WNS (Holdings) Ltd

NYSE:WNS

Earnings Call Transcript 2023-Q3

[Operator]

Good morning and welcome to the WNS Holdings Fiscal 2023 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, we will conduct a question-and-answer session and instructions for how to ask a question will follow at that time. As a reminder, this call is being recorded for replay purposes.

Now I'd like to turn the call over to David Mackey, WNS's Executive Vice President of Finance and Head of Investor Relations. David?

[David Mackey]

Thank you and welcome to our fiscal 2023 third quarter earnings call. With me today on the call, I have WNS's CEO, Keshav Murugesh; WNS's CFO, Sanjay Puria; and our COO, Gautam Barai. 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, 2022. 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 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 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, Group Chief Executive Officer]

Hey, thank you, David and good morning, everyone. In the fiscal third quarter, WNS continued to invest for the future while executing well and delivering solid financial results. Overall, our business continues to show both strength and resilience, despite the challenging macro environment.

Net revenue for Q3 came in at $292.0 million, representing a year-over-year increase of 12.2% on a reported basis and 19% on constant currency. Sequentially, net revenue increased by 1.3% on a reported basis and 2.3% on a constant currency basis after adjusting for foreign exchange.

Our acquisitions added approximately 3.6% to growth, year-over-year and 0.7% sequentially. In the third quarter, WNS added 11 new logos and expanded 24 existing relationships. Sanjay will provide further details on our third quarter financial performance during his prepared remarks.

As many of you are aware, in mid December, WNS announced the acquisition of two tuck-in strategic assets, in line with our stated criteria for M&A, we believe that these companies still gaps in our capabilities, our strong cultural fits, meets or exceed our financial objectives, and were fairly valued. At a high level, the additions of OptiBuy and The Smart Cube elevates WNS’s offerings in digital solutions, procurement, supply chain, and advanced analytics while helping expand our European footprint. These all represent identified areas of strategic focus for the company.

Based in Poland and founded in 2010, OptiBuy helps companies leverage the world’s leading digital procurement and supply chain platforms by providing consulting, implementation and integration solutions, deploying third-party technologies including Ivalua, Jaggaer and 09, OptiBuy is able to deliver significant benefits to clients across the procurement value chain, including cost reduction, improved cash management and streamlined supply chain performance.

The company’s focus on designing and building optimized digital processes is the perfect complement to WNS’s existing expertise in running procurement functions. In addition, OptiBuy brings front-end digital strategy and consulting services to the WNS portfolio and helps expand our geographic procurement footprints in the whole of Continental Europe.

The Smart Cube is a platform-led analytics firm focused on procurement, supply chain and commercial sales and marketing. They have a unique on-demand digital market intelligence platform called Amplifi PRO that helps generate actionable insights and improved decision-making. This technology accelerator combines artificial intelligence with human intelligence to scan the competitive landscape, benchmark costs, measure KPIs, identify trends and manage risks for clients.

In addition, the Smart Cube has a seasoned team of approximately 600 research and analytic experts including more than 400 with masters degrees. These resources possess deep domain expertise in procurement and supply chain and technical skills including data engineering, data visualization, artificial intelligence, as well as machine learning.

For procurement and supply chain, the Smart Cube delivered analytical market intelligence across category management, commodity management and suppliers’ risks including expertise in ESG sourcing. In commercial sales and marketing, they help drive revenue growth management, consumer and market insights and pharmaceutical marketing effectiveness.

Both OptiBuy and the Smart Cube bring strong domain leadership, highly specialized teams and proven track records of performance across the revenue growth, operating margins and customer satisfaction. They also serve blue chip client rosters that present significant cross sell and upsell opportunities. While these firms has niche areas of vertical expertise including retail CPG and healthcare, WNS views both assets as horizontal in nature allowing us to easily take their offerings across our verticals as well as geographies.

These services are highly complementary with our existing offerings and with each other and will enable WNS to provide differentiated end-to-end solutions to our global clients. As I mentioned earlier, procurements, supply chains and analytics are strategic areas of investment for WNS. The global procurement space is rapidly growing and evolving as clients shift their attention from transactional processing to tactical buying to strategic objectives including risks and compliance, e-sourcing, category management as well as sourcing innovation driven by digitally led solutions with integrated analytics and deep domain expertise clients are looking for their BPM partners to help reduce supply hazards, increased agility, drive sustainability, streamline capital and improve cash flows for them.

Since our acquisition of Denali in March of 2017, WNS has consistently been recognized by the industry analysts as a leader in procurement BPO. Over this time period, our procurement revenues have grown by more than 25% compounded and now represents approximately 10% of total company revenue. And while we are happy with the progress we have made, we believe our new acquisitions will help accelerate WNS’s leadership position and business momentum by enabling WNS to better compete for large global multi-tower transformational deals.

Looking forward, we remain excited about the current demand environment for BPM and WNS’s differentiated positioning in the markets. We continue to invest both organically, as well as inorganically in creating solutions with combined state-of-the-art technology with best-in-class talent. Despite the weak macro, our new business pipeline has never been healthier and the company is delivering solid top-line growth while maintaining industry-leading margins.

