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WNS Holdings Limited (NYSE:WNS)

Q4 2014 Earnings Conference Call

April 30, 2014 08:00 ET

Executives

David Mackey - SVP, Finance & IR

Keshav Murugesh - CEO

Sanjay Puria - CFO

Ron Gillette - COO

Analysts

Joseph Foresi - Janney Capital Market

Rahul Bhangare - William Blair & Company

Bryan Keane - Deutsche Bank

Edward Caso - Wells Fargo Securities

Manish Hemrajani - Oppenheimer

Ashwin Shirvaikar - Citi

Operator

Good morning and welcome to the WNS Holding’s Fourth Quarter and Full Year Fiscal 2014 conference call. (Operator Instructions). Now, I would like to turn the call over to David Mackey, WNS' Corporate Senior Vice President and Finance and Head of Investor Relations. Please proceed, sir.

David Mackey

Thank you and welcome to our 2014 fourth quarter and full year earnings call. With me today on the call I have WNS’s CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our new Chief Operating Officer, Ron Gillette.

A press release detailing our financial results was issued earlier today. This release is also available on the Investor Relations section of our website at www.wns.com.

Today's remarks will focus on the results for the fiscal fourth quarter and full year ended March 31, 2014. 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 May of 2013. 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 that management will discuss are defined as follows, Net revenue is defined as revenue less repair payments; adjusted operating margin and adjusted net income, or ANI, are defined as operating margin and 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 WNS' CEO, Keshav Murugesh. Keshav?

Keshav Murugesh

Thank you David and good morning everyone. We’re pleased to report that during the fourth quarter WNS was able to grow our topline, expand our margins and generate solid cash flow. Q4, net revenue came in at 122.7 million which represents an 8.9% increase versus the same quarter of last year and a 2.6% increase sequentially. Excluding the impact of exchange rate movements our fourth quarter constant currency revenue grew 7.8% year-over-year and 1.8% sequentially.

This is despite headwinds associated with the transition of a large online travel client which was discussed last quarter. During the fourth quarter WNS added five new logos, expanded six existing relationships and renewed 13 contracts. We also signed the fifth large deal of the fiscal year adding a large U.S.-based healthcare client to our portfolio. I would now like to take a few minutes to review the Company’s 2014 accomplishments before we turn our attention to the upcoming year.

Both financially and operationally fiscal 2014 was a good year for WNS, our net revenue came in at $471.5 million which represented 8.1% year-over-year growth or 8.5% on a constant currency basis. This top line improvement coupled with operating and profit margin expansion helped increased our adjusted net income to $72.4 million or $1.37 per diluted share up 34% from a $1.03 in fiscal 2013. In addition the company generated 81.4 million in cash from operations and 61.8 million in free cash during fiscal 2014.

Year-over-year these represent increases of 26% and 42% respectively. Operationally the company also made significant progress during the year. Our sales force productivity is gradually improving as evidenced by our five large deal signings, 21 new client additions and 37 expanded relationships.

In 2014, WNS continued to invest in several key areas including new horizontal and vertical service offerings, expanded delivery footprint, strengthened domain expertise and enhanced technology enablement. The success of these initiatives was validated by direct feedback from our clients and by the analyst and advisor community. In the past year these key influencers have recognized WNS’s capabilities in the areas of insurance, utilities, finance and accounting, social media, business analytics and corporate social responsibility with awards for leadership and performance.

We’re also pleased with the company’s progress from an HR and resource productivity perspective. Our HR team received prestigious awards from TISS and CUBIC during the year recognizing the company’s innovative efforts in the areas of training and talent management. These initiatives are helping drive our attrition rates lower and enabling WNS to improve delivery productivity.

In 2014, our full year attrition rate reduced for the third consecutive year coming at 33%. This compares to a 43% attrition rate reported in fiscal 2011. As we look forward into fiscal 2015 the demand environment for BPM remains stable and healthy. Sales cycles and project ramps for larger engagements continued to be slow and cautious but these opportunities are moving through the pipeline and decision are being taken. While WNS’s underlying business momentum remains healthy, the company will have some short-term revenue pressure in 2015.

