WNS (Holdings) Management Discusses Q4 2013 Results - Earnings Call Transcript

Apr.17.13 | About: WNS (Holdings) (WNS)

WNS (Holdings) (NYSE:WNS)

Q4 2013 Earnings Call

April 17, 2013 8:00 am ET

Executives

David Mackey - Head of Investor Relations and Senior Vice President of Finance

Keshav R. Murugesh - Group Chief Executive Officer and Director

Deepak Sogani - Chief Financial Officer

Analysts

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

Ashwin Shirvaikar - Citigroup Inc, Research Division

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Bryan Keane - Deutsche Bank AG, Research Division

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good morning, and welcome to the WNS Holdings Fiscal Fourth Quarter and the Full Year 2013 Conference Call. [Operator Instructions]

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

David Mackey

Thank you, and welcome to our 2013 fourth quarter and full year earnings call. With me today, I have WNS's CEO, Keshav Murugesh; and WNS's CFO, Deepak Sogani. 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 fourth quarter and full year ended March 31, 2013.

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, which was filed with the SEC in April 2012. 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 revenues are defined as revenues less repair payments; adjusted net income, or ANI, is defined as profit, excluding amortization of intangible assets and share-based compensation. These terms will be used throughout the call.

I would now like to turn the call over to Keshav Murugesh, WNS's CEO. Keshav?

Keshav R. Murugesh

Thank you, David, and good morning, everyone. We're pleased with the company's operational and financial progress during the past quarter. Our fourth quarter net revenue was $112.8 million, representing a 13% increase on a year-over-year basis and a 0.7% reduction versus the prior quarter.

During the fourth quarter, the British pound to U.S. dollar exchange rate depreciated 3.3% sequentially and 3.5% versus the company's guidance in January. With approximately 50% of the company's net revenues denominated in pounds, this reduced sequential net revenue by $1.8 million. Excluding this impact, WNS's constant currency revenue net growth in the fourth quarter was 13.4% year-over-year and 1% sequentially. It is also important to remember that WNS had a spike of approximately $2 million booked in the third quarter, which related to incremental transition revenue for new projects.

During the fourth quarter, WNS added 7 new clients, expanded 5 existing relationships and renewed or extended 15 contracts.

Adjusted operating margin for the fourth quarter was 15.8%, increasing 195 basis points from the third quarter. Sequential margin improvement was driven by operating leverage associated with higher constant currency revenue, reduced transition revenue and cost, and hedging gains on both rupee and pound contracts. Seat utilization in the fourth quarter declined slightly as the company added over 300 seats in our Vizag facility in India. This center, which was opened in the fiscal fourth quarter -- first quarter, is located in a Tier 2 city, which allows WNS to diversify our employee base and better manage the costs of delivering service. Our constant -- our fourth quarter adjusted net income came in at $15.8 million, which represented an increase of 20% versus last year and 13% sequentially.

I would now like to take a few minutes to discuss the highlights of our full year 2013 performance, and we will then turn our attention to fiscal 2014. From both a financial and operational perspective, we believe that WNS took a significant step forward during this past year. Our net revenue grew 10.4%, which was 8.7% growth on an organic constant currency basis. This represents solid acceleration from the 6.9% reported growth and 5.3% organic constant currency growth that was posted in fiscal 2012.

Revenue improvement was broad-based across WNS's verticals and service offerings. Our emerging verticals, including Utilities, Retail & CPG and Shipping & Logistics, all grew well above the company average, while our larger traditional verticals, including Insurance and Travel, continued to grow at healthy rates. Growth by service line was marked by improving demand for offerings in Finance & Accounting and Research & Analytics, which both grew above the company's average. Contact center revenue grew at an accelerated rate in 2013, driven by our acquisition of Fusion Outsourcing in South Africa. Operationally, WNS also made solid progress during fiscal 2013. Highlights include the expansion of our mobile delivery capability, the creation of new service offerings, increased focus on technology, enabling our solutions and improved sales force productivity.

During the year, the company's seat capacity increased 16%, representing an increase of over 3,000 seats. The company expanded its delivery footprint in India, adding new centers to tap regional talent pools, take advantage of lower-cost locations and leverage long-term tax holidays. WNS also added the ability to service clients in 4 new countries during 2013, including the U.S., South Africa, Poland and China.

We are especially pleased with the successful acquisition and integration of Fusion Outsourcing in South Africa. This asset has allowed us to attract new clients and expand our relationships with existing clients. It has also become clear that BPO relationships are becoming more global in nature. More and more, clients are looking to work with strategic global partners, not vendors, with limited geographic delivery capability.

WNS's investments are resonating well here, as is evidenced by the acceleration in our onshore and nearshore revenues. While this creates short-term pressure on margins, having these onshore and nearshore capabilities is increasingly critical to winning the larger, more profitable heavy lifting work provided from offshore locations.

With respect to new services and technology enablement, during the year, the company was able to create an expanded and diverse set of solutions for the BPO marketplace. Our capability creation group, which was launched in the first quarter of 2013, has been instrumental in rolling out unique horizontal solutions for Finance & Accounting and Research & Analytics, as well as industry-specific offerings. Several of these solutions leverage WNS-owned IP, while others include the integration of capabilities provided via strategic partnerships.

For 2014, expanding our portfolio of service offerings and increasing our use of technology will continue to be critical areas of focus and ongoing investment. What also became clear in fiscal 2013 is that the WNS brand is improving, driven by company's investments, performance and increased visibility. We received several key awards and recognitions from the industry analyst and advisor communities this year. WNS was named a leader in Insurance BPO by both Everest and HfS, a major player in business analytics by IDC and a leader in Finance & Accounting in the most recent Gartner Magic Quadrant.