Additionally, we are making steady progress on our key ESG and corporate sustainability goals. This past quarter, WNS was named to the Forbes 2022 list of World’s Best Employers highlighting our success in creating a globally collaborative inclusive and rewarding organization. In addition, the company signed our commitment letter with the science based targets initiative or SBTI to reduce our emissions in line with the latest climate science.

Combined with our financial and operational performance, we believe our ESG initiatives will allow WNS to deliver maximum value to our customers, our employees, shareholders and the communities we work in.

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

[Sanjay Puria, Chief Financial Officer]

Thank you, Keshav. In the fiscal third quarter, WNS net revenue came in at $292.9 million, up 12.2% from $261.2 million posted in the same quarter of last year and up 19% on a constant currency basis. Sequentially, net revenue increased by 1.3% on a reported basis and 2.3% on a constant currency basis.

Acquisitions contributed 3.6% to year-over-year revenue growth and 0.7% quarter-over-quarter. Our sequential revenue growth was driven by broad-based momentum with both new and existing clients and a half month impact of our acquisitions of OptiBuy and the Smart Cube. This benefit were partially offset by currency depreciation against the U.S. dollar, hedging losses, travel seasonality and a reduction in short-term revenue.

In the third quarter, WNS recorded $0.7 million of short-term revenue. Adjusted operating margin in quarter three was 21.9% as compared to 21.4% reported in the same quarter of fiscal 2022 and 20.6% last quarter. Year-over-year adjusted operating margin increased as a result of operating leverage on higher volumes, improved productivity and favorable currency movements net of hedging. This benefit more than offset the impact of annual wage increases and costs associated with our return to office.

Sequentially margins increased as a result of higher volumes and improved productivity. This benefit more than offset increased wages and return to office costs. The company’s net other income expense was $1.2 million of net expense in the third quarter, down from $0 million reported in quarter three of fiscal 2022 and down versus 0.7 million of net expense last quarter.

Year-over-year benefit from higher interest rates were more than offset by lower cash balances resulting from share repurchases and acquisitions and increased interest expense associated with long-term debt taken in quarter two and quarter three. Sequentially, reduced interest income on lower average cash balances and higher interest expense driven by long-term debt more than offset a $0.3 million non-recurring benefit from a settlement of an insurance claim.

WNS' effective tax rate for quarter three came in at 19.8%, down from 20.6% last year and the same percentage as last quarter. Both year-over-year and sequentially, changes in our effective tax rate are largely the result of shifts in our geographical profit mix and changes to the mix of work delivered from tax incentive facilities. WNS also received a one-time benefit of $0.3 million in quarter three as our liquid mature fund investment shifted from short-term to long-term statement.

The company's adjusted net income for quarter three was $50.6 million, compared with $44.4 million in the same quarter of fiscal 2022 and $47.2 million last quarter. Adjusted diluted earnings were $1.01 per share in quarter three versus $0.88 in the third quarter of last year and $0.94 last quarter.

As of December 31, 2022, WNS balances in cash and investments totaled $249.8 million and the company had $179.4 million in debt. In the third quarter, WNS generated $70.3 million of cash from operating activities, incurred $11.4 million in capital expenditure and took out $100.9 million term loan for our acquisition of the Smart Cube.

In addition, the company paid net $168.7 million towards our two acquisitions, as well as new captive carve out with a large North American insurance company. DSO in the third quarter came in at 34 days as compared to 30 days reported in quarter three of last year and 30 days last quarter.

With respect to other key operating metrics, total headcount at the end of the quarter was 57,994 and our attrition rate in the third quarter was 28% as compared to 36% reported in quarter three of last year and 41% in the previous quarter.

In the quarter, attrition reduced across most skill levels and geographies, including significant reductions in voice-based CX services in the Philippines and entry-level work in India. The company expects attrition will normalize over time in the low 30 percentage range, but could continue to be volatile quarter-to-quarter in the current labor environment.

Build seat capacity at the end of the third quarter increased to 37,611 including organic growth and the addition of infrastructure from OptiBuy and the Smart Cube. In quarter three, WNS continued our progress towards in-person operations averaging 60% work from office during the quarter.

In our press release issued earlier today, WNS provided our revised full year guidance for fiscal 2023. Based on the company's current visibility level, we expect net revenue to be in the range of $1,146 million to $1,158 million representing year-over-year growth of 12% to 13% on a reported basis and 17% to 19% on a constant currency basis.

Our three acquisitions are expected to contribute approximately 3% inorganic growth to fiscal 2023 and our top-line projections assumes an average British pound to U.S. dollar exchange rate of 1.21 for the remainder of fiscal 2023.

Consistent with our guidance approach in previous years, we currently have over 99% visibility to the midpoint of the range which does not include any uncommitted short-term revenue or improvement in travel volumes beyond quarter three levels.

I also wanted to once again call out that our guidance includes the ramp down of a large healthcare process in fiscal quarter four.