In a typical year WNS expects to face upto a 5% revenue headwind from reductions in our client’s business volumes, committed productivity improvements and changes in client’s strategic plans. For fiscal 2015, WNS enters the year with an expected revenue headwind of 11%. In addition to the usual volume and productivity reductions there are two incremental challenges facing the company this year.

First, as was discussed last quarter we have a large online travel client who is transitioning work from WNS to another OTA partner. As a reminder our client is moving processes from their client platform to leverage another OTAs superior technology platform under a marketing arrangement and this is a technology platform decision and has nothing to do with WNS’s performance.

We now have full visibility to the transition plan which will proceed on an expedited timetable. It is now estimated that most of the customer care and sales work currently performed by WNS will transition away by the end of July creating a 4% year-over-year revenue headwind for the company. Our visibility at the midpoint of guidance includes this reduction but does not include the potential revenue from winning more business with the new OTA provider.

We’re working closely with this client, retraining our resources on the technology platform and competing with incumbent vendors to increase our wallet share. We believe that this new relationship has the opportunity for significant expansion over the next few years. In addition to the OTA transition, WNS has also entered into a tentative agreement with an existing major client for a five plus year extension to our existing contract.

This would take the contract expiration to March of 2022. Under the proposed terms, WNS would maintain exclusivity on all existing processes and geographies and be regarded as a preferred supplier for new areas.

The client will receive a price discount along with productivity improvements linked to the movement of processes to non-FTE based pricing models. While this extension is expected to create a 2% revenue headwind in fiscal 2015 we firmly believe that this agreement creates a win-win for WNS and the client and is in the long term best interest of WNS and our shareholders.

Final terms and conditions are subject to the execution of the formal agreement. Despite these challenges the company still expects revenue to grow between 4% and 10% for the year and we currently have 90% visibility to the mid-point of our guidance range. We enter 2015 with a healthy new business pipeline and several large deals in play for the first half of this year. The company is targeting a minimum of six large deals for fiscal 2015, although as we have discussed the timing of formal contract signature and ramp of process hand-offs remain somewhat unpredictable.

The entire WNS team continues to focus on improving sales productivity and we believe there is significant capacity for the team to increase closure rates for both hunting and farming opportunities.

Demand in 2015 is expected to be driven by higher value, higher margin services including industry specific BPM, finance and accounting and analytics. With respect to profitability, our ANI guidance of $77 million to $83 million assumes that both operating margins and profit margins will expand year-over-year.

Similar to last year, key focus areas for 2015 includes sales force productivity, breadth and depth of services, domain expertise, technology enablement and operational excellence.

We believe our investment philosophy and go to market approach is resonating well with clients and prospects helping create differentiation and positioning WNS for success in the BPM industry. We remain committed to our long term goals of growing revenue and maintaining profits at or above industry rates.

I would now like to turn the call over Sanjay Puria, our CFO to discuss further our financials. Sanjay?

Sanjay Puria

Thank you Keshav. With respect to the fourth quarter numbers net revenue increased to $122.7 million from $112.8 million in the same quarter last year growing 8.9%. On a constant currency basis year-over-year net revenue grew 7.8% with appreciation in the British Pound against the U.S. dollar more than offsetting depreciation in the Australian dollar and South African Rand against the U.S. dollar. Sequentially net revenue increased by $3.1 million or 2.6% with revenue aided by appreciation in the British pound against the U.S. dollar. On a constant currency basis fourth quarter revenue grew 1.8% sequentially.

Year-over-year quarter four revenue growth was led by the shipping and logistics, auto claims, utilities, insurance and banking and financial services verticals which all grew over 15%. From a service offering perspective revenue growth was faced by auto claims, finance and accounting and research and analytics which grew 23%, 20% and 13% respectively when compared to last year.

Sequentially, revenue growth was broad based across verticals and service offerings. Adjusted operating margin was 19.1% in quarter four as compared to 15.8% reported in the same quarter of fiscal 2013 and 18.4% last quarter.