WNS is also proud to announce that we have been named the 2013 winner of the prestigious Golden Peacock Award for Global Business Excellence. I have personally been actively involved with the NASSCOM BPO forum, spearheading the effort to rebrand our industry from BPO, or business process outsourcing, to more BPM, or business process management. All of this recognition is positively impacting our ability to attract and retain top talent and to participate in more sales opportunities.

From a sales effectiveness perspective, traction continued to improve throughout the year with the sales team building a stronger pipeline and producing improved results. During fiscal 2013, WNS closed 4 large deals, defined as having potential for $5 million to $10 million in annual contract value. We were successful in farming several key accounts, deepening our relationships by cross selling higher value processes and new geographies. This client expansion was driven by the ability to leverage our domain knowledge, vertically integrated organizational structure and client-centric approach. While the 2013 sales performance represented a step in the right direction, we believe there remains significant opportunity for improvement in 2014 and beyond.

Despite the aggressive investments in our business during 2013, the company was able to maintain our ANI margin and expanded -- and expand adjusted net income faster than revenue. While operating margins were off by 170 basis points on a year-over-year basis as a result of our investments, the transition to tax exempt facilities in India helped reduce our effective tax rate. In addition, the company's improving cash flow and balance sheet positions reduced interest expense and allowed WNS to generate additional interest income. As a result, our adjusted net income percentage expanded slightly year-over-year, coming in at 12.2%.

As we enter fiscal 2014, we are pleased with the overall strength and positioning of our business. We are also encouraged that the demand environment for BPO services remains stable and healthy despite uncertainty in the global economy. Our guidance of $460 million to $480 million in revenue represents 6% to 10% top line growth and includes a 2% headwind resulting from depreciation in the British pound. On a constant currency basis, guidance is for revenue growth of 8% to 12%, with 90% visibility to the midpoint of the range at this point in time.

Revenue guidance also includes a 4% headwind for known reductions associated with client's business volumes, M&A activities and changes in strategic direction. We consider this level of business reduction to be normal in any given year and is typically seen in the first half of our fiscal year. These volume reductions, coupled with sharp depreciation in the pound, will put pressure on our first quarter revenue. The good news is that similar to last year, we have solid visibility to sequential revenue acceleration in Q2 and beyond as the headwinds abate and projects ramp. Additionally, our overall new business pipeline remains very robust, and we are pleased to report that the large deal pipeline is especially strong.

While we continue to see final decisions on larger and more transformational deals progress slowly, we believe WNS remains well positioned to win several of these large engagements in the coming year. In fact, we are off to a fast start so far in 2014.

In the first 2 weeks of April, we have already signed 3 new logos for outcome-based fair audit services. And more importantly, we have already closed our first large deal win of the year, where we will be taking over the clients' entire Finance & Accounting operation. Key growth areas for the company our expected to be in the higher value service offerings, including Finance & Accounting, Research & Analytics and industry-specific solutions. Demand for these services remain strong and traction continues to build in both the pipeline and our revenues. Emerging verticals should once again grow above the company average in fiscal 2014.

But we continue to see strength and traction in our traditional verticals as well. We believe that the overall team size and skill profile of the sales organization is appropriate at this point in time. We are optimistic that the productivity of our sales force will continue to progress as the year unfolds, and that both hunting and farming revenues will benefit from having the team in place for another year.

In terms of key investment areas for 2014, WNS will focus on adding breadth and depth to our services, increasing our use of technology and adding domain expertise. We are actively working to create enhanced capabilities around risk offerings, domain-led analytics and social media solutions.

WNS also expects to increasingly integrate technology into our solutions, leveraging our capability creation group. The objective is to create wherever possible differentiated solutions and platforms based on WNS-owned intellectual property, which will enable stickier relationships and nonlinear revenue growth.

With respect to domain expertise, WNS is seeking to capitalize on greenfield opportunities in emerging verticals such as Shipping & Logistics, Utilities and Retail CPG while improving our industry leading position in Insurance and Travel. In 2014, investments in services, technology and domain capabilities will be driven through a combination of internal development, strategic partnerships, and possibly, niche tuck-in acquisitions. These ongoing investments are critical to creating and maintaining differentiated positioning in the marketplace and are highly aligned with the long-term direction of the BPO industry. We firmly believe that the combination of process knowledge, domain expertise and unique technology-enabled services and solutions will allow clients to achieve true business transformation. Increasingly, this is what clients expect from their BPO partners.

These investments however, must be leveraged as we move forward. The entire WNS team and I are focused on continuing to drive accelerating top line growth, while at the same time expanding our margins and profitability.

Let me now hand the call over to Deepak Sogani, WNS's CFO, to walk through the financials. Deepak?

Deepak Sogani

Thank you, Keshav. With respect to the fourth quarter numbers, net revenue increased $212.8 million from $99.8 million in the same quarter last year, representing an increase of 13%. On a constant currency basis, year-over-year net revenues grew 13.4%, reflecting a 0.9% depreciation in the British pound. Sequentially, net revenues decreased 0.7% as a result of depreciation in the pound, and approximately $2 million of incremental transition revenue booked in the previous quarter.

During the fourth quarter, the British pound depreciated sharply. The average pound to dollar exchange rate dropped 3.3% sequentially from 1.61 to 1.55, creating a revenue headwind of $1.8 million. On a constant currency basis, fourth quarter revenue grew 1% versus Q3.