Full year adjusted net income for fiscal 2023 is expected to be in the range of $193 million to $197 million based on a INR 82.5 to U.S. dollar exchange rate for the remainder of fiscal 2023. This implies adjusted EPS of $3.82 to $3.89 assuming a diluted share count of approximately 50.6 million shares.

As noted in our press release, acquisition-related expenses have been excluded from our A&I definition effective quarter two of this year. With respect to capital expenditures, WNS currently expects our requirement for fiscal 2023 to be up to $42 million.

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

[Operator]

[Operator Instructions] Our first question comes from Bryan Bergin with Cowen. Your line is open.

[Bryan Bergin, Cowen]

Hi guys. Good morning, good afternoon. Thank you. I wanted to just start with a high-level demand question. It sounds healthy, but would you say demand is broadly consistent with what you've been communicating over the last couple of quarters? Anything to call out there? Any changes in decision-making or areas you are seeing clients lean into more or less?

[Keshav Murugesh, Group Chief Executive Officer]

Yes, Bryan, so I'll take that. Yes, it's more or less consistent with what we have been communicating. But I think one of the positives we are starting to also see is that as a number of clients, as well as prospects keep hearing all the messaging around a looming recession and things like that, we are starting to see them get a little more aggressive I think, about looking at their options, taking decisions a little faster and looking at potentially how WNS can help them.

So in fact, I would say that it's starting to look a little healthier from our point of view at this point in time, more salutary in terms of how they are responding and reacting and that also includes their starting to feel their toes around whether they should take any decisions on their captives that they are holding.

So, it's also potentially a stage where we're starting to see some more conversations now on captives. So I actually think that this whole recessionary talk, as well as the potential demand contraction that everyone is talking about is actually playing in very well to the sector and definitely to WNS.

[Bryan Bergin, Cowen]

Okay. That’s good to hear. A follow-up on the client cohorts. So just looking at the growth performance between top 10 versus your non- top 10, it looks pretty solid with growth being driven in that non-top 10, which is good, but the top 10 are moving a little bit slower. Can you talk about your expectations and your opportunity among that larger client base as you think out over the next year?

[David Mackey]

Sure. Let me take that Bryan, and if Gautam or Sanjay want to chime in. Happy to hear the comments as well. But I think this is not to be – and this is not unexpected. When you look at our top ten, we do have a handful of clients there that are extremely mature that have been with WNS for a while that have been aggressively pursuing transformation and automation agendas, which pressures their ability to grow.

Now we have been able to continuously nudge the revenue that we get from these clients forward. But obviously, when we manage multiple processes with them, in that environment it's difficult to grow, right?

The good news is, I think we still have significant opportunity for growth with the vast majority of our top 10 clients, but we should consistently see in our business that the growth in those next tiers of clients given the opportunity to expand the scope of what we do for them is much, much greater. We should continue to see that the growth with those clients accelerates at a more rapid rate.

[Sanjay Puria, Chief Financial Officer]

And maybe I'll just add that other than the top 10, based on the new clients what we have been continuously adding, it gives a much larger opportunity for us because after the initial ramp up or the transition, the farming, the upsell, the cross-sell opportunity is much, much larger with them as we move onward. And that's what historically we have seen and that's what we are excited about.

[Bryan Bergin, Cowen]

Okay. Okay. I appreciate the added color on procurement revenue. Thank you.

[David Mackey]

Thanks, Bryan.

[Operator]

Our next question comes from Maggie Nolan with William Blair. Your line is open.

[Jesse Wilson, William Blair]

Hi thanks. It's Jesse on for Maggie. Congrats on the good results again. So, I first had a question on guidance. You previously set expectations for a sequential decline in revenue in the next quarter, but you've also updated guidance, as well. So, how would you say the implied decline compares to your previous expectations?

[Sanjay Puria, Chief Financial Officer]

So, if you know, when we last time provided the guidance specifically, we did spoke about a ramp down from one of our client in the healthcare process and accordingly, it was sequentially down. But now we are updated based on two parameters: one, further organic growth of almost 1% to our guidance and the two acquisitions what we have done, that has further contributed to another 1% to our guidance from an overall year perspective.

[David Mackey]

Yes. So I think just, the good news is when you look at what’s really happened, we obviously had stronger growth in Q3. We expect better growth organically in Q4 and we have added the acquisitions as Sanjay mentioned of Smart Cube and OptiBuy, which are now included in our guidance. So, it’s a combination of both organic and inorganic improvement from where we were a quarter ago.

[Jesse Wilson, William Blair]

Got it. That's good to hear. I had a clarification question. So when is that healthcare process expected to finish ramping down? I believe that's a single process for a single client, correct?

[Gautam Barai, Chief Operating Officer]

Yes. The ramp down has been completed as of December 31.

[Jesse Wilson, William Blair]

Got it.

[David Mackey]

Yes, the new baseline run rate for revenue should be set here in Q4. The ramp down was, like you said, one client, one process and it was effective January 1. So we will see the full impact of that in fiscal Q4.

[Jesse Wilson, William Blair]

Okay. And then my last question was more about demand. So, are you able to provide a sense of how large or comprehensive the new deals are? Are any processes jumping out to you?

