WNS (Holdings) Ltd

NYSE:WNS

Earnings Call Analysis

WNS Holdings Navigates Revenue Challenges While Building Stronger Growth Pipeline

In the fiscal second quarter, WNS Holdings reported a net revenue of $310.7 million, down 4.4% year-over-year, impacted by the loss of a large healthcare client. However, the company added 9 new clients and expanded 41 existing ones, demonstrating resilience. Notably, adjusted net income was $51.5 million with adjusted EPS at $1.13, aided by a one-time tax benefit of $9 million. Guidance for fiscal 2025 has been revised, projecting revenue between $1.250 billion to $1.296 billion, reflecting a year-over-year change of -3% to +1%. Future growth is expected as the demand for data and AI services remains strong, setting a solid foundation for recovery in the upcoming quarters.

Navigating Through Challenges

WNS Holdings reported its fiscal 2025 second-quarter earnings, and the results tell a story of both resilience and ongoing challenges. The company recorded net revenues of $310.7 million, a decrease of 4.4% compared to the same quarter last year, and a 0.6% drop from the previous quarter. The decline is attributed to the loss of a major healthcare client and persistent reductions in online travel revenues, which have impacted the firm's performance across all sectors.

New Business and Client Expansion

Despite the setbacks, WNS added nine new logos and expanded 41 existing client relationships this quarter, showcasing some capacity for growth. Notably, after accounting for the loss of the healthcare client, all other sectors exhibited sequential growth, indicating a healthy demand for their digitization and cost-reduction initiatives.

Revised Revenue Guidance

The outlook for full-year revenue has been revised down, expecting a range between $1.250 billion and $1.296 billion. This guidance implies a year-over-year decline of 3% to 1%. Importantly, this updated forecast excludes any contribution from a currently growing large deal pipeline, ongoing declines in online travel volumes, and currently stagnant discretionary project spending. The company asserts that the guidance now reflects a more conservative assessment of business conditions, particularly in the online travel sector where revenues are expected to continue declining.

Tax Benefits and Profitability

Adjusted net income reached $51.5 million for the quarter, showing some stability compared to $54.4 million in the prior year. Improved adjusted diluted earnings per share rose from $1.10 last year to $1.13. Furthermore, the effective tax rate significantly decreased to 8.5%, mainly due to a one-time tax benefit that reversed nearly $9 million of deferred tax liability.

Operating Margins and Cost Management

WNS's adjusted operating margin in the second quarter was reported at 18.6%, down from 21.5% year-over-year. The primary drivers of margin contraction were lower revenue generation and active investments in infrastructure and sales, compounded by increased SG&A expenditures. Despite these challenges, management anticipates that margins can improve to a margin range of 19% to 20% for the fiscal year, bearing in mind that achieving low 20s margins will be a focus going forward.

Team Expansion and Future Hiring Plans

To meet anticipated growth, WNS has already begun increasing its headcount, planning to hire 90 to 120 days in advance of the expected upswing in business—which executives believe will manifest in the third and fourth quarters. WNS's current headcount stands at 62,951 with an attrition rate of 34%, which reflects the company's commitment to stabilize and expand its operational capacity.

Focus on Long-Term Growth

WNS is heavily investing in domain expertise, data analytics, and technology-enabled offerings, aiming to leverage AI capabilities to drive future growth. Their strong pipeline of over 20 large deals representing more than $500 million in annual contract value affirms their strategic direction. While the immediate quarter faces uncertainty, Keshav Murugesh, CEO, expressed robust confidence in long-term growth trajectories, emphasizing that the worst may be behind the firm, and prospects for sequential growth in revenue are optimistic.

Commitment to Shareholder Value

Throughout the first half of fiscal 2025, WNS repurchased 2.8 million shares, demonstrating its commitment to shareholder value while the company maintains strategic growth through investments in new technology and expertise. As WNS looks to future opportunities, including areas like generative AI, it underscores its focus on generating sustainable value for shareholders.

Conclusion

In summary, WNS Holdings is weathering a storm of challenges, marked by revenue declines and strategic adjustments, but the commitment to growth, enhanced operational capacity, and prioritization of key sectors offer potential paths to recovery. Investors may look forward to a gradual recovery in revenues, backed by a strong strategic vision and focus on long-term value creation.

Earnings Call Transcript 2025-Q2

[Operator]

Good morning, and welcome to the WNS Holdings Fiscal 2025 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, the 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 rations. David?

[David Mackey, executive]

Thank you, and welcome to our fiscal 2025 second quarter earnings call. With me today on the call, I have WNS' CEO, Keshav Murugesh; and WNS' CFO, Arijit Sen. 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, 2024. 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, acquisition-related expenses or benefits and impairment of goodwill and intangible assets. We are also excluding costs related to our ADS program termination and costs associated with the transition to voluntarily reporting on U.S. domestic issuer forms.

Adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, goodwill and intangible asset impairment, ADS program termination costs, the transition to voluntary reporting on U.S. domestic issuer forms 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?

[Keshav Murugesh, executive]

Thank you, David. Good morning, everyone. WNS' second quarter revenue and margin were largely in line with company expectations, while EPS came in above forecast based on onetime tax benefits of $9 million. The company posted net revenue of $310.7 million, representing a year-over-year decrease of 4.4% on a reported basis and 5.2% on a constant currency basis after adjusting for foreign exchange. Versus the previous quarter, net revenue decreased by 0.6% on a reported basis and by 1.5% on a constant currency basis. Sequentially, the ramp of 4 large deals sold in fiscal Q4 of last year and broad-based demand for process automation and cost reduction initiatives in the first half of 2025 largely offset the loss of a large healthcare client and continued reductions in our online travel revenues.

During the second quarter, we added 9 new logos and expanded 41 existing relationships. For the full year, guidance has been lower to reflect continued reductions in online travel volumes and slower-than-expected conversion of large deals. While the large deal pipeline continues to expand, the timing of these contract signings as well as associated revenue ramps is proving difficult to predict. As a result, at this time, we have removed the large deal revenue contribution from our fiscal 2025 guidance. Currently, we have more than 20 large deals representing over $500 million in annual contract value spread across all key verticals, services as well as geographies. We are making good progress moving these deals through the pipeline and remain confident that WNS is well positioned to win more than our fair share of these opportunities.

For the past several quarters, we've been discussing how WNS is increasingly delivering outcomes for our clients at the intersection of domain, digital as well as data. We continue to make strategic investments in all 3 of these areas with a focus on developing proprietary technology tools and platforms, forging new strategic relationships as well as reshaping our global talent. Today, I want to spend a little time highlighting our organizational capabilities and progress in our data, analytics and AI practice.

At WNS, we believe the true power of analytics is realized when combined with technology, domain specialization and process expertise. As a result, we are focused on ensuring that analytics and technology are integrated into everything we do, from customer CX solutions to end-to-end transformational engagements. Today, WNS boasts a mature, robust and differentiated analytics practice that has been built over the past 20 years through a combination of organic investments as well as strategic acquisitions. At the core of our analytics practice is data management, which is the foundation for all analytics work, including AI as well as generative AI.

WNS has built a strong portfolio of data management services and platforms that enable our clients to source, clean, organize, integrate as well as secure their data to unlock its inherent value. This includes expertise in converting unstructured data from sources like e-mails, images, text, audio, sensors as well as social media posts into structured data to create usable analyzable constructs. Our strength in optimizing data quality and managing data as an asset are critical to help deliver actionable insights as well as business outcomes.

In addition, our strategic acquisitions over the past several years have helped turbocharge WNS' ability to combine analytics and technology to create reusable components which underpin our services and solutions. These proprietary assets are stitched together with domain and process expertise, adding humans in the loop to create productized services across both horizontals and verticals. Our productized services enable WNS to accelerate speed to market and deploy our solutions at scale while maintaining the flexibility to co-create customized differentiated solutions for each of our clients.

To date, WNS has built AI-led analytics assets across all key horizontals, including finance and accounting, procurement and supply chain and customer support. The company has also created unique industry-specific capabilities such as claims management and recovery services for insurance companies, R&D and clinical specialization offerings for big pharma, revenue growth management services for retail and CPG firms and a Gen AI-led documentation platform for shipping and logistics. These offerings have enabled WNS analytics to attract some of the world's largest brands as clients, including industry leaders in beverages, biopharma as well as restaurants.

Within our data practice, we have also been investing in the expansion and enhancement of our front office onsite-centric consulting capabilities. And with the pace of change and technological advancement accelerated, clients are increasingly looking for experts to help them assess their current situations and help them co-create solutions. Over the past 2 years, WNS has built a global analytics client solutions team of senior resources that is solely focused on helping clients achieve these objectives. These senior-level consultants have data as well as domain specialist backgrounds and are responsible for helping clients with their data, AI and analytics requirements across strategies, gap analysis, road maps, change management, governance and processes. The upfront consulting efforts helped set the foundation for successful business transformation programs as well as value-driven relationships.

As a result of these investments, WNS' analytics is experiencing strong growth despite the weak macro environment with our stand-alone analytics was growing at a 20% CAGR over the past 3 years. And while stand-alone reported analytics today represents 14% of WNS revenue, it is safe to say that the majority of total company revenues now has analytics embedded as part of the client solution, and all of the large deals in our pipeline have technology-enabled analytics as a critical component of our value proposition. WNS' solid growth and expanding capabilities in data, analytics and AI are increasingly being recognized by the analysts and the adviser community.