On a year-over-year basis adjusted operating margin improved 330 basis points as a result of depreciation in the Indian rupee, increased operating leverage on higher volumes and improved productivity. This benefits more than offset our investments in global infrastructure and the impact of our annual wage increases. The sequential adjusted operating margin, improvement of 75 basis points is largely the result of currency favorability and increased volume which more than offset the impact of lower seats utilization.

Interest expense this quarter was $0.7 million down slightly from the $0.9 million reported in quarter four of last year and consistent with last quarter. The company’s other income was $3.1 million in the fourth quarter up from $1.6 million reported in the same quarter last year and $2.5 million last quarter.

The year-over-year and sequential increases in other income are the result of higher cash balances and improved returns on our India based investments. WNS’s effective tax rate in the fourth quarter was 19.1% up from 14.9% last year and 16.4% in the previous quarter. The increased tax rate this quarter was the result of taxable exchange rate gains and geographic mix of profits.

The Company’s adjusted net income for quarter four was $20.9 million compared with $15.8 million in the same quarter of fiscal 2013 and $19.8 million last quarter. This represented growth of 33% year-over-year and 6% sequentially.

Adjusted diluted earnings were $0.40 per share in quarter four up from $0.30 reported in the fourth quarter of last year and $0.38 in the prior quarter. As of March 31, 2014 WNS’s balances in cash and investments totaled $146.2 million. The gross debt position was $84.7 million with the company reporting a net cash position of $61.5 million at the end of quarter four. WNS generated $25.4 million of cash from operating activities during this quarter and free cash flow of $22 million after accounting for $3.3 million in capital expenditures.

DSO in the fourth quarter came in at 30 days, down from the 33 days reported in quarter four of last year and up from 31 days reported last quarter. With respect to other key operating metrics, our total headcount at the end of the quarter was 27,020. Our attrition rate in quarter four was 31% down from 36% in the same quarter of last year and up slightly from 30% in quarter three.

While the attrition rate can vary quarter-to-quarter we’re pleased with the overall trend over the past few years. Built seat capacity was 23,503 at the end of the quarter up 162 seats or less than 1%.

Average build seat utilization in quarter four was 1.14 as compared to 1.18 reported in the same quarter of last year and 1.16 in the previous quarter. We recognize that seat utilization is an area where the company fell short of our goals this year and we are focused on improving this key operating metric over the next few years.

That being said we must continue to ensure that we have sufficient capacity and reach to service our client’s global requirements.

I would now like to provide you with a brief financial summary of fiscal 2014 before we turn our attention to the company year. As Keshav mentioned our net revenue for the year came in at $471.5 million growing 8.1% on a reported basis and 8.5% on a constant currency basis. The company’s full year adjusted operating margins expanded 280 basis points to 17% driven by depreciation in the Indian rupee, improved productivity and higher business volumes. Interest income increased $4.8 million based on higher cash balances and investment returns.

While interest expense reduced $0.7 million on lower debt levels. As a result adjusted net income increased from $53.1 million in fiscal 2013 to $72.4 million in fiscal 2014, growing 36.3%. From a balance sheet perspective the company’s cash balances grew $28.6 million while total debt reduced by $11.6 million. In our press release issued earlier today WNS provided our initial guidance for fiscal 2015. Based on the company’s current visibility levels we expect net revenue to be in the range of $490 million to $520 million representing year-over-year revenue growth of 4% to 10%. Revenue guidance assumes an average British Pound to U.S. dollar exchange rate of 1.66 for the full year.

Excluding the projected year-over-year exchange rate impacts, our constant currency revenue guidance represents growth of 1% to 7%. We currently have 90% visibility to the midpoint of the revenue range consistent with April guidance in prior years.

As Keshav mentioned this guidance includes an 11% revenue headwind associated with the OTA transition, contract extension with our largest client and normal business volume productivity reductions.

The majority of the impact from the contract extension and OTA ramp-down is expected in the fiscal first quarter of 2015. As a result we currently anticipate a sequential revenue reduction from quarter four to quarter one in the range of 3% to 4%.

