on a constant currency basis after adjusting for foreign exchange.

As discussed last quarter, the sequential reduction was largely the result of the delivery transition for a large Internet-based procurement client from on-site to offshore, lower travel volumes, and softness in our project-based revenues. Overall, from a demand and booked revenue perspective, there were no major changes or surprises during the third quarter.

Travel volumes reduced during the quarter, particularly for domestic online travel. While some of this is a function of normal seasonality, we also saw volume reduction in our high end business-to-business customer experience portfolio. This, we believe, is attributable to both corporate travel spending and client-specific issues.

In addition, demand for WNS' project base work, including hyper automation, procurement, and analytics products, saw a slight sequential decline in Q3 and remains below the levels expected in a healthy macro environment. While certain volumes and project work have reduced, demand for our core process management initiatives continues to be healthy, driven by client requirements for process automation as well as cost reduction. Our new business pipeline is robust and clients are moving forward with strategic initiatives.

During the third quarter, WNS added eight new logos and expanded 32 existing relationships. I'm also excited to announce that we have now received a commitment from our large insurance captive relationship to proceed with a portion of the phase two plan. This new process is expected to begin ramping later this quarter.

Today, I would like to provide you with a brief update on our AI as well as Gen AI initiatives. As we continue to build, design, implement solutions for our clients leveraging these technologies, the pipeline of Gen AI use cases continues to expand across our verticals as well as service offerings and we are making steady progress moving these initiatives forward with our clients.

Today, we have secured client commitments for Gen AI implementations, which span verticals, including insurance, retail, CPG, travel, shipping and logistics as well as banking and financial services and represent horizontals such as procurement, operations, and customer experience.

In some of these examples, the Gen AI solution has been a catalyst for new business, including customer additions and expansions of existing relationships. For others, Gen AI is helping transform the existing book of business and drive improvements that previous solutions were unable to deliver. At WNS, our approach continues to focus on combining our deep industry expertise with Gen AI to deliver enhanced levels of performance, accuracy, and business value, which is differentiated and superior to generic Gen AI applications.

For example, we currently have an existing client implementation, leveraging a powerful new WNS proprietary Gen AI decision support engine, which enables our agents to quickly access relevant information from large numbers of complex, lengthy documents and then synthesize and summarize the results to meet the customers' requirements.

This solution, which combines the power of human intelligence as well as artificial intelligence is positively impacting most key business metrics, including reduced handling times, improved accuracy, and higher first call resolution rates. For our client, this is improving end-user satisfaction and increasing revenue retention. For WNS, the solution is revenue neutral, margin accretive, and resulting in additional process management opportunities. We are also excited to highlight that this Gen AI deficient in engine is scalable, both horizontally as well as vertically across WNS.

We are also pleased to announce that we are now upgrading Malkom, our intelligent automation platform, for the shipping and logistics industry with Gen AI capabilities. The updated version now called Malkom AI is designed to revolutionize the way incoming data sources, including e-mails, chat, messaging, web portals, and EDI are processed.

The enhanced platform enables cognitive extraction and routing of data to specific workflows within our clients' organizations as well as IT systems, which in turn either fully automate these workflows or flag them for human validation and completion as is needed. Malkom AI now demonstrates WNS' capability to leverage deep industry expertise and process knowledge in the application of Gen AI and other cutting-edge technologies.

Overall, we continue to see Gen AI as a long-term catalyst for our business. Our investment in this as well as other new technologies and our ability to combine these powerful tools with domain, people, and process is generating increased interest from both existing clients as well as new prospects. These tools are enabling WNS to improve both the quantity and quality of client discussions with the focus increasingly shifted towards innovation, competitive positioning as well as value creation.

In addition, we are seeing strong willingness from these clients to share in the financial and operational benefits of our Gen AI solutions. So for WNS, this includes the ability to capture new revenue streams, shift the commercials from FTE-based models to stickier, higher value managed services and outcome-based models as well as improved margins.

I would also like to share with you some activities in progress designed to help improve our ability to compete for capital. In our press release issued earlier today, WNS announced that we have formally transitioned the company to three global headquarter locations in New York, London as well as Mumbai. This change supports the company's decentralization of senior leadership as well as decision making as highlighted by our organizational structure change announced in April 2023.

These headquarter additions also reflect the company's financial and operational evolution over the past 25 years, including the geographic diversification of our revenue mix as well as delivery footprint. In addition, earlier this week, WNS' Board of Directors granted approval for the company to move forward with plans to convert our ADSs to ordinary shares.