We've now been named the market leader by HFS and analytics, AI, data platforms and automation services, a star performer for analytics business process services by Everest and a leader in data science services by Analytics India Magazine and an AI game changer by NASSCOM. The company also received Seven Stevie Awards for its AI, machine learning and Gen AI solutions and an AI Excellence Award from Business Intelligence Group for our Gen AI capabilities. As the analysts and advisers remain important gatekeepers to many client initiatives, this positive recognition is critical to ensuring that WNS remains top of the mind for outsourcing opportunities.

In summary, by combining the power of data, digital as well as domain, today, WNS is able to deliver impactful business outcomes for our clients, including generating actionable insights to improve decision-making, reducing business risk, enhancing customer experience and enabling innovation and competitive differentiation.

With respect to our fiscal 2025 guidance, while we remain comfortable in our ability to close some of the large opportunities, given their uncertain timing, we have removed the large deal revenue contribution from our updated projections. Guidance also assumes a further reduction in OTA revenues in the second half of the year based on current volume trends. And despite these challenges, we are comfortable in our ability to sequentially grow revenues in fiscal Q3 as well as Q4, providing solid momentum exiting the year. Any second half large deal signings should provide some incremental revenue this year but, more importantly, will provide enhanced visibility to our revenue acceleration in fiscal 2026.

WNS remains committed to continuing our investments in domain expertise, data and analytics and technology-enabled offerings leveraging AI and Gen AI to ensure our ability to deliver long-term profitable growth and sustainable shareholder value.

I would now like to turn the call over to our CFO, Arijit Sen, to further discuss our results as well as outlook. Arijit?

[Arijit Sengupta, executive]

Thank you, Keshav. In the fiscal second quarter, WNS net revenue came in at $310.7 million, down 4.4% from $325 million posted in the same quarter of last year and down 5.2% on a constant currency basis. Sequentially, net revenue decreased by 0.6% on a reported basis and 1.5% constant currency. The quarter-over-quarter revenue decline was driven by the loss of a large healthcare client, volume reductions in online travel and ongoing weakness in discretionary project-based revenues.

These revenue headwinds were partially offset by the ramp of a large deal closed in Q4 and healthy demand for digitization and cost-reduction-focused initiatives. In fact, excluding the large healthcare client loss, each of our verticals posted sequential growth this quarter. In Q2, WNS recorded $1.2 million of short-term high-margin revenue.

Adjusted operating margin in Q2 was 18.6% as compared to 21.5% last year and 18.4% last quarter. Year-over-year, adjusted operating margins decreased as a result of lower revenue and employee utilization, increased investments in infrastructure and sales and higher SG&A levels resulting from $2.1 million of expense provision reversals for performance incentives and bad debt in Q2 of last year. These headwinds were partially offset by favorable currency movements. Sequentially, margin improvement was driven by favorable currency movements.

The company's net other expense was $1.4 million of net expense in the second quarter as compared to $0.1 million of net expense in Q2 of fiscal 2024 and $0.3 million of net expense last quarter. Both year-over-year and sequentially, the unfavorable variance is a result of higher debt levels and lower cash balances driven primarily by our share repurchases. WNS effective tax rate for Q2 came in at 8.5% as compared to 22% last year and 23.1% in the prior quarter. The Q2 tax rate reduced by almost $9 million primarily due to onetime tax benefits associated with the reversal of a deferred tax liability on intangibles. Both year-over-year and sequentially, other changes in the effective tax rate were driven by our geographical profit mix and the percentage of work delivered from tax incentive facilities.

The company's adjusted net income for Q2 was $51.5 million compared with $54.4 million in the same quarter of fiscal 2024 and $44 million last quarter. Adjusted diluted earnings were $1.13 per share in Q2, up from $1.10 in the second quarter of last year and from $0.93 last quarter. As of September 30, 2024, WNS balances in cash and investments totaled $221.5 million, and the company had $262.8 million in debt. In the second quarter, WNS generated $43.6 million of cash from operating activities, incurred $12.7 million in capital expenditures and paid debt repayments of $43 million.

The company also repurchased 1,156,000 shares of stock at an average price of $56.61, which impacted Q2 cash by $71.7 million. Through the first half of fiscal 2025, WNS has repurchased 2.8 million shares of stock at an average price of $53.46 and a total cost of $149.7 million.

DSO in the second quarter came in at 38 days as compared to 35 days reported in Q2 of last year and 36 days last quarter. With respect to other key operating metrics, headcount at the end of second quarter was 62,951 and attrition rate was 34% as compared to 30% reported in Q2 of last year and 34% in the previous quarter. We expect attrition to average in the low to mid-30% range, but the rates could remain volatile quarter-to-quarter. Build seat capacity at the end of Q2 increased to 43,108 and WNS average 72% work from office during the quarter.