Despite some of the revenue pressures we have discussed WNS is pleased to highlight that our 2015 guidance reflects year-over-year expansion in our adjusted operating margins and that once again our adjusted net income will grow faster than revenue. Adjusted net income for fiscal 2015 is expected to be in the range of $77 million to $83 million based on a 60 rupee, to U.S. dollar exchange rate for the full year.

This implies adjusted EPS of $1.44 to $1.56 on a diluted share count of approximately 53.3 million shares. The company expects CapEx level to be in the range of $25 million to $30 million in fiscal 2015.

We will now open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). The first quarter we have comes from the line of Joseph Foresi from Janney Capital Market. Please proceed.

Joseph Foresi - Janney Capital Market

My first question is on the guidance, I think typically what you’ve done is given a conservative guide to begin the year and then walked up the guidance as you’ve through the year. Has the methodology towards guidance changed at all and what is the swing factor that puts you at the lower or at the upper end, obviously you talked about the headwind but I’m just wondering, is that ramping a new contract or how should we think about that?

Keshav Murugesh

Sure. Joe you’re right. Absolutely the first and foremost I must tell you that the philosophy is consistent with whatever we have done across the previous year. So we have a 90% visibility today at the midpoint of the range. We know exactly what our booked commitments are at this point in time and we also have entered the year with some solid kind of potential deals for which we expect to see signings happen over the next two quarters, over the first two quarters of this year.

So we have discussed the headwinds and we have baked all of that into our guidance, but what we expect will drive revenue higher in the range really is ramp from the existing deals that we have already won as well as quicker conversion of some of the new deals including some of the large deals that we expect to win at this point in time.

Joseph Foresi - Janney Capital Market

Then just kind of moving on to my second question, on the margin expansion front, can you give us a rough idea of remind us what the total potential margin expansion is and then give us some idea of what we can expect not just this year but next year? Now how should we gauge that going forward?

Keshav Murugesh

I think when you look at the margin opportunities going forward for WNS there are several levers that we have to pull here in and certainly I think Ron will chime in here a little bit later but some of the things that we’re doing to work on some of these productivity improvement initiatives. But the largest margin lever that we have talked about and Sanjay mentioned in his prepared remarks is the seat utilization. We’re currently at an all-time low in terms of our average seat utilization. We have made significant investments into our infrastructure and if you look at the lever that we have to pull over time there, if we can get from a seat utilization of 1.14 back to a seat utilization over the next couple of years of 1.25 for example.

We’re looking at north of 250 basis points of margin expansion opportunity. So this is clearly one of the big levers that we have going forward to continue to improve our operating margins. We also think there is some innate opportunities in the nature of the business and some of the things that we’re doing in terms of leveraging investments on the SG&A side with accelerated revenue growth as well as opportunities over time as the industry moves towards higher value services and higher value model.

So we directionally believe that long term margins will continue to move forward. Obviously in a given year anything can happen but at this point in time we’re excited not only about the growth opportunities for the company but the margin expansion opportunities over the next couple of years.

Joseph Foresi - Janney Capital Market

And then the last question from me. I think you had said you’re working on six large deals, if I remember last year it was about five and it seems to be growing. Is it fair to characterize the pipeline is potentially getting better and the sizes of the deals are getting larger? And how do you think about the pipeline this year versus prior years?

Keshav Murugesh

Yes Joe, I think you’re right there. I feel far more comfortable entering this year about first of all the overall pipeline and how well it is distributed both across verticals, horizontals as well as geographies as well as the size and scale of some of these deals that we’re playing in and I must give full credit to our teams running our businesses as well as our sales force that have really positioned WNS extremely well with prospects, with clients, with the advisors, with the analyst community. As a result of which we’re being invited to many more deals than we were invited earlier. And again my confidence at this point in time is that we expect that we will sign six large deals, at least six large deals during this year. So right now our target is six large deals but going into the year we already have solid visibility to potentially each one of them already.

And again the focus is how do we ensure that these deals are actually executed on and signed off between Q1 and Q2 to allow the company enough time to bring margins -- to bring revenue and obviously margins in and also to recoup some of the impact of the speed bump that we faced with the large OTA, right?