The company intends to complete this exercise prior to the end of fiscal first-quarter 2025. The WNS Board has also granted approval and the company intends to voluntarily shift from foreign private issuer status reporting under IFRS to domestic filer status reporting under US GAAP. This change is expected to be implemented prior to the end of fiscal second-quarter 2025.

The company believes these actions are in the long-term best interest of all WNS' stakeholders. Key objectives include improved access to capital through the ability to participate in the US indexes and additional active investment funds, reduced share price volatility as well as enhanced governance.

In summary, despite the challenging macro environment and certain non-recurring headwinds in fiscal 2024, WNS now enters fourth quarter with more than 99% visibility to double-digit full-year revenue growth and continue to expect industry leading stable margins for fiscal '24. We also remain optimistic that our growing pipeline for core automation as well as cost reduction-based services and reducing headwinds set the company up for accelerated growth in fiscal 2025.

WNS continues to invest in technology, analytics, and domain to ensure our competitive differentiation remains intact, enabling the company to deliver long-term sustainable value for every one of our key stakeholders.

I would now like to turn the call over to our CFO, Sanjay Puria, to further discuss our results as well as outlook.

Sanjay?

Thank you, Keshav. In the fiscal third quarter, WNS net revenue came in at $315.9 million, up 7.8% from $292.9 million posted in the same quarter of last year and up 5.9% on a constant currency basis. Sequentially, net revenue decreased by 2.8% on a reported basis and 2.3% on a constant currency basis. The sequential revenue reduction was driven by the offshore delivery transition, for large Internet account volume reductions with certain clients primarily in 48 travel and weakness in discretionary project-based revenues. These headwinds were partially offset by strong client demand for cost reduction focus initiatives.

In the third quarter, WNS recorded $0.5 million of short-term revenue at company average margin. Adjusted operating margin in quarter three was 20.6% as compared to 21.9% reported in the same quarter of fiscal 2023 and 22.4% last quarter. Year-over-year adjusted operating margin was pressured by annual wage increases and return-to-office costs.

This headwind were partially offset by improved productivity and favorable currency movements. Sequentially, margins decreased as a result of wage increases, higher SG&A expenses driven by quarter two provision reversals for performance incentives and bad debt, and lower revenue.

The company's net other income expense was $2.8 million of net expense in the third quarter as compared to $1.2 million of net expense reported in quarter three of fiscal 2023 and $3.6 million of net expense last quarter. Year-over-year net interest expense increased due to higher debt levels and lower cash balances, driven by our acquisition and share repurchases. Sequentially, the favorable variance was a result of interest income on tax refunds, sale of assets, and slightly lower interest expense.

WNS' effective tax rate for quarter three came in at 6.6% as compared to 19.8% last year and 22% last quarter. In the fiscal third quarter, we realized a one-time tax benefit of $9.5 million resulting from the reversal of a deferred tax liability on intangibles. Both year over year and sequentially, other changes in our effective tax rate was a result of shift in our geographical profit mix and changes to the mix of work delivered from tax incentive facilities.

The company's adjusted net income for quarter three was $58.2 million compared with $50.6 million in the same quarter of fiscal 2023 and $54.1 million last quarter. Adjusted diluted earnings were $0.0118 (sic – see press release, pages 1 and 9, "$1.18") per share in quarter three of 18% versus $1.01 in the third quarter of last year and up 9% from $1.9 last quarter.

As of December 31, 2023, WNS' balances in cash and investments totaled $260.4 million, and the company had $177.4 million in debt. In the third quarter, WNS generated $73.7 million of cash from operating activities, incurred $10.3 million in capital expenditures, and made debt repayments of $20.2 million. The company also repurchased 1 million shares of stock at an average price of $58.13, which impacted quarter three cash by $58.1 million. Our revised full-year guidance assumes WNS will continue with our share repurchase program in the upcoming fiscal fourth quarter. DSO in the third quarter came in at 35 days as compared to 34 days reported in quarter three of last year and 35 days last quarter.

With respect to other key operating metrics, total headcount at the end of the quarter was 60,652, and our attrition rate in the third quarter was 29% as compared to 28% reported in quarter three of last year and 30% in the previous quarter. We expect attrition to average in the low- to mid-30% range, but the rate could remain volatile quarter to quarter in the current level environment. Build seat capacity at the end of the quarter three increased to 40,658 and WNS average 69% work from office during the quarter.