In our press release issued earlier today, WNS provided a revised full year guidance for fiscal 2025. Based on the company's current visibility levels, we expect net revenue to be in the range of $1.250 billion to $1.296 billion representing a year-over-year range of minus 3% to plus 1% on a reported basis. On a constant currency basis, the guidance ranges from minus 4% to 0%. As Keshav mentioned, our fiscal 2025 guidance assumes no revenue contribution from the large deal pipeline, ongoing reductions in online travel volumes and no improvement in discretionary project spend. Guidance also excludes short-term revenues and any incremental revenue from a large insurance captive. Top line projections assume an average British pound to U.S. dollar rate of 1.31 for the remainder of the fiscal year.

Full year adjusted net income for fiscal 2025 is expected to be in the range of $190 million to $200 million based on a INR 83.5 to $1 exchange for the remainder of fiscal 2025. This implies adjusted EPS of $4.13 to $4.35, assuming a diluted share count of approximately 46 million shares. With respect to capital expenditures, WNS currently expects our requirements for fiscal 2025 to be up to $65 million.

We will now open the call for questions. Operator?

[Operator]

[Operator Instructions] And our first question coming from the line of Nate Svensson with Deutsche Bank.

[Christopher Svensson, analyst]

I wanted to delve a little more into the large deal pipeline in win rates. So you had the 4 large deals in 4Q of last year, 1 large deal in 1Q. It sounds like none this quarter. At the same time, can you talk about how the large deal pipeline is at record levels. So I guess I'm just hoping for a little more clarity on the lower visibility called out versus maybe realizing lower win rates than what you've seen historically. Going to the comments from last quarter, I think you said that the large deal wins baked into the prior guide would imply a below average win rate in the pipeline. So just trying to get a sense of how much the change in guidance is being driven by general demand trends versus maybe increased pressure on the competitive or pricing side of things?

[Keshav Murugesh, executive]

Okay. I think I'll take that. So first of all, I must mention, once again, I want to underline the fact that the overall pipeline for sale continues to be very strong and at record levels across most of our businesses. The impact that we spoke about for H2 is essentially because of what I would call the perfect storm around 2 or 3 specific areas that were called out in the prepared remarks. Actually, at this point in time, we continue to have a very strong pipeline of large deals. And let me just explain how these things are progressing.

Today, I would say that we have almost more than 25-plus large deals which are $10 million plus in terms of ACV. And many of these are very strategic in nature. They need very strong involvement both sides of the house, our side as well as the client side. And what happens in many of these deals which we are now understanding better is that as the client gets much more comfortable with who they're interacting with in WNS, what actually happens is their focus is built on the comfort around our understanding of their business domains very well. They definitely want to see much more attention from the top of the house, which means I need to be personally involved in many of these deals.

Many of these deals are focused not just on regular transformation or cost leadership for the client, but a lot of it is focused around revenue accretion, which means involvement of many more layers inside the client side. I want to also mention that this also means it's a very strong partnership model between both sides. And it also means in a positive way that in many of these deals, we've been able to move the narrative away from procurement, which is very critical for WNS in terms of making sure that over a period of time these ultimately result in a win-win for both sides and not driven by a procurement approach to these programs.

All these deals in terms of size, complexity as well as in the nature are very, very strategic. And it also, by definition, means more involvement from an executive committee on the other side, often boards getting involved in the decision on the other side. Board from WNS side also getting involved in terms of taking some of these decisions and I think that is the misstep that we made when we baked some of this revenue into our guidance. If you look at how we actually have made progress, the number of deals, size of deals and the volumes now being projected by some of these prospects are even higher than what we saw last time. I mean, we just guided -- we just mentioned that we have almost $500 million of ACV in some of these deals.

But the reality is it is taking a little longer, and we probably assume that based on the fact that we signed some of the deals in fourth quarter or something in Q1 that the same progress in signings would continue in Q2. What we have only done at this point in time has been more conservative in terms of taking that revenue out of the potential pipeline for the rest of the year because we understand that even when we close this during Q3 or Q4 or wherever, the potential for revenue during this year will be minimal, but potential for revenue in the next years will be high.

I want to end again by saying these deals are very, very critical for WNS. They're changing the game for us for the long-term, and we believe super confident about the fact that the $1 million to $3 million deals that we are continuously winning as well as some of these deals, as they win, will build tremendous comfort, confidence in terms of long-term. And some of it is also being reflected in terms of the headcount that you may have seen on our books.

[David Mackey, executive]

And just to add to that real quick, Nate, I think the other thing to touch specifically on the question you asked about win rates, the removal of the large deal pipeline has nothing to do with win rate, right? I think we still believe we're extremely well positioned in these opportunities. I think the removal of the large deal pipeline is about timing and not relative to our expectations about the number of deals that we can win or how we're positioned within these deals.