And again in terms of how this pipeline and the sales momentum compares with previous years? I would say significantly better and it's essentially because we’re invited to every deal at this point in time and productivity of the sales force is huge focus area and it is continuously going up. And I’m sure some of these things Ron will want to talk about further in terms of the steps that he is taking to step it up even further, but we feel very, very confident about how we are positioned at the start of the year.

Operator

The next question we have comes from the line of Rahul Bhangare from William Blair. Please go ahead.

Rahul Bhangare - William Blair & Company

The large client that was renew until 2022, I believe that agreement was valid until about 2017. So I was just curious why renew the deal so early on. Was there some type of competitive threat at the account that drove that decision?

Keshav Murugesh

As you’re aware this is a large client of WNS’s, also a very valued kind of relationship and as you’re aware we have a great relationship with this client and have constant dialogue on various aspects of our relationship all through the year.

Somewhere recently we got comfortable with the possibility of a win-win kind of opportunity which we have executed on over the past week or so and therefore in terms of timing it has happened very recently but it is something that has emerged from a very strong relationship with the client, understanding the client’s needs, working on a win-win model and doing something agreeably earlier than the timeframe that was already contracted. But I think more focused on these long term impact to WNS’s shareholders and the reality is by doing this, so there was no imminent threat of a competitive bid in my view.

I think what we have effectively done is ensure that is now -- that threat is taken away for a long period of time. We have positioned the contract in such a way that it's a win-win. So not only is the client benefited but we’re also benefited in terms of many areas some of which we highlighted in the prepared remarks the fact that we have exclusivity in all the existing processes. We have right of refusal on new processes, we’re very, very focused jointly on moving more and more of this contract into a transaction price or kind of a model which means over a period of time the ability for WNS to also expand margins.

Most importantly I will say that the way this contract has been rewritten, it gives the client huge leverage to drive further savings inside their organization as a result of which we believe WNS will also benefit from revenue uptake.

Rahul Bhangare - William Blair & Company

And my second question is around operating margin, I was just curious what operating margin assumption is baked into guidance and you had mentioned that you are expecting improvement year-over-year. I was just wondering how do you split that between FX and operating leverage?

David Mackey

I think the company does not provide specific operating margin guidance in terms of a target number. We have given you an ANI number and we have told you that we do expect some increase, other income as a result of having higher cash balances or tax rate for next year is expected to be in the same range as it was this year. So it's pretty easy to back into what the range of adjusted operating margin looks like and what you see is both below and the high end it does represent an improvement in net adjusted operating margin figure on a year-over-year basis.

Obviously we do have baked into our numbers for fiscal 2015 some currency benefit as a result of not only how the currency has moved over the last six months but also our long term hedging policy which allows us to protect our cost structure going forward. I think we’re looking at a balanced approach between currency and operating leverage in terms of the contribution for next year, understanding the fact that we do have some margin headwinds associated with the ramp down of the OTA and the contract extension that we’re discussing. So these are clearly not only revenue headwinds but also present some pressures from a margin perspective despite the fact that we have got both of those issues, we’re able to deliver revenue growth and margin expansion this year. We’re pretty excited about that.

Operator

The next question we have comes from the line of Bryan Keane from Deutsche Bank. Please proceed. Your line is open.

Bryan Keane - Deutsche Bank

I just wanted to ask about the five large deals won, have all those deals or maybe you can give us an update on how many of those deals have already started to ramp up and then what is the target date for to have all five deals starting to ramp?

David Mackey

Off the five deals, we currently have four of them that are in ramp up mode, the one that we have signed most recently still has some work to do to be able to get that to ramp. We have not seen a steady state. I was on any of these opportunities at this point in time. So not only do we still have some opportunity in terms of growth to continue the ramp going forward on these deals that we have already signed but we also believe that each of these relationships has significant expansion opportunity beyond the committed volumes that we have received so far. So really excited about what these are going to contribute next year but also excited about the opportunity to continue to grow these relationships going forward.

Keshav Murugesh

And I just want to underline that last statement that Dave made because in every one of these deals we came in with a particular area as a starting point but I’m delighted to see that our BPM where we’re offering this end to end kind of strategic partnership model to each of these clients is resonating very well and we’re seeing solid conversations taking place with each of these clients on processes beyond the original scope of work.