In our press release issued earlier today, WNS provided our revised full-year guidance for fiscal 2024. Based on the company's current visibility level, we expect net revenue to be in the range of $1,270 million to $1,292 million, representing year-over-year growth of 9% to 11% on both reported and constant currency basis. Top-line projection assumes an average British pound to US dollar exchange rate of 1.27 for the remainder of the fiscal year. And we currently have over 99% visibility to the midpoint of the range.

Full-year adjusted net income for fiscal 2024 is expected to be in the range of $212 million to $218 million based on an INR83.3 to US dollar exchange rate for the remainder of fiscal 2024. This implies adjusted EPS of $4.27 to $4.39, assuming a diluted share count of approximately $49.6 million shares. With respect to capital expenditures, WNS currently expects our requirement for fiscal 2024 to be up to $60 million.

We will now open the call for questions.

Operator?

(Operator Instructions) Surinder Thind, Jefferies.

Good morning. I'd like to start with a question on just demand environment and more specifically, just the volume aspect of the business. Can you maybe talk a little bit about how client volumes have evolved relative to expectations maybe six months ago when we first started seeing signals of clients wanting to slow down and then what are the current client conversations as we look forward, maybe six months at this point?

Sure, Surinder. So I think if you look across the last couple of quarters, what we've seen is and what we had included in our guidance was expectations from our clients, projections from our clients, and for certain funds, especially in the travel space commitments from these clients to reducing volumes. And historically, when we've seen that kind of a trend from customers, they've proven to be extremely conservative. What we've seen over the last couple of quarters is those numbers have come in much closer to their projections and commitments and what we've seen in the past. So as a result, we have not been able to recognize upside relative to volume, relative to our forecast and guidance during that period.

So essentially, at the end of the day, the volume projections that they had provided us with proved to be accurate. I think the good news on the upside is as we look forward in the fourth quarter, we are not seeing clients continuing to drop those forecasts and those protection. So our hope, at least, at this point, is that the volumes have stabilized at these levels. And then as we move across into fiscal 2025, we have upside if we see some macro benefits out there.

And I'd just add that while that was a good explanation on the volumes of the current business, the other fact to also mention here is that we continue to see a lot of interest in terms of existing clients as well as new prospects continue to have very positive discussions in terms of longer-term strategic plans for both transformation, cost saving as well as implementation of some of the Gen AI tools that I spoke about earlier. So I think right now, it's a mixed bag, but it is -- it looks exactly like what we said it was likely to be as of last quarter.

That's helpful. And then as a follow-up. When we think about your AI strategy, the platforms, the tools, the technologies that you want to build; the question here is how truly differentiated can you build some of those products and how bespoke is that to the client solutions that you build? And maybe how much is reusable? And then I guess, overall, do you have to accelerate spend to, I guess, win the arms race for AI here? How do we think about all of that dynamic?

Yes, I think I'll take a stab at that answer first.

So first and foremost, I think we are very clear that this is a movement that will only keep gaining traction. And our job right now is to make sure that our clients see us as a responsible partner, leading them in this charge. So many of them may not yet be completely ready to get on this bandwagon because some of the current stresses that they're seeing are more focused around profitability, volumes, things like that.

So from our point of view, giving them the comfort that we are training our people. They've got the right partnerships in place. We have invested very strongly in the tools and the required technologies, and that's some of the solutions that they are used to seeing from WNS are all being enabled through AI and Gen AI tools is something that is being seen as very positive.

The second thing that we are all seeing very positively is the intent from WNS to look at our core business, understand, which are the areas that actually need faster implementation of some of these tools, so that we are more partner like to our clients. And even if it means cannibalization of short-term revenue for us, that have understood the intent from a WNS point of view is to do that in order to build very strong long-term sustainable relationships with them.

So if you look at the current stage, it is all about building out completely new tools, creating these partnerships, and enabling existing tools through Gen AI. In many cases, we use the base tool that is available and then create something which is bespoke for a particular client. But most often, we also have the ability to reuse quite a few of these tools. So when we are talking about some of these branded tools that I spoke about earlier, our ability to use them across multiple clients while incurring a one-time cost of the stock is high and therefore our ability to have high-quality relationships or discussions with our clients in terms of how to share that cost or the opportunity in the first case is also built on trust as opposed to just plain opportunity.