[Keshav Murugesh, Group Chief Executive Officer]

Let me take that question and I'm sure Gautam and Sanjay and Dave may want to add a little more. First and foremost, I would like to say that broadly we are seeing more and more clients want to jump on the bandwagon first. I think that's the core, want their transformation agenda to be driven, those who were bystanders over the past year or two have actually now got a little more aggressive, fearing that they are going to miss something that if there is a full-blown recession, that they have not actually embarked on that project. So that's the first thing.

The second is we are seeing with a lot of existing clients the move from just transformation to one of also resilience, so which means we're also seeing a lot of them add more to the table in terms of cost reductions, more efficiency gains, things the traditional model has always stood for.

In addition to that, we are starting to see a number of new prospects who are now excited by the new offerings that we have created, some of the new acquisitions that we have brought to the table, as well as the fact that some of the clients that have now come in through these acquisitions already starting to interact with us in terms of the broad base of offerings that WNS can bring to all of them. So I think the combination of this means that people are looking not only for the transformation agenda now, but also the resilience and add to that, the fact that people running captives are also starting to say that, is this the right strategy for me, should I not been focused on my core business and maybe WNS is a better company to manage some of that. The combination of all of that means the pipeline looks healthy and we think will get healthier.

[Gautam Barai, Chief Operating Officer]

Just to add to what Keshav mentioned, both in the U.S. and U.K./Europe, we continue to see that both these countries face labor shortages and along with that, what we are seeing is clients requiring more digital intervention, we are able to sell – cross-sell quite effectively and newer clients, the decision-making has shortened significantly, so the ability to ramp up, the requirements to ramp up is increasing more and more. So all this bodes quite well for us as our demand pipeline continues to increase.

[Jesse Wilson, William Blair]

Understood. Thank you for taking our questions.

[Gautam Barai, Chief Operating Officer]

Thanks, Jesse.

[Operator]

Our next question comes from Mayank Tandon with Needham & Company. Your line is open.

[Mayank Tandon, Needham & Company]

Thank you. Congrats on the quarter. Maybe, Keshav, just given your comments around the healthy demand climate and the asset decision-making, is this the time then to more aggressively ramp up your sales engine? Or just given the uncertainty, you might want to hold back? Just any thoughts around your sales force investments going forward.

[Keshav Murugesh, Group Chief Executive Officer]

Yes. Thanks, Mayank, actually, great question. So I'll tell you, actually, we have never stopped investing in our sales force. So I just want to mention once again that I think we have one of the most experienced sales force in the industry at this point in time. We have kept making sure that we are rightsizing, adding wherever required and most importantly, focusing a lot on driving the productivity of the sales force, right, rather than just increasing numbers.

I am delighted to tell you that while we will not step back in terms of sales investments, as well as marketing investments, we will also position the new people coming in through some of these acquisitions to broad-base WNS’s positioning and footprint in the marketplace.

So I just want to say that at this point in time, we think that we must continue to invest in the area, but that does not mean having to take up numbers. We are looking at each one of our businesses carefully, looking at each area of demand carefully and where it is needed, we will keep investing. That could be in the form of more sales feet on the ground, or it could be in terms of more training, it could be in terms of other things as well. But not necessarily just taking numbers up.

[David Mackey]

Yeah, and just add a little bit of color to Keshav’s comments, Mayank. We closed December with a 142 sales people in the organization, which is up almost 20% from where we ended fiscal 2022. We ended fiscal 2022 with 121. So we have built the sales force out and as Keshav mentioned that’s a combination of WNS hires, as well as the three acquisitions that we've done.

But essentially, when you look at a 20% increase in the sales force and you look at the time it takes to close deals in the BPO, BPM space, the reality is, you have not seen the benefit in our revenue growth from the hires that we've made over the last six to nine months. So, we have made that investment. We've continued to make that investment. And as Keshav mentioned now, the real focus at this level is to make this next – this last step function that we've done in sales more productive.

[Mayank Tandon, Needham & Company]

That’s helpful to know. Thank you so much for that. Just one quick follow-up, in terms of pricing and more specifically around productivity benefits that you typically pass on to your clients, I think historically, if I am right, it's been somewhere in that 5% to 7% range. Given some of these market dynamics today, any change in your expectations on that as we look forward, especially into the next fiscal year?

[Gautam Barai, Chief Operating Officer]

Yes. Traditionally, what we had was about 5% to 6% and what we are seeing is about a couple of percentage points increased requirements by the clients to drive the TCO benefits. And again, that's quite sustainable for us and especially this is helped by our recent acquisition of Vuram through which we are able to drive increased digitization and transformations and increased productivity.

[Mayank Tandon, Needham & Company]

So just to be clear, in other words, are the benefits or the impact to your P&L going to be less or more, I am sorry, I missed that, going forward.

[David Mackey]

Let me take that, Mayank. So, essentially, what's happened now is because of digitization and automation, the productivity headwinds that we give to clients are greater than they've been in the past. And we talked about that walking into this year that we expected an additional 1% productivity hit for this fiscal year as a headwind versus prior years.