Bryan Keane - Deutsche Bank

I would like to also get just some thoughts on kind of two industry concerns, one obviously is closure rate. It doesn’t seem like closure rate have been too much of a problem. It seems pretty normal pattern stuff but maybe you could talk a little bit about closure rates on large deals since we have heard in the industry or some other competitors have talked about having a tough time closing some of these large deals and sales cycle is getting extended. That’s one and then two pricing, you know there has been a lot of comments in the industry recently especially by some of the multinationals talking about some weakness in pricing. Obviously a different type of area and the area that you guys are focused but we would like to hear your thoughts there as well.

Keshav Murugesh

Sure, maybe I will take a stab at it first but in terms of timing there is some uncertainty. So for example deals have been extended, the sales cycle has been extended but we have not seen a significant change in terms of the timing and the tenure of these deals. So we have traditionally felt that large deals take about nine months or so to reach a decision stage. We continue to see that kind of timeframe. We haven't seen any significant change there. Secondly, in terms of the scope of these deals we at WNS are actually being invited to more of these deals whereas from an industry point of view we have heard a few people give out slightly different impressions in terms of kind of deals they are seeing. I’m happy to report that we’re actually seeing more deal flow or more impact, all of us are flying around much more than we have ever flown on before.

We’re sitting in much more, many more client kind of meetings. We’re actually seeing a lot of client visits into each of our delivery location. So that’s very positive from our point of view. Now coming to pricing, I think WNS over the last few years has focused very strongly on a highly differentiated model as a result of which our ability to really strongly position the domain solutions, our horizontal higher end value kind of solutions and present it as a unique kind of model to our clients has worked quite well. So we have actually not seen any pricing pressure and as you’ve heard earlier our confidence about actually building operating margins inspite of what everyone else is saying on pricing is high. So we have delivered last year, we expect to continue to deliver next year and that’s a big, big focus area of this company. Just making sure that we do not dilute pricing power from our side and operationally we keep performing.

Sanjay Puria

And maybe just to add to that some of this large deals as well as they are complex deals because of the multi-tower, so some time contracting takes little bit more time and the client wants to be really comfortable and accordingly the ramps goes little bit slower than expected because they want to do in a phase wise manner and be comfortable with that.

David Mackey

I think one of the things that’s also important Bryan to differentiate is whether or not there has been a change in terms of the sales cycles to large deals versus whether or not there has been a change in the pipeline between the mix of large deals and small deals and I think when you look at WNS clearly the shift to selling large, multi-tower complex deals was something that was impacting us two or three years ago and you saw it in the lack of revenue growth, you saw it in your conversations and discussions around the pipeline and the fact that things were taking longer. But once you got a mature pipeline with large deals moving through all phases it shouldn’t impact the timing of deal signing. Certainly it can erratic quarter-to-quarter but the reality is you need to have large deals at all phases of the pipeline, not just early on to avoid having a gap in your revenue acceleration and we feel very comfortable that we have not only being successful in signing more large deals each of the last few years but we have also been successful in moving large deals through the various phases or pipeline to what we have now got comfort with several large deals that are coming out of the tail-end that give us comfort and confidence about the six plus large deals that Keshav talked about.

So you need to make sure that that flow is continuing to move and we believe we’re there right now but certainly if you’re transitioning your business from farming activities with existing clients that can be fairly quick and not go through formal processes and involve a lot of pain and suffering, that transition to trying to sell large deals to new clients in a competitive environment can create some pain and some pause in your business.

Bryan Keane - Deutsche Bank

Last question and clarification for me, the OTA that’s causing the headwinds this year, will it a one year phenomenon or will it bleed also into next fiscal year as well? Thanks so much.

Sanjay Puria

The OTA deal you know right now we just got visibility and you know from a transition perspective but you know as Keshav also mentioned that we have enough opportunity and we’ve already entered into an existing relationship with other OTA client so and we have started some commitment with that and with that we feel there is enough opportunity for us in the long term from a growth perspective. So currently the 4% headwind has been baked into our guidance and we’re over that.