Our adjusted operating margin, which excludes share-based compensation and amortization of intangibles, was 15.8% in Q4 as compared to 17.5% reported in the same quarter of fiscal 2012 and 13.9% last quarter. On a year-over-year basis, the adjusted operating margin declined 165 basis points as a result of investments in global infrastructure, the capability creation group and the acquisition of Fusion Outsourcing.

Also, as clients have increasingly adopted our new onshore and nearshore capabilities, the company's delivery mix has shifted, putting pressure on the adjusted operating margins. Depreciation in the Indian rupee against the U.S. dollar and the operating leverage associated with revenue growth significantly helped offset these impacts. Sequentially, the adjusted operating margin expanded 195 basis points, as Keshav discussed earlier.

Interest expense this quarter was $0.9 million, the same as reported in Q4 of last year and also the same as the previous quarter. The company's other income was $1.6 million in the fourth quarter, up versus the $0.2 million expense reported in the same quarter last year and $1.3 million of income last quarter. The year-over-year and sequential increases in other income are a result of improved cash flow and higher balances in cash and investments.

WNS's effective tax rate in the fourth quarter was 14.9%, down from 19% last year and up from 13.5% in the previous quarter. The lower tax rates reported during 2013 are a result of the improving usage of our tax-exempt facilities in India.

The company's ANI for Q4 was $15.8 million compared with $13.2 million in the same quarter of fiscal 2012 and $14 million in the last quarter. This represented growth in ANI of 19.8% on a year-over-year basis and 12.9% on a sequential basis.

Adjusted diluted earnings were $0.30 per share in Q4, up from $0.27 reported in both Q4 of last year and the previous quarter. Earnings per share in the fourth quarter were reduced by approximately 5% when compared to Q4 of last year as a result of the primary stock offering completed by the company in February of 2012. Our fourth quarter diluted share count stands at 51.9 million shares.

As of 31st March 2013, WNS's balances in cash and investments totaled $117.6 million. This exceeded our drafted position of $96.4 million with the company reporting a net cash position of $21.2 million at the end of the fiscal year. The company generated $17.8 million in cash from operating activities in the current quarter and free cash flows of $14.3 million.

DSO in the fourth quarter was reported at 33 days, down from 35 days reported in Q4 of last year and up from 32 days reported in the last quarter.

Our CapEx for the quarter was $3.4 million, with the majority of the spend in support of our infrastructure expansion programs.

With respect to other key operating metrics, our total headcount at the end of the year was 25,520. The attrition rate in Q4 was 36%, down from 39% in the fourth quarter of last year and up from 33% reported in the last quarter. Built seat capacity was 21,975 at the end of the quarter, which represented a net increase of 428 seats over the previous quarter. Average built seat utilization in Q4 was 1.18 as compared to 1.26 reported in the same quarter of last year and 1.20 in the previous quarter.

I would now like to take a minute to provide a brief recap of the 2013 full year financial results. As Keshav mentioned, WNS's revenue grew 10.4% in the year, which was 11.2% on a constant currency basis, and excluding the Fusion acquisition, 8.7% on an organic constant currency basis. This represents solid acceleration from 6.9% growth and 5.3% constant currency growth in fiscal 2012. Full year adjusted operating margins were down 170 basis points, coming in at 14.2%. Margins were impacted during the year by our investments in infrastructure and new offerings, along with the shift in our delivery mix and the acquisition and integration expenses associated with our South African asset.

Helping to partially offset these costs were operating leverage from higher revenue and favorable currency impact resulting from depreciation in the Indian rupee. Profits from the year benefited from lower interest expense and higher interest income, based on the company's improved cash flow and balance sheet positions and also from lower taxes, stemming from our investments in tax-exempt facilities in India. The net result was adjusted net income of $53.1 million or 12.2% of revenue in FY '13 versus $47.3 million or 12% of revenue in FY '12. On our reported revenue growth of 10.4%, the company's ANI expanded 12.2%.

Cash from operations was $64.6 million in the current year, a 12.9% improvement from $57.2 million in the last year. While CapEx level was steady at $21.2 million, free cash was $43.5 million, up 20.7% from $36 million in the last year.

I would now like to share with you some additional full year metrics of note. The company added 34 new clients, including 12 from Fusion, and expanded 34 existing relationships during the year as compared to 17 new clients and 30 expansions in 2012. Full year addition was 35% compared to 38% in the last year, seat utilization growth 6.3% on a Y-o-Y basis, coming in at 1.21 versus 1.29 in 2012.

As we have discussed, WNS has historically run seat utilizations at rates closer to 1.35 to 1.4, and the reduction reflects the company's investments in both new geographies and tax-exempt facilities in India. These levels are expected to improve over the next few years as the company grows generating margin opportunity as these assets are leveraged.

Looking forward to the coming year, WNS provided initial guidance for fiscal 2014 in a press release issued earlier today. Based on the company's current visibility levels, we expect net revenue to be in the range of $460 million to $480 million, representing year-over-year revenue growth of 6% to 10%. Revenue guidance assumes an average British pound to U.S. dollar exchange rate of 1.52, a reduction of 3.8% year-over-year, which will impact approximately half of the company's revenues.

Excluding the depreciation in the pound, on a constant currency basis, revenue guidance represents growth of 8% to 12%. We currently have 90% visibility to the midpoint of the revenue range, consistent with April guidance in previous years. ANI is expected to be in the range of $59 million to $63 million for 2014 based on 54.4 rupee to U.S. dollar exchange rate. This ANI implies adjusted EPS of $1.12 to $1.20 on a diluted share count of approximately 52.5 million shares. At the midpoint of guidance, ANI is growing at 15% on a constant currency revenue growth of 10%.