But from a P&L perspective, what you have to also understand is that the movement to leveraging technology and automation provides margin opportunity, margin leverage, right? So, while it may be pressuring the top-line, it’s creating better opportunity to expand margins and deliver on the bottom-line.

[Mayank Tandon, Needham & Company]

Got it. That’s very helpful. Thank you so much. Congrats guys.

[David Mackey]

The other thing I want to make sure, we hit here is, is just to make sure that you understand that while the productivity on a given process may be higher. The reality is in order to deliver the kinds of benefits the clients want, in many cases, we have to expand the scope of what we are managing for that client in order to deliver it.

So while same-store sales, if you will or same processes may be facing a 1% bigger headwind than previously, what it's also doing is opening up opportunities for us to expand the scope of the relationship and add new processes for WNS to manage.

[Operator]

Our next question comes from Moshe Katri with Wedbush. Your line is open.

[Moshe Katri, Wedbush Securities]

Hey thanks. Let me add my congrats on very solid results. So I have two follow-ups. First, as we continue to see this pivot in the pipeline towards, I guess, cost optimization and I don't know some people are talking about vendor consolidation as well, how different is it going to be for WNS in terms of the economics of the new – maybe the new nature of the projects that are coming on board? Is there any difference there?

And then, when we're in India early December, we heard some conversation about captives, which is something that keeps on coming on and off throughout – during the past 15, 20 years. Maybe you can talk a bit more about the captive opportunity here for WNS because again, that's kind of something that we haven't heard people talk about for a couple of years now. Thanks a lot.

[Keshav Murugesh, Group Chief Executive Officer]

Sure. Maybe I'll start and have the others add on. But like I said, the opportunity actually is continuing to sound very, very positive and therefore, again, it will be different things for different people and different companies. So we are very, very confident about the fact that the way we have invested in terms of first and foremost, domain, in terms of technology, in terms of our transformation agenda, in terms of our innovative models, engagement models with clients, as well as the kind of people that they want to interact with, we will definitely be the beneficiary of any exercise that is being undertaken by clients, as well as prospects, right?

And that's actually resulting in a larger pipeline and yes, we are actually seeing in some cases, some players talk about consolidation. But as of now, we've actually been benefiting from those trends because people really want to interact with companies that have all of these capabilities and can surely take them in the path of resilience, as well as transformation. That is one.

The second is, while all of this happens, obviously, companies on the other side are also looking at making sure that their transformation agenda is not disturbed, so they have to make the right choice of the partner. But beyond that, they are also looking to make sure that these companies can help them with their cost take out challenges, so that they can continue to be relevant and not create any negative impact with their end-customers. So again, again I think companies like WNS are seeing the statements of that as well.

Now in terms of captives, there have been two trends that have been happening Moshe, one is as with the successful management of COVID-19 by this sector generally and some countries in particular, there has been a move towards many companies wanting to create certain captives in India and other countries, right. Now that is one sign and these are normally captives created in areas which is very close to these customers, and they don't want to really hand it over to a third-party kind of a player.

But what we are also seeing very quickly is that smaller captives, 100, 200, 500-persons kind of captives that are being created, already are starting to face issues that go beyond just management of the cost and the resilience, it becomes HR problems, the management of attrition, things that we are extremely good at and that is causing new heartburn and new heartache for these people who actually own these captives and that is, again, driving this discussion at a new pace.

While decisions may not have been taken yet, all I can tell you is the quality of conversations that we are having has dramatically increased. You would have seen that in one particular case, we actually helped a very large global insurance player with the problem that they had and that's actually very large and very salutary to WNS and we think this trend will continue to progress.

[Gautam Barai, Chief Operating Officer]

Also just to add to what Keshav mentioned, besides the challenges that the captives would face, one of the bigger advantages that we bring on the table is cross-industry transformation and digitization benefit, which most of the captives struggle with and that's where we are seeing an increased level of conversations where we are being asked to come in to help drive digitize and transform.

[David Mackey]

Yes, and just to further add to that, Moshe, I think interestingly enough, when you look at the questions that were asked earlier about ongoing productivity commitments and improvements, I think one of the reasons that clients aggressively look at potentially getting rid of captive units is because if you can find a partner who will commit to productivity improvement, why do you want to try and run this yourself and hope you can deliver productivity improvement.

So I think that level of visibility, certainty to being able to manage your cost structure going forward is something that's very appealing to clients. The big challenge, obviously, for these companies is determining what they believe is core and mission-critical to their business and they need to keep in-house and what they believe is less core or they are not good at, that they are better off finding a partner to help them manage and that's something that every client is going to have a different opinion on.

[Moshe Katri, Wedbush Securities]

That's really helpful. And just if I can just sneak in a last one here, clients continue to ask about the UK business. The UK has been resilient in the past few years, given what's going on in the UK from a regulatory perspective, but obviously the economy has not been doing that great. But maybe some color on what you are seeing in the UK market? Thanks a lot.