[Christopher Svensson, analyst]

Yes. That's great to hear on the win rates, and I think it was a prudent thing to take those out of the guide. So that's appreciated. I guess for the follow-up, maybe taking a step back. When I think about the history of WNS, you've obviously been able to differentiate yourself with history of strong execution, consistent double-digit organic growth and then being able to set expectation so that you can kind of beat and raise as you move to the fiscal year. Obviously, we're in the midst of a really weak macro and still a lot of uncertainty out there.

But maybe taking a step back, you touched on this in your last answer, but maybe can you talk a little bit more about your confidence in your ability to return to that historical growth profile and execution as we move into fiscal '26 and beyond? I think last call, you mentioned that you were well set up for next fiscal year, but obviously a ton of puts and takes impacting the business right now. So I think it would just be helpful to hear your thoughts on the business' ability to get back to that strength you've demonstrated historically.

[Keshav Murugesh, executive]

Yes. Again, we are super confident about our ability to get back to strong growth rates. Once again, I must mention that what we have experienced this year are very specific client-related or specific issues that we have had to call out for this year. Nothing to do with the demand trends. Nothing to do with the tailwinds we are seeing in the industry. In fact, we would expect that with all the uncertainty being seen outside, we would only benefit being one of the legacy players and transformational kind of players in the industry.

Again, I must mention that most clients are looking for partners who come in with very strong understanding of digital, data and domain that we spoke about. But most of the deals are also being led by technology, analytics, AI in some cases, generative AI as well, all areas that WNS has traditionally invested in and continues to invest very strongly in. Again, I must say that we have already got a lot of confidence in terms of revenue momentum for Q3 as well as Q4 coming back, right, in terms of sequential growth. And as we win some of these other deals, the large deals as well as the traditional bread-and-butter $1 million to $3 million or $1 million to $5 million deals, we believe that we are probably among the -- at the lowest end of -- or the worst is now behind us in terms of where we could be, and the future state is one of solid growth as well as profitability.

[David Mackey, executive]

Yes. And just to add a little color to that, Nate. I think as was mentioned in the prepared remarks, the underlying growth in Q2 was extremely healthy. I mean, if you take out the large healthcare client loss, we grew in excess of 3% sequentially in Q2. The guidance, despite removing the large deal pipeline, we're looking at $320 million which represents a 3% sequential growth from Q2. And obviously, if you do the math to what's left for Q4, you're looking at a 2% to 3% sequential growth from Q3 to Q4. So the confidence in returning to double growth -- double-digit growth comes from the 3% sequential growth rate that we're now posting despite not having the momentum from the large deal pipeline.

[Christopher Svensson, analyst]

I appreciate the color and you good to hear about the long-term confidence.

[David Mackey, executive]

Thanks, Nate.

[Operator]

Our next question coming from the line of Bryan Bergin with TD Cowen.

[Bryan Bergin, analyst]

Can you comment on the OTA side of the equation here? How much was this pressure a result of some of the guidance reduction as well?

[David Mackey, executive]

Sure. So let me take that. When you look at the guidance reduction for the full year, we're looking at about a 1% to 2% impact from the Q2 reduction in OTA and our expectation of continued volume reductions in the back half of the year. So again, I think we've been -- we've tried to be conservative here about our expectations for the sector. And we've discussed at length over the last several quarters the reasons for the challenges that we've had in the OTA sector, whether that's automation, whether that's strategy change, whether that's customer specific challenges within the OTA space and their inability to forecast their volumes and predict accordingly.

So I think we've taken a very conservative approach to the OTA space. But I also want to reiterate some of the messages that we brought last quarter, which is that if we can't be impactful to the client, if we can't create value for the customer and if the client is not willing to recognize the value that we're delivering, then it's not a business that we want to be in, right? So we're not going to play in low-end, commoditized types of work. And if the client is taking a commoditized view of these services and solutions, then we're going to be getting out of it.

[Keshav Murugesh, executive]

Yes. But I must just add one element there, Dave, which is while that is our stated objective and we are having lots of interesting discussions with the client and the clients in the sector generally, we also realize that all of them are also understanding that business model transformation for themselves also is going to be critical in order to survive the onslaught of what's happening in the market for them long-term.

And therefore, I must say there are also lots of healthy discussions happening between both sides in terms of things that we can do for them that go well beyond some of the traditional services that may have got commoditized and which we are walking away from but allows us to bring the rest of the power of WNS in, in terms of digital, data, domain, analytics and take them into higher value kind of services. So we'll have to watch the space in terms of how that develops.

[David Mackey, executive]

Yes. Suffice to say, Bryan, our OTA revenues in the second quarter were now below 4% of total company.