David Mackey

I think the short answer to the question Bryan is when you look at the OTA transition we expect that revenue to kind of go from where it is today down to it's minimum level between now and July. So I would say 75% to 80% of the impact from the OTA transition will be felt this year. There maybe some lingering year-over-year issue in fiscal Q1 of next year versus fiscal Q1 of this year but the vast majority of this impact will be 2015.

Operator

The next question we have is comes from the line of Edward Caso from Wells Fargo Securities. Please proceed.

Edward Caso - Wells Fargo Securities

I guess my question is around the source of your pipeline and opportunities, are these greenfield opportunity is presumably little bit longer to bring over the fence or are they sort of takeaway’s or maybe the breakup of former mega deals?

Keshav Murugesh

It's a combination for a number of things I would say and again I want to really give my sales team credit for positioning WNS in every one of the different kind of sources of these deals. I will say first and foremost it comes from greenfield activity where we have chosen specific kind of names that we must target and we must own and we get after them and some of that may also include a faster decision taking place because of a breakup of a larger deal somewhere else, right? But credit for that really goes to superior sales by our sales force.

The second I would say is based on how we have really positioned our sales team across geographies and across verticals, it means we’re actually positioned with completely new geographies where we traditionally did not -- as credible player and we’re starting to see good pipeline and good sales activity and closures out there and finally I will say that in a number of our verticals where traditionally we’re extremely strong in Europe particularly UK, we’re now a very, very relevant and strong player both in North America as well as the Asia-PAC market. So I think it's very broad-based, it's a cross vertical, it is a cross horizontal across these [ph] and it's a combination of all of these including (indiscernible).

David Mackey

And I think the other thing just to add a little bit of color to that is, the other thing that’s really exciting for us is when you look at some of the large deal opportunities that we have got in the pipeline today, we are actually in a position to help lead the client in terms of developing how and why they should be moving forward with business process management and several of the deals that we’re talking about that are large in scope are situations where we have been able to highlight existing relationships with clients that we have today and point out to customers why this is what they should be doing.

So whether it's in the travel space, whether it's in the insurance space, whether it's in the utility space, what we’re able to do is hold out an end to end deep relationship that we have been saying this is the right way to approach it and as a result what’s happening is some of these deals are actually getting structured to our advantage. We feel really good about our ability to hold out some of our existing customers and existing relationships and use that to help us in different areas [ph].

Edward Caso - Wells Fargo Securities

My other question is on the other side of the equation, are you seeing movement to replace -- use technology rather than people to drive activity, in another words, are we starting to delink the body count and revenues and is the client through their contracting process allowing you to do this and how big of an investment and how big of a cultural change might that be?

Ron Gillette

Definitely we’re seeing that there is a trend, as I’ve settled into the company over the past few months, had a chance to go across the organization. We have lots of initiatives in each of the verticals across the company that are doing exactly that. That are taking existing processes and automating them or creating new solutions, so this will definitely have a positive impact on our productivity and there is a delinking that will go on but our existing clients were able to bring new ideas and solutions to them where we have some FTE based contracts. We’re able to move those to transaction based pricing and implement technology solutions in there to give us greater productivity. Hopefully that helps --

Keshav Murugesh

I will just add a little bit there, I think all of that is very accurate but I will say that the focus really from a client’s point of view is really to interact with companies like us and focus us on business outcomes not really on inputs and that train left long ago. So if you ask me we have been providing these solutions for the past two or three years now, it's not new from a WNS point of view. We’re extremely focused on using technology to drive productivity in the processes right? And whereas a number of deals come to us today with both a technology layer as well as a process layer. At this moment in time we have actually being able to win many of these deals which have a traditional IT kind of component as well with the hell of some very solid partnerships that we have forged. Some of the investments we have made within the company as well as and really focusing the client away from independent business process and technology areas but really getting them to focus much more on business kind of solutions and in terms of the contract extension we spoke about. I think one of the most exciting things that happened there is the fact that we moved the contract in such a fashion just as Ron explained into one that moves away from the traditional old models that you spoke about to much more transaction pricing oriented models and outcome based models which will help us drive margins and help the client save more money and become more efficient and become much more impactful with their clients.