[Gautam Barai, Chief Operating Officer]

Yes. What we are seeing is, of course, what we are seeing is not much of a difference in terms of the client demand, because where we are seeing an advantage within the UK is, as companies are preparing for a weaker macroeconomic scenario, the increased demand for digitization for them to align their cost base in line with the potential in terms of where the demand is going to come from is leading them to drive increased need for companies like us and that's where we are seeing our UK pipeline, in fact, is as strong as ever and the decision-making cycle in fact in the UK for clients to take the decision in terms of giving the go ahead is much, much more aggressive and at the same time, the ramp-up cycles are shorter.

[Keshav Murugesh, Group Chief Executive Officer]

And I just want to add one further aspect. I think UK clients and prospects who engage with our sector and us in particular over the past few years have prepared to some extent for Brexit and the kind of impacts that go with it.

So I think they have always realized for quite a while that they may not be able to get the talent that they will need from a tech point of view to transform their own agendas. And therefore, they have allowed companies like us to leave them in terms of dramatically transforming how they go to the market, right?

So, while UK as a whole may have a problem of not having the talent to take care of different services, the reality is, we have helped insurers, fintech companies and others to completely transform their business models through Insurance-in-a-Box, FinTech-in-a-Box kind of solutions, which are solutions which were unheard of in the past, right?

And therefore, we have actually helped them prepare for tough times, but more importantly, gain market share as a result of these new offers.

[David Mackey]

Yeah, and just to add a little bit of color to that from a financial perspective, Moshe, when you look at our numbers, obviously, year-to-date, the UK is up about 4% year-over-year which certainly doesn't look that encouraging. But it's important to remember that that 4% growth is with a 12% currency headwind. So what we have seen in our business is healthy, healthy growth on a year-over-year basis within the UK on an organic constant currency basis.

[Moshe Katri, Wedbush Securities]

That’s helpful. Thanks guys.

[David Mackey]

Thanks, Moshe.

[Operator]

Our next question comes from Ashwin Shirvaikar with Citi. Your line is open.

[Ashwin Shirvaikar, Citi]

Hey guys. Thanks for doing this. Let me start with a two-part question, just back to the economic environment, first, if you could remind on volume sensitivity, should there be a slowdown or air pocket? I just want to outline downside risk. And then the second one is, it seems, Keshav that you are saying digital transformation objectives that actually still impact for clients that’s consistent with our own checks. But any color on how the nature of digital initiatives like the candy?

[David Mackey]

Sure. So let me kind of take the first part of that and I'll let Keshav talk a little bit about digital and kind of what we're seeing from a client perspective. But looking at the exposure, if you will, to our business, I think there are really four different pockets where we could see pressure, right? And most importantly, I think what I want to highlight upfront is that we have not seen these to-date, right?

But the reality is, certainly, we have the potential for volume pressures with certain clients, certain verticals, certain processes and obviously, for everybody who follows the WNS story, travel comes to mind, is something that's front and center. But we also do have the potential for volume exposure in certain verticals like shipping and logistics or financial services.

The second area where we could see pressure would be what we've been discussing here, which is productivity pressure, total cost of ownership pressure from clients. And we've seen that steady and rational as we've moved across through this year and across the years.

The second would be – the third would be where clients have structural or strategic changes to their business and this would fall into the category of what we've seen with this large healthcare process that we've lost in Q4, where the client has made a strategic decision to move in a different direction.

And the last would be delays and cancellations, where we have not seen any of that to-date. So, I think just to kind of highlight where we could potentially see exposures, those would be the areas. But I think what's more important, Ashwin, is that we understand that we believe in this weak macro environment, the opportunities for our business as things get challenged more than outweigh these risks. So we believe this is a great environment for BPO, BPM.

[Gautam Barai, Chief Operating Officer]

And also – hi, Ashwin, this is Gautam. And just to add to your – or answer your second part of the question, what we are seeing with clients is firstly in terms of the digitization journey is to change the target operating model, taking into account the end-to-end process and especially in the banking financial services, insurance and healthcare clients what we are seeing is these are companies or industries that clients are actually playing with legacy systems and infrastructure the need for smart, non-invasive workflow engines that can actually drive an end-to-end process.

So what we are seeing is not just discrete process efficiencies, but an end-to-end process efficiency that gets driven and that's being driven quite upfront rather than in later stages of the deal. So that's where the digitization journey is starting to impact more and more.

[Ashwin Shirvaikar, Citi]

Got it. Got it. And then on M&A, you’ve obviously done couple deals here, but is it still a good pipeline what should appetite in the current environment do you see the need to maybe maintain a level of net cash on your balance sheet? Any thoughts in that direction?

[Keshav Murugesh, Group Chief Executive Officer]

So let me start, I am sure Sanjay will want to add a little bit more. So, first and foremost, as you know that we've, for a long time, had this focus on constantly looking at assets that are capable of adding new capability, while being accretive also to WNS models overall over the past few years. It's just that in the past few months, we have had the opportunity to actually complete three deals which are bringing very strong capability and playing in extremely well with where the market is headed in terms of some of the new demand areas. So really delighted with what has happened there.

At the same time, I want to again underline that our approach to M&A will continue to be disciplined, focused and we will continue to look at assets, particularly capability-led assets in a very disciplined fashion and if there is something that ticks the box and which makes sense to us and if it is coming in at the right valuation.