[Bryan Bergin, analyst]

Okay, okay. And then as it relates to just the headcount growth sequentially, can you just comment where are you seeing that growth? What's attributing to that expansion?

[Arijit Sengupta, executive]

Yes. So let me take that, This is Arijit. So look, I think Dave talked about it, if you pare out the large healthcare client loss, you will see that there is growth that's coming in Q2. Our guidance also implies a 2% to 3% sequential growth year-on-year. So the hiring for that growth, we already started hiring, and the headcount increase actually cements our view of the pipeline and the growth momentum that we are [indiscernible] in Q3 and Q4.

So that -- we've already started the hiring. We are expecting the increase in revenue to happen in Q3 and Q4. Our business requires us to hire 90 to 120 days in advance for us to ramp and train the employees, that some of that is bearing in the higher headcount numbers that you are seeing in Q2.

[David Mackey, executive]

I think the other thing that's embedded and Arijit touched on it a little bit is, if you'll recall, the large healthcare client that we lost, what was a technology-heavy service offering, right? So when you look at kind of how that works its way through our sectors and things like that, what you'll see is that while it was very high revenue for us, the number of employees supporting that service offering were relatively low. So part of what you've seen here is that as we replace the healthcare lost client revenue with more traditional types of WNS revenues, it's going to take more people to backfill that headcount.

[Operator]

Our next question coming from the line of Mayank Tandon with Needham & Company.

[Mayank Tandon, analyst]

Keshav and Dave, I wanted to just get a better grasp on the headwinds that you called out. Could you just walk through the timing when these headwinds will start to abate? In other words, when do we get to a model when it's a clean slate and we can see that growth start to show up, especially as these big deals start to ramp up, potentially in a few quarters based on some of your comments.

[David Mackey, executive]

Yes. Look, I think we've talked about in general, Mayank, 3 meaningful headwinds, right, over the last year, 1.5 years. One is the large healthcare client loss, one is the shift from on-site to offshore of one of our large Internet-based client, and the other has been the OTA volumes. Obviously, this quarter was the ramp-down of the large healthcare client. So I guess, depending on whether you're looking at this on a sequential basis or a year-over-year basis, we can have different discussions about kind of the headwinds. But on a sequential basis, at any rate, the vast majority of this will have abated by Q3. So we don't have a sequential impact from Q2 to Q3 from the large healthcare client. We don't have a sequential impact from Q2 to Q3 from the Internet client moving offshore, and we have a modest expected headwind within the OTA volumes.

[Mayank Tandon, analyst]

Got it. That clears it up. And then just as a follow-up, I wanted to ask about margin expectations, what is embedded in the guide in the back half. Maybe you could walk through gross margins and the operating margins. Just trying to get a sense if you're going to be a little bit more fixated on expense management in the face of maybe the slower ramp of those larger deals. Just any color on the margin trajectory in the back half and your expectation is to get back to that low 20s EBIT margin longer-term as revenue starts to come through.

[David Mackey, executive]

Yes. I think, Mayank, our expectation is that we're going to get back into the low 20s by the fourth quarter and that we will see margin expansion on the adjusted operating margin line in both Q3 and Q4. We're probably looking in the 19% to 20% range for adjusted operating margins for the full year. And that's really, at the end of the day, because we've removed the revenues associated with the large deals. But the investments that we've made in the business, whether that's into expanding our capabilities or building out our infrastructure, which we need to continue to do, we're not going to scale back on that. The bottom line is we believe in the long-term health. We see the momentum in the business. We need to be planning for the future.

So those investments are not going to be scaled back. The infrastructure spend and the build of our global capability is not going to be scaled back. And if you look at the real reason that we've got a little bit of margin pressure on a year-over-year basis, it's an expense coverage issue. At the end of the day, our SG&A rate is going to run a little bit higher this year because it doesn't make sense to take those numbers down for 2 quarters and then build them back up starting in the first quarter of next fiscal. So at this point in time, we are going to see steady margin expansion through the back half of the year. But the reality is that the full year margins are going to be a little bit below where we were last year.

[Keshav Murugesh, executive]

Yes. Mayank, in fact, I'll just mention one thing. This is now all about growth and not just about margin now. Our focus now is we believe that the worst is now going to be behind us over the next few weeks, months, quarters based on all that we have announced. We believe that we have a very, very strong pipeline. We believe that we have to come back in terms of overall growth rates. And that's where we are focused and are investing in, and we are confident that these investments that we are making in all the core areas, including sales and marketing, will help us close deals and come back to the growth rates that we have traditionally delivered to the market.

[Arijit Sengupta, executive]

And just to add the other question on gross margins. And if you see our gross margins and gross margin is actually fairly flat versus last year. And that gives us confidence that our underlying business continues to remain profitable while we continue to invest in some of the sales investments that Dave and Keshav talked about. So fundamentally, business continues to be profitable. We have invested in our sales and marketing. And as the growth comes back, operating margin will also improve.