And I think just (multiple speakers) to add what Keshav has said is at the end of the day clients are looking for digital transformation. And the reality is that Gen AI as a tool is only one component of what they're looking for. So we continue to believe that our key differentiator is domain expertise. The ability to understand the client's business, understand the client's problem, and leverage process, leverage people, leverage technology, whatever the technology might be to solve that problem.

And to Keshav's point, certainly, certain components of that solution have to be customized and proprietary to that specific client. But at the same time, we're also creating reusable components and we can bring across the entire portfolio. So I think the approach actually works well and plays into the strength of where this company has made our investment over the last 10, 15 years.

Thank you. That's very helpful.

Bryan Bergin, TD Cowen.

Hi, good morning. Good evening. Thank you.

First one I have, just as it relates to the share class conversion, the voluntary filer status ship, are there any notable financial implications from these items to be aware of as you transition next year? Just really anything to be aware of around maybe tax structure and from an accounting change, anything dramatically different versus potentially just the hedges up top moving.

No, so there are no financial implications specifically for moving from ADS to the common stock over there. Even from a tax structuring -- the structure remains the same. It is just access of the capital and reduce the volatility from a share and volume perspective. Those are the brand objectives, but primarily no financial impact.

There will be changes to some of the financial metrics as we transition from IFRS to US GAAP based on exactly what you were referring to, how these two different standards treat certain types of transactions and certain types of costs. But the reality is, to Sanjay's point, there should be no change from the conversion from ADS to ordinary shares.

Okay. Very good. And then as it relates to the headquarter additions and the growing global diversification. Can you just discuss the margin implications from these changes. Do you have any difference in view on the medium-term potential and adjusted operating margin?

They are already embedded in our structure. There should be no change as a result of anything that we've discussed today relative to the approach to capital access.

Great. Thank you.

Thanks, Brian.

Spencer Lebov, Wedbush Securities.

It's Moshe Katri from Wedbush question. Question, can we get an update on the captive client, specifically the delays or the pause that we've heard about last week? And then I have another follow up. Thanks.

As in the remarks what we mentioned that last quarter, there was a delay over there. But the good news as we move forward, we already got a commitment of the portion of the phase two from that client, and we will be starting the delivery from the later part of the quarter four. And as we move forward, the discussions are further on the balance portion of the phase two, which maybe there as part of the next 12 months.

I think just to reiterate what Sanjay is saying, obviously a lot of concern and consternation out there about the delay. As the company had said last quarter, we still believe that it was a question of when, not if, we were going to get this piece of business. All the indications from the client were that they were going to continue to move forward with this process addition, and it was nice to see that they are taking steps in that direction.

And just to remind you again that this is a part of the overall commitment from the client. So as Dave mentioned, it's all about when, but it needs to happen during the tenure of the contract.

I just want to mention one thing that some of these conversations are mostly about transformation as well as cost saving. Now based on how well prepared a client maybe on some of these larger initiatives, they can only delayed that much. Thereafter, based on the macros, based on the business need, it's just smart for customers to actually move ahead with these journeys.

So I just want to mention again that while over the last one or two quarters we've saw these delays, we are also quite confident that not only will they come back in terms of phase two of this particular transformation, but the opportunity for WNS to go deeper into many more areas with this client is very high over the next few quarters.

Okay. So that's definitely a positive development, so there is a go ahead. Some of that revenue generation will be recognized towards the end of Q4. And then there's phase two that gets recognized in fiscal '25. Is that the right way of looking at it?

Yeah, you're absolutely right. It's going to be minimal revenue during this financial year. But as we transition, it's going to be the following year of FY25 where the most of the revenue will start recognizing.

(multiple speakers) I'm sorry, Moshe. And the hope also is that they continue to give us the additional components of phase two as we move throughout fiscal '25 that also contributes above and beyond what we've been awarded at this point.

Okay. Sorry, just to go back to the, can you remind us what was the -- what is the potential run rate from this specific captive client?

Yeah, we talked about last quarter the delay in pushing that revenue out of our fiscal '24 financials costing the company almost 2% of revenue.

And that's been -- some of it is getting pushed out to fiscal '25?

Well, in our last guidance, all of it was pushed out. The majority of it is still going to be pushed out because we're not recognizing anything until later in this fiscal fourth quarter. But the good news is because we're starting in the fiscal fourth quarter, we should have a higher run rate of revenue in fiscal '25 from this award.