In terms of hedging, WNS is approximately 80% hedged for fiscal 2014 and 40% hedged for fiscal 2015, using a combination of options and forward contracts. The company expects CapEx levels to be in the range of $20 million to $22 million in fiscal 2014.

With this, we conclude our prepared remarks and open up the call for questions. Over to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Joseph Foresi of Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

I was wondering if we could start by just talking about your feelings about the demand environment in 2013 versus 2012, and I think you talked about the pipeline having a number of large deals. Maybe you could give us some quantitative and qualitative color around what the pipeline looks like at this point?

Keshav R. Murugesh

Sure, Joe. So I think from a perspective of going into 2014, I must say I feel extremely confident and comfortable with the position the company is in today, particularly from our sales traction, pipeline and impact point of view. And this feeling comes from the fact that we believe that we have now put together the right team. We have brought in the right kind of domain experts that are now interacting directly with clients in each of our geographies. Our new offerings are resonating well with the marketplace. And most importantly, our sales people are able to articulate our differentiated strategy in terms of the end-to-end vertical, along with technology enablement and higher value services to the client, such that they are able to actually talk to the client and give them a lot of comfort that they are looking -- or we look at their business the same way that they look at it. Now all of this together means we have been also able to impact very positively the analyst and the advisory community. And you must understand, on the higher end F&A and Analytics areas, that group of people are very, very influential even today. So what is now happening is WNS is getting invited to a number of deals by the analyst and the advisory groups. Our sales people are pounding the streets, are making sure that we are known in every prospect's environments, such that when there is an RFP or a need to bring in a good strategic vendor, WNS is now being brought into the deal. More importantly, I'm very confident about the impact that our U.S. sales people have now started creating in the marketplace. And recall that, that was the huge opportunity for us maybe 1 or 2 years ago, and we're now seeing we're playing a number of deals -- playing a number of deals in the U.S. as well. So all of this together means that more deals are entering the pipeline, deals are being pushed faster through the pipeline. And I think closures of deals that we started talking about last year are beginning to happen already, which is very positive for me. The other area that I want to talk about is, as compared to maybe 2012 or maybe even early 2013, across 2013, I saw that we have started getting invited to a number of these larger deals. Which again, is a great comfort for me because the reality is, it means that the client sees WNS as a completely different company, as a company that is capable of being trusted to deliver $5 million and $10 million ACV deals. And as we spoke about last year, we only -- we said that we signed 4 of these deals last year. We spoke about 2 more deals that were in the pipeline. We completed one, I think, last quarter. And what is really good is whereas already we have signed one more large deal, the second deal on the Insurance side that we spoke about earlier has not gone away. In fact, we're seeing a lot of activity on that deal as well. And I won't be surprised if over the next few weeks, we'll have the ability to announce something positive there as well. Having said that, I must say, a number of other new large deals have also entered the pipeline. So I feel really good about the way the sales team is positioning the company, executing well and the way the sales delivery and the capability groups are collaborating very well.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. Could you talk a little bit about the seasonality that you guys pointed out in the first quarter and how that shakes out throughout the year? I think it was associated to -- with Insurance, but in the past, I think it had been more on the Travel side that we saw seasonality. So maybe you could walk us through that?

Keshav R. Murugesh

Yes, I'll just give you some high-level color and have Dave and Deepak take over. But what we've just included there is some known volume ramp downs. And as I said earlier in my prepared remarks, some M&A activity impacting a particular client, as well as really currency impact. And all of this really, from our perspective, is normal and seasonal in Q1. Having said that, and I feel extremely confident about how we have positioned the company for the whole year.

David Mackey

From a seasonality perspective, Joe, I think what's important to understand is this is the time of the year when we sit down with the clients, go through their budgets, understand their needs for the year and we get visibility to what the demand looks like for their end clients. And as a result, we get projections for their business volumes for the year. And typically, they tend to be conservative with us. So what we see is that we get volume reduction forecasts from our clients. Now 2 things tend to happen throughout the year. One is sometimes those volume reductions don't materialize. The second thing that happens is it doesn't include new processes, new geographies, new opportunities to cross sell into that account. So what the first quarter tends to reflect for us is committed reduction from the client, but it doesn't reflect the upside and the opportunity from those clients. And we did talk about a couple of clients that were that way last year. On top of that, we also have a situation this year similar to last year where we have a client that's divested one of their business units that we were supporting. And as a result, we have a committed ramp down from that. So we do have some visibilities to some drops in the first quarter from a volume perspective. We also have a headwind of about $1 million from Q4 to Q1 as a result of the pound moving from 1.55 to our guidance of 1.52. That being said, the growth in our business, the ramp of what we've signed over the last couple of quarters, gives us enough confidence to feel that we should be flat to slightly up in the first quarter, but just wanted to make sure people were aware that there was some pressure on our first quarter revenue numbers.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then the last question from me, just on the guidance, a kind of a two-part question. First, what is built into the -- I know you have 90% visibility to, I think, the midpoint, but what's built in there from a deal ramp perspective towards the upper end of guidance? And then if you could just talk a little bit about margins, are we expecting some shift in the margins to maybe a new normal as you're trying to ramp the business and growing clients? Or how should we think about the margin profile sort of short and long term?