[Operator]

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

[Puneet Jain, analyst]

Keshav, could you double click on clients' behavior as it relates to incorporating AI or analytics in their processes? Is their behavior different across new versus existing clients? Or are there any verticals where you're seeing demand stronger than others?

And also, you previously mentioned generating 5% of revenue from Gen AI this year. Is that still on track given some of like the large deal contribution, it seems, like have been pushed out?

[Keshav Murugesh, executive]

Yes, Puneet, that's an excellent question. So just in terms of behavior, as you would expect, based on the stress our client is facing or the opportunity that they're seeing in the market, different verticals obviously are behaving slightly differently. We spent a lot of time talking about OTA and things like that. And I don't want to go down that path of explaining that. But generally, if you look at it, everyone has understood very well that companies like WNS understands the domain side very well, has invested so much in our digital and analytics.

And AI has been around for a while. Our ability to incisively use AI to deliver better outcomes for our clients has now got accelerated or enabled, I would say, over the last possibly 18 months or so because there's much greater belief in that model. Generative AI is something that everyone understands, can be something that can make client models much smarter, can help them with their cost challenges, can help them with their transformation agenda. And therefore, over the past so many quarters our focus has been on, first, educating clients about how we can help them with this model, about how they don't have to invest in licenses in order to get the benefits of some of these models. And then over a period of time, help them pinpoint which are the processes that could actually benefit from some of these business model changes for them.

So I think -- I think at this point in time, what we're seeing is people now realize that this is one more change in technology and model that is going to help them in terms of transformation, transforming their agenda, being more relevant to their end customers, doing things smarter, better, faster, more impactful manner, so to speak. And therefore, to do that, as a client, you need to work with a provider or a partner who really is an extension of your enterprise, who understands your domain, understands your history, understands your strategy, understands where you want to be over a period of time and what are the growth levers for you. And that is where WNS scores each and every time, right?

So first and foremost, I would say that, that is a huge advantage that we have because of the sheer knowledge of our customers' businesses, the core verticals, the transformation agenda and our points of view on how different models are changing, right? That's the first thing.

The second thing is, we spoke about generative AI. We are now very focused after educating many of these customers in terms of leading them down specific paths now, right, to help them understand that these offerings that we bring to the table will make them not only more efficient but also help transform their business models. And so what's actually happening is it is allowing them to focus much more on the external while allowing us to manage the rest for them. Coming to large deals obviously, when you interact with a new customer and you're looking at a completely different business model where you moved away from procurement and interacting at the top of the house on the other side, when you go into this discussion, you bring all the armory that you have to the fore in order to create a transformed business model, as a result of which it's a CEO-led initiative on both sides. And therefore, all the kind of engines that we bring to the table are really available up front and center in terms of some of these new deals.

At the same time, this thinking is also going into expansion within our existing clients. So one can see that while the earlier processes took a little longer, at this point in time, expansions around existing clients is all being focused on leveraging some of these models. And any of the large deals now have a combination of all of this up front and center. And that's the reason why probably some of these closures take a little longer. Because it means significant amount of disruption even for the client, right, acceptance of this disruption and change, validating all the assumptions and making sure that it's a handshake at the top of the house between WNS and the client, right?

So it's a significant change, and we expect, therefore, that as we start winning some of these models, this will be the model of the future that will drive WNS' growth momentum for the long-term.

[Puneet Jain, analyst]

Got it. And is 5% still like a reachable target?

[David Mackey, executive]

Yes. I think it absolutely is. As Keshav mentioned, the Gen AI revenues and the implementation are not specific to just new initiatives, while it's certainly a part of almost all of the new initiatives and I would say all of the new initiatives. A lot of what we're doing with Gen AI is expansion opportunities within our existing customer base and changing how we're operating within some of our existing customers.

So that contribution is not all just kind of gross growth. It's also changing some of what we're doing for existing clients as well in delivering enhanced value to those customers. So I think that 5% target for the year is still good.

[Puneet Jain, analyst]

Got it. And then, Dave, you were very helpful in identifying like the 3 issues and sharing like the timing of those. As we think about next year, like can you quantify the year-on-year impact you should expect from those 3 headwinds or any other puts and takes that you should consider for next year? I can imagine like these headwinds will still have impact on a year-on-year basis in the first half of next year, so.

[David Mackey, executive]

Yes. Look, I mean, I think the simple math, Puneet, is we know that the healthcare client is going to impact 3 of the 4 quarters for this year. So we have 1 quarter of impact next fiscal year. So you can expect roughly 1% on a year-over-year basis from the large healthcare client. The OTA space for the full year is going to end up costing us around 3%, 3.5% of revenue. So if you just take the mid-year convention for that, I think you're looking at roughly 1.5% to 2% for next year. So you're looking at a 3% lag, if you will, from the ramp downs in this fiscal that bleed into fiscal '26.