Maybe, Moshe, I just help you with that. And as Dave mentioned, it was a 2% which got impacted for this fiscal year. Out of that, what we have been awarded is 25% of that now and which is completely awarded and which will be recognized in FY25. But at the same time, the balance 75% still there is an opportunity which we are working, which should help us during the next fiscal year.

Okay, great. Final question. Since May of last year, again, someone decided that WNS is exclusively going to get impacted by Gen AI, right?

Any indication that any of those -- any of that kind of prophecy is materialized in terms of your revenue base, cannibalization, et cetera, just to be clear. Thanks.

Not at all. Actually from our point of view, voluntarily, like I said earlier, wherever we think the clients will benefit by embracing Gen AI even if they are not ready, we are going in, having those conversations, building deep connections with our clients, and building out plans that will help us grow net of the cannibalization at the level that the industry expects.

To be very clear, Moshe, in terms of what we've seen to date, what we've embedded into this guidance, there has been zero negative impact to our revenue from Gen AI.

Maggie Nolan, William Blair.

Hi, thank you and congratulations on all the developments. I wanted to ask about the project-based work and whether you have any changes in expectations over the next couple of quarters just given that clients are starting to finalize their budgets for calendar '24?

Sure. I'll take that, Maggie. I think, as we've talked about, we did see that some of the softness that was projected and committed from clients didn't materialize here in the third quarter.

The good news again is that when you look at the fourth quarter numbers, we are not seeing a further decline in that expected project revenue. It doesn't mean that it couldn't happen, but at this point in time, it's our belief that the project run rate has somewhat stabilized here. And to the extent that we don't take another leg down in the macro or we don't see a meaningful pickup in the macro, this is probably going to be the sustainable level for project-based work for us.

And maybe we'll have more color because January is the time where the clients' budgets will start getting for the next fiscal year. And I know that some discussions have already started based on that. So we'll be able to maybe have a better color when we provide updates for the next quarter.

Thank you. And then I mean, you have a great track record of posting strong margins and you continue to do so. But there are a lot of moving parts with volumes and project-based work. And you mentioned this new product that's margin accretive. So I'm hoping you could maybe help us think through some of the puts and takes on margins even into fiscal 2025.

So you're right, from those moving parts perspective, but there's a lot of variable costs associated from a business perspective and though volume keeps on moving up or down quarter over quarter, and accordingly, we are able to manage those costs associated with that due to the variability. So accordingly, we believe that as we keep on investing into our business, as we keep on seeing some of the volatility in the volume, about 20% operating margin what we have been consistently delivering and we expect to continue that.

Yeah, I would just reiterate what Sanjay said that we do continue to believe that these margins are stable, that there will continue to be puts and takes in terms of wage increases and the ability to improve margins as we continue to transition this business towards transaction outcome, subscription-based models, and deliver higher value for our customers and those models. So the expectation of the company continues to be in that 20% to 22% range for adjusted operating emerging going forward.

Perfect. Thank you.

Thank you.

Nate Svensson, Deutsche Bank.

Hi, guys. Thanks for the question. I wanted to touch base on something that came up in the prepared remarks. It is about the potential for a re-acceleration in revenue growth in fiscal '25. So I think a few of the questions earlier have gone at this point whether it's the insurance captive ramping next year or expectations for project-based work. But I just wanted to hear about your confidence or your visibility into that potential re-acceleration next year, particularly given volumes and short-term work is stable to slightly down in this environment?

Yes. So I'll take that. So I think the first thing is we continue to be positive about the potential for growth in our business, right? We think that the macros, while we are causing pressure at this point in time and have cost pressure probably this whole year and will continue to be weak as we are hearing from the economists for the next few quarters. We'll also push customers to want to now start taking decisions that go beyond just the core business transformation agenda and go much more into cost savings in order to be smart about how they're running their businesses, one.

The second thing is our change that we made in terms of our org structure has now been digested well, has been understood well by the market, and that is actually now starting to evoke much higher quality and even better conversations with a lot of prospects as well as our existing customers. We actually think over a period of time that will also start evoking higher benefits for the company.

The third thing I will say is that with other changes that we made around our sales focus, farming focus as well as creating specific track teams to go after some of these things, we are actually seeing a higher quality conversations on larger size deals, which again, we believe may take time to actually see decisions.

But actually the number of deals entering the pipeline, the quality of the discussions we are having, and the levels of connects that we are now generating around these deals will actually deliver a very strong pipeline for growth longer term.