Deepak Sogani

So there are 2 parts to your question, clearly, what is the visibility to the upper end of the revenue guidance, if you would, right? At this point of time, our visibility for the midpoint is at 90%, and given the significant wins that we only started seeing in the current year, it looks reasonable for us to get more comfortable with the revenue momentum as the quarters progress in the current year. So broadly, the view for the current year is that we are getting into this year with very good revenue momentum, good client acquisition momentum as well, which was there in the last quarter, which is there in the current quarter as well. So as we progress through the quarters, our sense is that we should be seeing a more revenue visibility, we should be seeing good revenue momentum. And at the same time, as Keshav spoke about, we are seeing the quality and the sizes of the wins that we are getting also improved considerably, right. So that's on a larger picture, the revenue profile and the comfort and halted growth

Keshav R. Murugesh

Let me just add there, Deepak, so Joe, from -- your other question was also about the outer end of guidance. And again, what we have provided at this point in time in the 90% visibility is consistency in terms of how we normally guide at the beginning of the year. But I think, what will help us get to the higher end of the guidance would probably be faster movement of 5 or 6 of the larger deals that we think we could secure during the year, based on timing of client decisions that will push us there. Again, I want to say very, very positive about how we have started the year with activity on some of those deals, but time will tell how many of them will move fast and how many of them will be pushed out a little during the year.

David Mackey

And I think to Keshav's point, last year, at this point in time, we talked about needing to sign 4 or 5 large deals to get to the high end of our guidance. We signed 4 large deals in fiscal 2013 and closed the year 1.5% above the high end of our guidance walking into the year. So we started the year at $410 million to $430 million. We closed at $436 million and that was signing 4 large deals. So Keshav's target, if you will, of signing 5 or 6 large deals this year is in sync with the momentum we need to kind of get us there. Now obviously there are other issues associated with that, including our existing volumes with clients and our ability to farm those existing relationships. So a number of moving parts but to get at or above the high end, we're going to need to sign some new clients. And the good news about that is not only does it give us the fuel to get to the high end of guidance this year, it provides us with a fantastic base for acceleration into fiscal 2015.

Deepak Sogani

And the second part of your question, Joe, was on the leverage in our margins, correct?

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Yes, that's correct.

Deepak Sogani

So clearly coming into this year, we are sitting in on investments that we've already made in our business in past, including in the sales organization, in the global delivery infrastructure and in the capability organization. And as we build our business, we should be able to start seeing the leverage from these investments coming in. Just to kind of remind everybody about the potential leverage opportunity in our business, the seat utilization, at this point of time in the last quarter was at 1.18, which is at a historic low level for us. And we've seen this at 1.35 levels to 1.4 levels in the past, and we're working to improve our seat utilization over the next 12 to 24 months. And each percentage improvement in the seat utilization would actually improve our adjusted operating margins by 25 basis points. So we have a significant possibility there and we're working to kind of leverage that, if you would. We're also seeing the business shift towards higher end services and for us to be able to get higher realizations. We're also leveraging the technology to deliver services, so non-linear content is also a key area of focus. The basis of the investments that are already sitting in and the fact that we are seeing other engagement models mature and move towards the higher end services and non-linear models, we clearly see directionally the operating margin to improve over last year. So adjusted operating margin should grow at a faster clip than the revenue. That's one clear focus area for us. And we're also seeing opportunities in the effective tax rate as we leverage our Indian SEZ centers better. And we're also kind of seeing better yields and better optimization of our investments, if you would. And this is that you will see ANI growth which will be perhaps even better than the adjusted operating margin growth.

Operator

And your next question comes from the line of Ed Caso of Wells Fargo.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Rick Eskelsen here. We've been doing a lot of work around visas lately and obviously it mostly impacts the IT side of India-based sourcing. Can you talk about what impact it may have, the proposed legislation, on your operations, if any?

Keshav R. Murugesh

Well, we don't think we're going to be impacted at all with any changes there. And if at all, if there is pressure for people to come from India or other locations into the U.S., we actually expect we will use it to drive more business offshore to our global center. So 2 things, one is we are actually creating new centers and new jobs in the U.S. We have a new center here, which is being populated at this point in time. And other than that -- otherwise, it plays in perfectly well to our offshore strategy.

David Mackey

I think to Keshav's point, unlike the IT business, we do not have an on-site component to how we deliver services. If there are services that need to be co-located, we have and have been investing in having that facility and that infrastructure to be able to do that. So I actually think that some of the potential changes on the immigration side, to the extent that they affect client behaviors, it could play extremely well into the strategy that we've put in place.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

And then a follow up on a few numbers question. One, did you give a guidance or expectation for the CapEx for next year, and also the tax rate?

Deepak Sogani

Yes, so we are expecting the CapEx to be steady between $20 million to $22 million in the next year. And on the tax rate side, we're expecting it to be between 15.5% to 16.5%.

Operator

And the next question comes from the line of Paul Thomas of Goldman Sachs.

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

I just wanted to follow up on the commentary about the fast start to FY '14. Has the pace of large deals improved or is this just, is it too early to make that assertion for the upcoming fiscal year?

David Mackey

I would say at this point in time, Paul, it would be premature to say that large deals are moving faster. I think what we are seeing though is deals that we've been working on for an extended period of time are starting to get closer and closer to closure. So as we have developed the sales team and the sales pipeline, this is the logical throughput from what we see. So very pleased with where we are. Obviously, as we've seen over the last couple of quarters, especially as it relates to the large Insurance deal that Keshav spoke about, things can get stuck at the end of this process, so we're mindful of that and we're conservative in terms of how we've baked in that type of movement through the pipeline and into our revenue line. But from an overall large deal throughput, if you will, I think things are still moving by and large at the same pace.

Paul B. Thomas - Goldman Sachs Group Inc., Research Division

And I just want to confirm, on the previous question, you guys made a comment that you're looking at maybe 5 or 6 large deals for the upcoming year? Is that to reach the higher end of the guidance range, is that how we should be thinking about it that you're going to need to exceed the large deal closures you had last year to reach the high end of guidance?