[Puneet Jain, analyst]

And is there any other headwinds that we should consider as we think about next year?

[David Mackey, executive]

Not at this time. Other than -- before I say not at this time, other than the standard headwinds that we have in our business around productivity and projects and expectations of known ramp downs. So I think that normal 10% to 11% is still in play.

[Puneet Jain, analyst]

Yes, of course. Yes. I mean, like any other unusual headwind. So thanks for clarifying. I appreciate it.

[David Mackey, executive]

No, no.

[Operator]

Our next question coming from the line of Maggie Nolan with William Blair.

[Jesse Wilson, analyst]

This is Jesse Wilson on for Maggie. So I understand your comments on visibility. So maybe can you take a step back and reflect on how you feel about some of the changes you've made in the sales force? How long do you think it will take some of these leaders to ramp up? And is the new model pulling you into conversations with a wider range of C-suite execs?

[David Mackey, executive]

Yes. Let me take this and then Keshav can kind of add some color here. But yes, I think our expectations around the contributions from these senior level sales associate, sales resources that we've hired, the Chief Growth Officers across all of our verticals are being largely met, right? I think that's -- this is how that large deal pipeline has been curated to have 20-plus deals with $500 million plus of ACV, it's something that we're extremely excited about. It's the timing and the closure that becomes an issue.

But we've built that pipeline over the last 18 months. I think we remain well positioned in a lot of those opportunities. They're doing what they're supposed to do. They're getting Keshav involved in these deals where he needs to be involved, where we need that CEO-to-CEO connect. And we still feel good about the investments that we've made into this new channel and the progress that we've made. Obviously, we would love to have signed 3 more large deals this quarter and have not had to adjust guidance.

But we also, I think, recognize that given the size, given the complexity and the scope of these deals, that they're going to be spotty, right, that it's going to be 3 in 1 quarter and nothing for 2 quarters. And we just don't have a lot of control over that. We don't have a lot of visibility to when they're going to hit. But I think as long as we keep moving them through the pipeline the way we have and connecting with the client at the right levels, we feel good about our ability to win more than our fair share of these opportunities.

[Keshav Murugesh, executive]

Yes. And I'll just mention that the pressure on performance with our sales team is very, very high. And I think the tenure of these people is more than 12 months at this point in time. So our focus really is on the productivity of these people, monitoring constantly, making sure that they are educated in terms of the pivot that is taking place at the company in terms of data, digital, domain and transformation and they are being able to engage prospects and clients with the right conversations.

So at this point in time, we believe that almost 65% to 70% of the sales force is actually productive in the sense that we want to be at. And normally in sales, anything above 50% or 60% is actually a decent track record, I must mentioned that as well. But at the same time, because we want to make sure that our people are constantly filling the pipeline with those $1 million to $5 million deals. Look, I want to also once again underline, large deals alone does not a company make, right? We need to constantly fill the pipeline with the bread-and-butter deals, which are $1 million to $5 million.

And many of this over a period of time become large deals and large relationships for us. So our focus in terms of making sure we have the right people bringing those deals and the rest of the people focusing on the large deals is very intense. I think we have the right energy behind it. There's a huge excitement in the company in terms of what's happening there. There's great excitement in the company in terms of the new capabilities that are being built, how these deals are being caught in terms of global delivery locations and how all of this together is creating magic for the company.

[Jesse Wilson, analyst]

Got it. I understand. That's helpful. For my follow-up, I saw in guidance that share count is higher by, I think, 100,000 shares from last time. So how much do you have left under the share repurchase program? And how come that ticked up by 0.1 million?

[Arijit Sengupta, executive]

Yes. So...

[David Mackey, executive]

I'm sorry. Go ahead, Arijit.

[Arijit Sengupta, executive]

Go ahead, Dave. Go ahead, Okay. So yes, so it's coming slightly highly because we've had some exercises in the last quarter. But from a -- but we have a pool of repurchase left. At this point in time, we are looking at using our capital for strategic growth, augmentation of some of the capabilities that Keshav talked about. We are also looking out for -- we're also looking at strategic M&A opportunities. But at the end of the fiscal, right, if you are not able to find effective utilization of this cash, we might consider doing an aggressive repurchase. But at this point, the focus is driving more towards strategic growth.

[David Mackey, executive]

And just to kind of close the loop on the numbers, we've repurchased 2.8 million shares in the first half of the year, which is obviously quite aggressive. We have another 1.3 million left on the authorization that was done back in May.

[Operator]

And at this time, we have no further questions in the Q&A queue. This will conclude today's conference call. Thank you all for your participation, and you may now disconnect.