And therefore, from my point of view, I continue to see the business being very positive. I continue to see long-term tailwinds. I continue to see the BPM industry being underpenetrated and huge potential for us to go after the white spaces that need penetration. And with the change in our org structure, our clients and prospects are interacting with us in a far superior way than we saw even two years ago.

The other thing I would add to Keshav's comments is remember that the biggest challenge that we have this year relative to growth are the unusual headwinds we have in our business. And to the extent that we've got 5%, 6%, 7% headwind to our business, that has nothing to do with macro, that has nothing to do with projects, that has nothing to do with volume, right? To the extent that these are unusual types of things as long as demand stays healthy for our core services, the ability to accelerate growth should clearly be there for us (technical difficulty).

Great. That's super helpful color. I really appreciate the detailed answer. I guess for my follow-up. Can you share what the inorganic impact was in the quarter, particularly versus what your expectations had been? The reason I ask is I know Vuram had been highly tied to short-term discretionary project work, and you had the reversal of the contingent considerations last quarter. So I was just wondering if we get an update on how OptiBuy and Smart Cube have been performing? Thanks.

Yeah. I mean, overall, obviously, they're performing below expectations relative to when we purchased these assets, but they do continue to perform above company average in terms of their contribution. So don't want to mislead from the standpoint of saying that these aren't healthy and well-performing assets. But in terms of the contribution on a year-over-year basis from -- to revenue growth, you're looking at about 2 -- a little over 2% year over year.

Very helpful. Appreciate the answers.

Kyle Peterson, Needham.

I wanted to start off here. I know just on some of the puts and takes of what you guys are seeing. And I guess there's obviously been some macro challenges over the last couple of quarters, but you guys do help streamline operations, reduce costs. So just wanted to see if you guys could walk through how some of those client conversations are going and what's the impact and focus on questions between some of the discretionary spend versus cost savings and efficiency initiatives?

Sure, Kyle. I think overall and Keshav alluded to it in his prepared remarks, right? I mean, there are three components to the revenue portfolio in terms of what we're seeing. One is those core cost reduction, automation, transformation requirements that clients have.

The second are the discretionary projects where, by definition it's got a fixed start and fixed end and clients need to pay upfront for the benefit as opposed to paying as they go for the benefits that they receive.

And then the third is volume, which is essentially the number of transactions that are getting pushed through the processes that we already own and manage. And obviously, as we've talked about, some of it's specific to certain verticals and some of it's specific to certain processes. We've seen pressure from both a discretionary spend perspective as well as from a volume perspective in certain verticals and subvertical.

That being said, the core business, which, for us, represents almost 90% of our total where what we're driving for the client is tangible business benefits, whether that's cost reduction, whether that's revenue generation, whether that's loss, leakage prevention, right? That piece of our business remains extremely healthy. That's really been the driver for the upside this year. And again, the reason that growth from this company is below normal is more about the headwinds to our business than the demand for our service.

Great. That's very helpful. And then just a follow-up on the M&A pipeline. I think you guys made a couple of acquisitions here in the last few years, but how are you guys thinking about potential targets how conversations are going and where valuations stand in this environment?

Yeah. So I'll just mention that we continue to be -- we continue to look at assets in chosen areas that we are interested in. Like we have said before, for us, it's all about capability creation. So the core around M&A really is, if there is some new capability that we can bring in, that would be really our focus. Valuations, we believe, have come very much under control over the past two years or so. And therefore, our ability to be productive and constructive in this area is high. We do constantly look at a number of some of these assets starting from small to midsized to sometimes even much larger sized assets also in order to make sure that our team is scanning the market very carefully and then giving us the insights to make a decision.

Having said that, we will not do anything that doesn't make business sense for us. So the timing of any future M&A activities and stuff like that can't comment on, but I can only tell you that we have been very constraint.

Yeah. And just I'll just add over there. There are multiple of those capability acquisitions, what we focus and target upon are in various stages of discussion at this stage, and in a specific point from a valuation perspective. In fact, even earlier evaluation were actually over high and now you've come to proper reasonable level and that's what we are seeing in various of our discussions with various of the target which are at a different maturity stage.

That being said, Kyle, the approach from the company remains the same. We were going to be opportunistic. We're going to find assets. It has the right capability that are the right cultural fit and that are at the right price. And if those opportunities aren't available in the market, we're not going to do acquisitions.

Got it. Great color. Thanks, guys.

(Operator Instructions) Mina Mafi, JP Morgan.