Keshav R. Murugesh

That's fair, because I think that's how we will get to the higher end of our guidance range, that's one. The second thing is, in terms of the confidence level, we are confident that based on our needle strategy, again, this may not be something that the industry as a whole is seeing, but WNS is seeing that based on our needle strategy where we have put our resources into some specific deals and specific thinking, including focusing on taking away deals from other vendors at renewal time is actually resonating extremely well with us based on our differentiated positioning. So for our example, in the last 2 quarters, 2 of the large deals actually came as deals where WNS replaced one of the large very well-known players in the industry. But it was -- it came out of our being smart, our pursuing that prospect for months together, our showing our differentiated kind of positioning there. And when the renewal happened, we were way ahead of the existing partner.

David Mackey

And just to clarify, Paul, I think in the spirit of transparency, certainly signing 5 or 6 large deals this year would help us get at or above the high end of guidance. But again, it's got to be that success rate, if you will, in conjunction with maintaining our business volumes on processes we currently manage as well as our success in farming the existing clients that will help us get there. So we don't necessarily need 5 or 6 large deals to get to the high end. The flip side to that is 5 or 6 deals will not necessarily ensure that we get there.

Keshav R. Murugesh

Yes, good point. And timing is going to be important as well.

Operator

And the next question is from the line of Ashwin Shirvaikar of Citi.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I guess my question is, Keshav, you had mentioned in your prepared remarks, there are more global deals in the pipeline. Now when it comes to delivering on global deals, is it just basically a matter of having a global footprint? What incremental capabilities do you need to build or buy, if you could talk about the investment needed and what you're doing to get it?

Keshav R. Murugesh

Great question. So I think the first thing is you have to be able to build tremendous trust with the prospect of the client about your ability in terms of being able to service, having similar kind of experiences with somebody else. And then being able to deliver across multiple geographies. Now the big change that we saw last year was that more and more companies are now moving away from appointing local vendors in countries, which has been the traditional model, to one where they want 1 strategic partner like WNS to come and take charge of a process end-to-end across the globe. So for example, a large company comes in and says, "I've got this F&A kind of transaction that needs to get done, I may want to start with accounts payable, or accounts receivable or whatever," but as opposed to saying that "WNS, you have centers in these 2 locations so you can service me out of here and some other company has delivery centers in 2 other locations, so they're going to service me there." That was the old model that has completely changed. Clients now want 1 strategic partner to influence their thinking, to give them the kind of delivery throughput and a strategic kind of direction. And that can only happen if that vendor or that partner, rather, has an end-to-end kind of strategy and also has an end-to-end geographic kind of footprint. And that's the reason why last year we went into some of these new geographies, all of them piggybacking on 1 or 2 large clients who said, okay, you've got these 5 locations but you don't have this one. And if you want this deal, you better have a location here as well. That's how we got into Poland. That's how we got into China and some of the other locations. And I can tell you, as I talk to the analyst community, they tell me that even with 1 or 2 other recent large deals where the client was used to getting the service out of 2 large vendors on a geographic basis, when the deal came up for renewal last year or this year, the renewal took place in such a fashion that the same 2 vendors got the deal again, but the mix changed completely. So now the deal has gone in such a way that 1 vendor handles all of accounts payable and accounts receivable globally, and the other vendor now manages 2 other areas globally, which means they actually vacated some parts of each other's business. That's the new normal, if you ask me. And to do that, therefore, we have to have capability, we have to have very smart sales people and the domain aligned people who can walk the talk and who can interact and convince clients. We need to have very strong kind of technology enablement such that we are providing a seamless kind of service across the globe to clients. And more importantly, we have to have a very strong governance and risk management process inside the company that gives comfort to the client and at the same time is also focused on deals in [ph] WNS and moving margins higher.

David Mackey

I think the other thing that's important, Ashwin, is to understand too that as Keshav mentioned, the geographies where we built out capability last year were driven by visible customer demand. The flip side of that is those geographies also are strategic for us, in that we believe they're core to what we want to do and core for us to service other clients. So if a client comes in and wants us to set up a new development center for them in Iceland, it's not necessarily something that we may want to look at. So there's got to be a strategic element to it and I think the perfect example is what happened in South Africa. We really had demand for 1 client in South Africa. We started as a partner and because of the opportunity we saw there, we turned it into an acquisition and now we're leveraging it across our customer base and to target and attract new clients. So I think while we do want to be strategic in terms of expanding our geographic footprint, we also need to be very mindful of the fact that it can't be a client-specific type of an investment, there has to be scalability and something strategic for us to take to other clients.

Ashwin Shirvaikar - Citigroup Inc, Research Division

I guess one other comment was with regards to setting up centers in India in newer, lower-cost locations and so on. This distributed sort of delivery capability, how does it affect your attrition rate? Is there an attrition target that you have that's lower than current, can you talk about that?