We will look to do it considering the fact that we believe that in this kind of an economy, as well as in the – in terms of just how the markets are moving and the business is moving and the demand from clients, we have a right of way in terms of leveraging all of these assets and creating these new capabilities in order to deliver impact, as well as impact for clients and growth for ourselves.

So whatever we do will be around capability, as well as will be accretive and in terms of the capital allocation, you want to talk?

[Sanjay Puria, Chief Financial Officer]

So I'll just add that Ashwin, yes, we do have a healthy pipeline, but the philosophy absolutely doesn't change from a M&A perspective, is all going to be around tuck-in capability acquisition and we'll be opportunistic to keep on adding those capabilities and including the captives opportunity what we keep on looking for.

And from a cash perspective, what you just mentioned, I think 15% of our revenue is good from a working capital perspective and we believe we have stable, healthy cash generation. So that's going to – it will be good enough from a growth prospect perspective.

[Ashwin Shirvaikar, Citi]

Got it. Appreciate the insights. Good execution. Keep it going guys. Thank you.

[Sanjay Puria, Chief Financial Officer]

Thanks, Ashwin.

[Keshav Murugesh, Group Chief Executive Officer]

Thanks, Ashwin.

[Operator]

Our next question comes from Puneet Jain with JPMorgan. Your line is open.

[Puneet Jain, JPMorgan]

Yeah, hi. Thanks for taking my question. Can you talk about sustainability of your attrition rate at these levels? I understand December is seasonally easier quarter, but is attrition, can it sustain at these levels on a going-forward basis? And are Philippine issues completely behind you now?

[Keshav Murugesh, Group Chief Executive Officer]

Hi Puneet. The continued reducing attrition over the past two quarters has been largely driven due to stabilization across most job families and especially over the last few months that has been led by our customer services agents’ requirements in the Philippines and a lot of the entry-level requirements in India. We do expect a little bit of volatility across certain niche job families but by and large we expect this to be stabilizing around the early 30s is what I see.

[Sanjay Puria, Chief Financial Officer]

So maybe I'll just add, Puneet, if you recall, we did spoke about that when the regulations got changed in Philippines, specifically from April 1 and where employees were really – were asked to come, to work from office 100% and that is where it all spiked and specifically around at the agent level. And we did mention that still that's not impacting from a delivery perspective.

So it took a couple of quarters for us to stabilize, and it started normalizing, adjusted, but having said that, it's too early to talk about it and we believe it will still take a certain time to normalize and maybe it will go back to those 30%. But I think it was more around at junior level, at the middle management and all it's pretty normal, what we used to see pre-COVID level.

[Puneet Jain, JPMorgan]

Got it. And it seems like your answer to prior Ashwin's question, it seems like you are going to be more acquisitive near term, focused on acquiring tuck-in deals. But on the other side, like how should we think about your current portfolio? Are there any businesses assets that could be deemphasized or you could look for some alternatives there?

[Keshav Murugesh, Group Chief Executive Officer]

Yes. So, first let me clarify. So at this point in time, we have done three acquisitions this year. So right now, we are digesting, right? And we will focus on digesting these acquisitions, welcoming all the people from these three companies, as well as the capabilities in a very excited manner, take it across all our client base and welcome many new prospects. I just want to mention that we'll do that.

But at the same time, we will also be opportunistic in terms of continuing to look at what is available out there. And if we need to do something that is small and accretive at some stage, we will look at it later. So I just want to set that expectation. We are not out there to just put our cash out to acquire. That's not our approach. It's always been a disciplined approach.

Now in terms of our businesses, generally, all the core businesses that we operate in continue to do extremely well, right? All the horizontal offerings that we have gone to the market with and we have positioned with you, we will continue to invest strongly in.

As we have mentioned in the past, the auto claims part of our business that we have historically kept deemphasizing continues to be on that journey and it is not an area of significant investment other than taking care of existing customers. But every time we look at a business, we are constantly evaluating the impact of that business, the growth potential of the business, as well as the ROI from the investments that we make in that business before we make progress. So I am really comfortable with the businesses we have at this point in time and their potential for the long-term.

[Puneet Jain, JPMorgan]

Thank you. No, I was thinking about auto claims as well, when I asked that question. So thanks for the answers, Keshav.

[Keshav Murugesh, Group Chief Executive Officer]

Thanks a lot.

[Operator]

Our next question comes from Dave Koning with Baird. Your line is open.

[David Koning, Baird]

Yeah, hey guys. Just I guess, a couple of quick things, a nice job too. So, on the travel vertical, it looked like revenue was down a bit sequentially. I know that it's a little choppy it's still growing a lot year-over-year. But anything to that, just a little bit of sequential decline?

[Gautam Barai, Chief Operating Officer]

Hi Dave, the Q3 decline that you see has historically been led due to softer volume during this time of the year, which is generally driven due to reduced leisure bookings. And also just to draw your attention, nearly 50% of our revenue comes in from the OTAs especially driven by B2B or B2C leisure travel. So that's where we are seeing.