Hi. This is Mina on for Puneet Jain. I have two quick questions on Gen AI. The first is that you mentioned that Gen AI is drawing in new clients as well as extending your market share of existing. Are these new clients first-time outsourcers or competitor takeaways? And are these projects still more in the discovery stage or getting into implementation?

Yeah, I think that's a great question because one of the things that we are seeing is with the existing portfolio, our ability to have these conversations obviously is high, but because they're used to doing things in a particular way, they take a little longer to climb on the bandwagon of Gen AI because there has to be a significant change management process that has been implemented even with an existing process, but with a lot of the first-time outsourcers with whom we are having lots of these conversations, their ability to get into this model upfront is much higher, and that's where we are having --we are quite excited about the fact that while we are implementing and experimenting with a lot of these solutions with our existing clients, the ability to take them into some of these new conversations and lead with Gen AI solutions is also very high.

And I can tell you that at this point in time, the pipeline of sales is very strong with some of these first-time outsourcers and many of them, it is Gen AI-led solutions and some of the platform-based solutions that I spoke about where the core of the discussion is happening around.

Great, thank you. My other question was just that you have stated you have as -- you expect a structurally higher margin profile as you guys are shifting more towards outsourcing? And have also mentioned that these Gen AI projects are coming in at higher margin. How much higher are the Gen AI projects? And is it significant enough to also structurally, I guess, shift your margin profile and raise it.

At this point in time, Mina, when you look at the quantum of work that's been shifted to Gen AI, it's extremely, extremely small, right? We've talked about a handful of very small projects that we've implemented and parts of processes that we have leveraged these tools on for existing clients at this point in time. So this is going to be an evolution like everything else. I think the opportunity tools like Gen AI presents and the need for digital transformation presents is the ability to shift clients from FTE models to non-FTE models. And we know that when we're able to move to either a transaction or an outcome or a subscription-based model, the margin levers that we, as a company, have at our disposal are significantly higher.

So what we want to do is we want to lock in that customer. We want to take ownership and accountability for results. We want to move to a model where we take ownership and accountability for those results. And therefore, make relationship stickier, but at the same time, give us multiple margin levers to be able to drive improvement. And what we see in our current portfolio is that the margins on the non-FTE component of our business are meaningfully higher than the FTE component. So that's really where the opportunity for margin expansion in space comes from. It is the evolution to higher value services and the higher value models to deliver those services. And Gen AI is just one component of that. But we do believe it has the potential to help serve as a catalyst for that move.

Got it. Thank you.

Thank you.

(Operator Instructions) Ashwin Shirvaikar, Citi.

Yes, thank you. Let me start with saying Happy New Year. First time, speaking with you guys this year, and congratulations on the good quarter and the rapid resolution what you have with the client.

Let me ask about the ADS to general shares transition and apologies if I've misinterpreted this, but have you sized the impact of things like the ability to now be on an index once you complete the process, the number of incremental investors who can now look at WNS, it used to be able to before that might have been what you meant by access to capital. But in terms of investor flow, I feel like that can be very significant levels of buying, but have you done that analysis?

Sure let me take that, Ashwin. Obviously, we've done several assessments of what the potential opportunities are across the entire -- both institutional and index capabilities for us. And you're right, the opportunity is meaningful. The reality is we know there are no hard and fast rules that we need to continue to demonstrate the right structure, the right metrics, the right approach to be able to access those funds.

So at this point in time to be able to say we definitively know that these certain things are given. I don't think we can do that. I think what we can say with certainty is that what we're doing here, certainly positions the company much, much better to have access to those funds. And obviously, if you look at our shareholder portfolio today, sitting here with 2% of our shares held in index fund, this has been a major deficiency for the company over the past several years.

So Ashwin, I think I would just like to take a higher level stab at this question, to answer this question. If you look, I mean, notwithstanding where the macros are and how demand is playing out at this point in time. If you just step back maybe a year or two, you will see that we have taken a view that the tailwinds for this business continue to be very, very high, for the sector itself and for WNS, in particular. There is the ability for us to continue to lead and grow and grow faster than industry over a period of time . That's really where our focus is.

We believe that the market penetration levels for BPO continue to be low and therefore, with some of the changes taking place in the world around us, including AI, Gen AI, and some of the other conversations we've been having over the last few quarters, the ability for smart companies to lead is very high. WNS is one of those smart companies that will claim its place.