Keshav R. Murugesh

Sure. Attrition for us and for everyone in the industry is obviously a very, very closely watched metric and something that we always want to have the right levels on. Again what is right and what is wrong is a matter of debate and discussion, based on where you're delivering from and what kind of service you're delivering. But from our perspective, we are quite happy with how attrition has played out over the last year in terms of reducing across the company. And more importantly, the way attrition has played out in the higher value areas that WNS delivers. So Finance & Accounting, technology and the Analytics area are significantly lower than the company average and the wall side, which you would expect to be higher. Now as we go into some of these Tier 2, Tier 3 kind of locations, actually, our experience has been extremely good. Because first and foremost, quite often, we turn out to be the first player or first, we have a first mover advantage in some of these locations and therefore our brand is recognized, people are excited to be part of the brand, it therefore brings in the right kind of people. The second thing is our experience has been that in some of these locations, we've been able to manage the costs lower, and therefore, profitability, a little higher than the traditional Tier 1 kind of locations. And the third thing is because of the impact of brand and the fact that we are able to actually take work to the people as opposed to taking people to work, which was the old model, it's a win-win for both us and the employer. Therefore, attrition is again at a very controllable level. So I would say that all of this put together means that whereas WNS would want to keep getting the attrition levels lower, I must also tell you that the industry standard is the following: for the GICs and the captives and again, this is something that is something that I must share because when I look at some of this data, wearing my NASSCOM cap on, I realize that it's not that well advertised. But for the GICs and the captives, 90% of people that they recruit are laterals and only 10% come from the campuses. And for the third party players like WNS, 60% are laterals and 40% come from the campuses. So technically, all of us actually built attrition into our models and I think the key question is, how are we delivering in respect to where attrition is, and I must say, WNS operates exceedingly well. Clients realize that we plan for attrition, we have the right people on the bench, the right training programs in place, and that's actually working very well for us.

Ashwin Shirvaikar - Citigroup Inc, Research Division

And then just got one numbers question, Deepak, if you could help me with the share count?

Deepak Sogani

Yes. It is 50.8 million shares.

Operator

The next question comes from the line of Manish of Oppenheimer.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Just following up on Ashwin's question, can you help to understand what's your strategy in terms of hiring, should we expect to see Tier 2 hiring growth to outpace Tier 1? And what's the availability of talent pool in Tier 2 now that there seems to be a push towards Tier 2 growth both in BPO and IT sectors?

Keshav R. Murugesh

I'll answer the second part of the question first. And again, as I've mentioned Ashwin, it completely depends on which centers, which location you go in to. There are Tier 2 locations which are now become overcrowded. I think they have bigger problems than the Tier 1 locations. We have very carefully avoided some of those locations. Our planned strategy is really to go into area, into locations where the government is welcoming, where the infrastructure is good, where the catchment area is great, and as far as possible, we have a first mover advantage. And I also like to add one more element there, where traditionally the culture is for people to work and be employed as opposed to owning businesses. Again, there's a big difference. So that's how we're focused in terms of getting in there. And therefore, as part of our assessment the catchment area has to be good and therefore our ability to hire people would be high, that's one. The second thing is, so if you look at our headcount numbers, you will notice that as of the fourth quarter end, headcount actually came a little lower than the third quarter, right. And that is because we were aware of the anticipated kind of volume reductions and we planned for it, but we should expect to see hiring pick up during this quarter and in the future. And again, depending on the mix and where we deliver from, it could be in these Tier 2 locations or 1 or 2 of the other Tier 1 locations that we have, as well as some of the other global locations where a lot of the business is also going into.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

And then can you tell us what the organic growth expectations are for fiscal '14?

Keshav R. Murugesh

Yes. So let me just state that fact, in our guidance, $460 million to $480 million actually indicates 8% to 12% constant currency organic growth rates on revenue.

Manish Hemrajani - Oppenheimer & Co. Inc., Research Division

Okay, got it. And then can you talk about the competitive situation a little bit, particularly as the larger IT services render those seeing declines in their IT business and focusing more and more on the BPO side?

Keshav R. Murugesh

Sure. I have a very strong view on the opportunity for the pure plays like WNS. I think the opportunity for us is immense. The market is there. The economy is still a modern economy. The buyers for IT services and BPM services are completely different and they're not integrated at this point in time. And whereas we keep hearing about this noise of IT players wanting to go aggressively to BPO, first and foremost, we're not seeing too much of activity there in our deals because first and foremost I think that the buyers are completely different. The people who buy IT services are completely different to the people who we interacted with, so that's one. So there's a natural check and balance there. The second is, there's a lot of noise there, we also believe that from an IT services point of view, remember, margins at a gross level are in the mid-40s. And on the BPM side, although the revenue visibility is very high with 6 and 8-year kind of deals, margins are still in the mid-30s. So the reality is, that for IT companies to aggressively grow BPO, it would mean, to some extent, dilution of their overall valuation. And I think that's playing a lot into some of their thinking, if you ask me. Most of them have the same sales team trying to go after IT and BPO and these are very differentiated kind of selling. You need to know this business. You need to know what conversations to have with your client. The third thing I will mention is from a procurement point of view, again, there's another natural check and balance. No procurement function that we have interacted with is actually looking to provide both IT and BPO services to the same partner or render the other side, particularly post the large bankruptcy we had with 1 Indian company a few years ago, having every procurement and risk management function has become very aware of it. So I actually think the time is very good for the pure plays to continue to hammerhead and move ahead. But again, it will completely be on a differentiated positioning strategy. If you're going out there, trying to sell processes, then the IT guys can get in and do something free and take it away from you. But if you're going out there saying, I'm adding value by actually completely changing the way you're interacting with your client, or if we are going out there and helping the client create a completely new disruptive kind of sales line or a new positioning, I don't think any IT company can actually come in there and disturb the pure plays.

David Mackey

And I think the reality, Manish, is that a lot of what you're seeing in terms of activity levels on the BPO side, with respect to the large IT services players, comes from low hanging fruit within their existing customer base and a lot of it comes from within the infrastructure management side of the business.

Keshav R. Murugesh

They're just being defensive there, once in a while opportunistic, I guess.