That's where the sequential drop has been for this quarter. But for Q4, we are already seeing moderately increased volumes, cost due to the recent weather events and also with increased bookings, but these numbers have still not been factored into our forecast that we have provided.

[Keshav Murugesh, Group Chief Executive Officer]

Yes, so Dave, let me just mention one thing. When we talk about recession, when we talk about all the impacts that we said we will have, I think a lot of people start voting with their feet in terms of their holidays and travel programs and blah, blah, blah. And therefore, we also see, therefore, customers of ours on the other side go soft in terms of their projections.

So I think some of this is also a factor of that. But as of now, as we look at how the sector is actually behaving, we are continuing to see a slightly more bullish positioning as opposed to the kind of numbers that they have given us in the past. So let's hope that people's faith in travel and having a nice holiday visiting their offices across the globe and potentially the revenge tourism comes back and it will benefit us.

[Gautam Barai, Chief Operating Officer]

And I just add that the bigger opportunity for us still arise that the volume was not still not at a pre-COVID level and that’s the opportunity from a forward-looking is there which is still below pre-COVID level, volume was still below almost like a 1.6% of the company's revenue. That's where the opportunity still lies ahead for us.

[David Koning, Baird]

Gotcha. Yes. Thanks for all that. That’s good. And I guess the one just follow-up, you had remarkably consistent margins. I think this year, you're trending to, I think, 21.5% or so. The last two years were right about 21.5%, which is impressive given rupee movements, revenue volatility, just all the different things. So, I guess I'm wondering, is there anything one-off in this year that we should just think about as we kind of think about next year or is this a pretty normalized year?

[Sanjay Puria, Chief Financial Officer]

It's a pretty normalized margin at this stage. There has been no one-off right now and we expect to continue with this margin as we move forward.

[David Mackey]

Yes, and I think as it relates to FX, David, it's important to remember that we've now seen 10-plus years where our hedging strategy has been extremely effective in protecting our margins and smoothing the impacts of currency over a two to three year period. So, not only does the hedging strategy give us the stability in the margins, but it also gives us the visibility to allow us to guide you guys properly.

[Keshav Murugesh, Group Chief Executive Officer]

I also want to just add one thing, Dave, and that is, I must give full credit to our teams across the globe, our operating teams who have created this new WNS, as I call it, in terms of just creating all these new innovative solutions, the new digital interventions, the new platforms that we have created and the new offering sectors the result of which, in spite of all the uncertainties outside, WNS is able to drive those efficiencies in order to maintain those margins.

And as I tell you, it's not an easy task, right, to make those investments, manage all those kind of problems that are out there, yet deliver those numbers. And I think it comes from our superior execution, but most importantly, also the new offerings that we have created over the last few years.

[David Koning, Baird]

Yeah. Certainly. Kudos to all of them and yes, thanks for the answers guys.

[David Mackey]

Thanks, Dave.

[Operator]

Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

[Vincent Colicchio, Barrington Research]

Yeah, Keshav, another question on travel. Curious with the awful airline issues recently in terms of – on the operating side, is that opening opportunities for the company?

[Gautam Barai, Chief Operating Officer]

Yes, absolutely and that – and with some of the problems that the airlines and the airports have been facing over the past year or so that's led to an increased demand across all our lines of services, whether it is our industry-specific offerings or our baggage handling offering and at the same time, our reservations and change management offerings.

So it drives volumes across all these areas and I would also say that as airlines actually increase capacity by introducing new aircrafts over the next number of months, we do see that the volumes also start increasing from there.

[Keshav Murugesh, Group Chief Executive Officer]

And I must mention that with all this talk of recession and the kind of stress people are facing in the markets, we are also seeing the airports also start moving with discussions and potentially decisions on transformation and the cost agenda, as well. So I actually think that all of this is going to be very positive for WNS in the short order.

[Vincent Colicchio, Barrington Research]

And then, one more, any large clients facing financial challenges retail comes to mind and if I remember correctly, I think your exposure to traditional retail is pretty low.

[Keshav Murugesh, Group Chief Executive Officer]

I think that’s safe to say, our exposure to peer retailers is extremely low events. I don’t think looking at our customer roster today, I don’t think we have any significant clients that we believe are at financial risk, but obviously this – in this environment things can change quickly.

[David Mackey]

Yes. Really important too, to remember that over the last couple of years, Vince, while we have had some recovery of the travel volumes we lost during COVID, when you really look at what's driven the health of our travel vertical, it's been the expansion of our existing relationships and new logos coming to the table looking for transformation, automation, digitization to be able to better compete.

So, I think the more difficult things consistently become for the airlines, the more they are going to look externally for help to change our operating models to be able to compete better.

[David Mackey]

Yes, I think that's safe to say. Our exposure to pure retail is extremely low, Vince. I don't think, looking at our customer roster today, I don't think we have any significant clients that we believe are at financial risk. But obviously, in this environment, things can change quickly.

[Vincent Colicchio, Barrington Research]

Thanks, Dave. Nice job, guys.

[David Mackey]

Thanks, Vince.

[Keshav Murugesh, Group Chief Executive Officer]

Thanks, Vince.

[Operator]

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