And while we're doing all of this, you will see that we -- in order to prepare all of this, we have made some significant changes. We mad an organization structure change in order to be even more nimble, flexible, right-sized, and innovative and attentive to our customers. That organization change has now settled in well. We have absorbed a number of leaders across the company, added a number of new leaders that have come in, and got very comfortable with this.

Our customer base, prospect base is very aligned around this new org structure. The implementations that we have done around technology as well as AI, Gen AI, and some of the things that I've spoken about in the last two or three quarters, are starting to resonate well.

Although like Dave said, at this point in time, the revenue impact on all of this is minimal, but we believe it will keep catching up, right? As a result of all of this, the conversations that are now starting with prospects are emerging as a much larger-sized conversations, larger-size deals that we think, over the next few quarters, will emerge at proper run rate events for what is happening.

And when we do all of this, we therefore think the potential for this company to access capital, manage our capital allocation program appropriately as well as allow the investor base to participate in this growth story in a constructive way has to be done. And that's one of the reasons why we have done all of this.

Now in terms of sizing of the opportunity -- I can't tell you, like Dave said, 2% of our equity is owned by the indices. As you know, when you look at the peer set and you look at others, a significantly larger part of their holding actually are indices. So we actually believe that some of these funds as well as some other stakeholders deserve to own the WNS stock. And as management, we are doing whatever's required behind the scenes to make sure that everyone is part of our long-term growth and success story. So that's really where this conversation is taking.

And maybe, Ashwin, I'll just add a little there that if you see the evolution from a WNS specific perspective, right, because the other question is the timing, right? Why is the time? Why it was not earlier and so on. And this whole diversification, whether it's from a revenue perspective, whether it was from the market, where they specifically on the North America, the structured chain what Keshav spoke about to support that entire growth, is how it has been evolving over the year. And that is where we believe that this is the right time for the company to really move ahead with some of this additional steps.

It's very complete. Thank you all, and I'll leave it there.

Thank you, Ashwin.

(Operator Instructions) David Koning, Baird.

Yeah, good morning, guys. Great job.

Thanks, Dave.

Yeah, and just a couple of quick ones. So, first of all, the health business, obviously still declining with the transition, but we've had four quarters now of a pretty similar decline, which implies Q4 hits a dramatically easier comp.

And I guess the real question here is how fast is that growing acts the transition really so we can get an understanding how fast Q4 could grow and going forward?

Let me take this, Dave. I mean, obviously, we know in fiscal Q4 of last year, we took a significant step down and we lost a large health care process with one of our clients. If you look at the challenges, for example, in the healthcare vertical this past quarter, it was actually on the analytics project work. So part of what we've seen here in the last quarter or two is some softness relative to project work and the analytics work in that vertical and sub-verticals for us, specifically in the pharmaceutical space. But you're right, I think we're getting to the point now where those headwinds anniversary and to the extent that we've got stability on the project side, we should see Q4 sequentially step up and we should start to see a reacceleration of that year-over-year growth.

Okay, great. That's exactly what I was looking for. Good. And then the second thing, just employees grew over 1% sequentially. The last couple of quarters were flat. That seems like a pretty good sign and often stocks start going up when employees grow. Maybe what's behind that? I mean, is there a lot of just confidence that you need to start building the employee base again, just to keep up with accelerating growth?

Sure. Let me take that one, Dave. Obviously, we fully expected this question given the fact our headcount went up in the quarter while revenue went down. And the reality is when you look at what we see going forward, when you look at having over 99% visibility to healthy sequential growth from Q3 to Q4, what we didn't want to do is get caught in a situation where we were letting people go and then rehiring them a quarter, quarter-and-a-half later.

So part of the reason margins were a little soft this quarter is because we carried excess resource. When you look at revenue per employee in the quarter, it was weak. And the reality is we were willing to do that and willing to absorb that in terms of the overall margins for the full year, maintaining at this [21.5%] a range absolutely willing to do that, given the visibility that we have to grow going forward.

And so just to add in the way we spoke about the large insurance clients from a quarter four perspective, we are in the phase two transition work will start. So it's preparedness for some of those also as well as some of the other visibility and the growth what we are seeing. So yes, absolutely, what we have mentioned that, it's just a matter of timing and also the mix changes, right, because the skills are different from a different business perspective. And accordingly, we've been just balanced a part of that.

Yeah. Well, good job. Thanks, guys.

Thanks, Dave.

Thanks, Dave.

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