Operator

And your next question comes from the line of Bryan Keane of Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

I just want to ask, obviously, 1Q we're talking about flat to slightly up in revenues. What causes that ramp up in 2Q sequentially? Obviously, I assume that the ramp up starts in 2Q and then in 3Q. Is that just some of the larger deals ramping or how do we think about that?

David Mackey

I think, at the end of the day, similar to what we saw last year, Bryan, the ramp is actually going on. The reality is it's being muted by currency and the ramp downs in a few customers. So we have visibility to projects that we signed in Q3 and Q4 that are ramping as we go into Q1 and Q2. The challenge that we have is unlike Q3 and Q4, we've got some ramp downs in the first couple of quarters that weren't happening in Q3 and Q4. So when we look at what we see going forward here and what we know we've got in the bag, if you will, that's why we're confident not only in the ability to accelerate revenue throughout the year, but also in having 90% visibility to the mid-point.

Bryan Keane - Deutsche Bank AG, Research Division

Okay, no, that's helpful. And then, just hoping you guys could quantify the potential increase in adjusted operating margin, I don't know if it's at least 50 basis points or how to think about that. And then maybe, what are some of the variables in that? I'm sure there's a range of outcomes for adjusted operating margins, what are some of the things that will make us or make WNS end up at the high end or low end?

David Mackey

I think that's a fair question, I'll let Deepak add as well. But I think directionally, we do expect the operating margins to expand, as you said and you're 100% right, Bryan. There are number of variables that play into what would cause us to accelerate faster versus slower and a lot of it has to do with the growth in revenue, the timing of that growth, the types of services that we sell and also the locations in which we sell. I mean we've talked a lot about seat utilization and how seat utilization has dropped. And hopefully everybody has had a chance to take a look at the metrics file that we shared with you. If you look at where the seat utilizations are, a lot of it has to do with our new tax-exempt infrastructure in India. So for us to properly leverage that seat utilization, the growth not only has to come from being in India, the growth has to come largely from new clients or new processes that allow us to leverage those SEZ centers. So how that mix shakes out for the year, drives a lot of what seat utilization could look like between now and the end of fiscal '14 and has a lot to do with our ability to accelerate that operating margin. The good news is we know we've invested in the right places, we know long term this is the right thing to do, and we do believe directionally that operating margins will improve throughout the year.

Operator

And your last question comes from the line of David Koning of Baird.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Just a couple of things on the movements in cash -- cash flow is obviously good, do you expect cash flow to be pretty much in line with adjusted net income over the next year?

Deepak Sogani

Yes, I would think the tax we've given, the taxation to be between 15.5% to 16.5%, that is going to be 1 cash outflow. But in a ballpark range, we would expect the operating cash flow to attract the current year operating cash flow and a little bit more.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay, good. And then the second thing along that line, there's a new line on the balance sheet that -- I know it's cash, but it's called Investments in FMP, I'm just wondering what exactly that is or why the cash moved into that line item?

Deepak Sogani

That's a noncurrent category of investments, where the investments are locked in for a period of 12 to 18 months. And that is why it's a new category, right?

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

Okay. So is it something like a CD or some sort of long-term cash holding?

Deepak Sogani

So yes, it is basically investment into mutual fund assets where the mutual funds are in the back end, investing in bank CDs, right. Most of our other investments are in liquid mutual funds, so it's one another category of mutual fund investment.

Keshav R. Murugesh

So very safe, solid investments, longer term and I think ability for us to earn a little more as well.

David Mackey

Exactly. And I think as Deepak mentioned, as we go throughout the year here, what you should see as some of those maturities come down, is that, that will move from a long-term category into a short-term category.

Deepak Sogani

Yes.

David J. Koning - Robert W. Baird & Co. Incorporated, Research Division

And then just finally, obviously now with a nice cash -- net cash position, there's more flexibility. I'm just wondering is the debt something that you would look to pay down more or acquisitions still kind of being a key use of cash and maybe even buybacks, small buybacks given now all the private equity holders are out?

Keshav R. Murugesh

That's a great question, Dave. The way I like to see it, I like to have a little bit of cash on the balance sheet that gives comfort to my clients. Recall 2 or 3 years ago, some of our competition used our balance sheet against us to take deals away, that's changed. Our competition now has a lot of debt and we actually are now net cash positive. I like to have that, it gives me the ability to tell our clients that they can sleep well at night, knowing fully well that they're working with a very trusted partner that has cash in the balance sheet, that's one. The second thing is, as we keep investing in our growth and we keep looking at increasing our growth levels, I think it's important for WNS to also start looking at some tweaks in terms of inorganic means that drives growth levels higher at the company. And therefore, as I've been talking about over the last year or so, we will be opportunistic in terms of using that cash to fuel our growth, to add more capability to more technologically enable the company and to make sure that the brand is impacting more and more brands, and essentially in the higher value areas of services that we offer. But at this point in time, I would say that we are quite comfortable having the cash on our balance sheet.

Operator

Thank you. I would now like to turn the call over to Keshav Murugesh for closing remarks.

Keshav R. Murugesh

Thank you. WNS is proud of the progress we have made in turning around our business in the past 2 fiscal years. And we are energized and excited about our ability to continue the momentum into 2014. The company has created differentiated positioning in an industry with long-term healthy growth prospects and we are currently operating in a favorable demand environment. WNS is committed to successful execution on our long-term strategic plans, which will enable us to grow revenues, at or about industry rates and expand margins.

We are confident that this will enable the company to drive increased value for all of our key stakeholders including our clients, our employees, shareholders and the communities in which we live and work. Thank you for joining us today, and we look forward to speaking with you soon again.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.

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