David Mackey

And I think to add some of the evolution overtime towards more technology enabled services and solutions will also be a function of client’s maturity levels and clients comfort with their provider. So today one of the big things that you see is people that are very new to business process management outsourcing are looking for a way to quantify and measure the savings to the organization and that’s difficult to do if you’re trying to do this in two steps.

So what we typically see is that most relationships both from a client perspective as well as from a provider perspective are better suited towards starting an FTE based model. It allows them to do a direct comparison from what it cost them now to what it is going to cost them in the future. It also allows us to come in and establish baselines and understand what the true cost of delivering service are, as that relationship matures as the comfort matures the need and demand for productivity improves. It's the perfect time to transition towards higher value models where you trust your provider implicitly. You don’t want to count the number of heads working on it and you can drive them to improve productivity. At the same point in time it's the perfect point for us to introduce components of technology and platforms to make these processes more efficient and to allow some of those benefits to accrue to us as opposed to accruing directly to the client.

Operator

The next question we have comes from the line of Manish Hemrajani from Oppenheimer. Please go ahead.

Manish Hemrajani - Oppenheimer

The six large deals for fiscal ’15 can you talk about timeline first half, second half of the year and also can you talk about regionally where you’re seeing your deals coming from. It is still the U.S. and UK? As has been the case in the past or has that changed?

Keshav Murugesh

So let me start by saying that in terms of where they are coming from, they are coming from all key regions where we have a good sales team. So it's coming from North America, from UK, Europe as well as from the Asia-Pacific market that’s one. In terms of timing of deals, at this point in time we have said six large deals across the year but the focus at the company at this point in time is really to pull them as quickly as is possibly across the first two quarters, as many as it's possible across the first two quarters to give us an opportunity to drive revenue from this year itself.

David Mackey

We would love to get those six large deal signed in the first half of the year, talk about how that helps us get at or above the midpoint of our guidance for this year and how those deals plus anything we sign in the back half of the year sets us up extremely well for fiscal 2016 but as we have also mentioned Manish that the ability to project exactly when these things are going to close and exactly how they are going to ramp is extremely difficult based on the size and complexity of these deals. So we feel very good about the number of deals that we have right now and the kill zone as we walk into the year as Keshav said, I think we’re in a much better shape than we were last year and definitely much better shape than we were two years ago at the same point.

If we can close some of these deals here in the first half and get 4 - 5 done in the first half of the year, we will be in real good shape but as we have said the timing is something we don’t have a lot of control over.

Manish Hemrajani - Oppenheimer

Can you share the added deal size for the six large deals?

David Mackey

Well we defined a large deal is having a minimum of $5 million of annual contract value. So everything that we’re looking at right now in terms of possible large deal closures has at least that 5 million value and obviously given an average number it's more than that.

Manish Hemrajani - Oppenheimer

Your headcount grew the fastest in South Africa, can you talk about the work you’re doing there and what’s the strategy going forward for that region [ph]?

Sanjay Puria

So South Africa, we have two components from a growth perspective. South Africa is a market itself and as well as some of the work we have won from the UK market and primarily right now the work we’re doing is more towards a customer service in the South Africa but you know we strongly believe that there is a good potential to really add some of the insurance work in that market because that’s where we found strategically that location to be very good when we did that acquisition and you know we’re very aggressively and strongly pursuing some of that opportunity in that market.

Keshav Murugesh

That’s right. So I would say that, Sanjay actually hit all the key points but I will just underline again that South Africa is extremely strategic for WNS from a global account point of view managing services for some of our global accounts particularly around the customer interaction areas and the accrual space, the insurance accrual [ph] and independently a very exciting market for us as the local market as well and so we’re actually seeing very solid kind of pipeline emerging there as well.

David Mackey

I think the other thing that’s important Manish to remember is that the growth and headcount that we have seen in South Africa has been to firm demand. So this is not a case, we have gone ahead and hired a bunch of people and hope we can sell business. This is to firm demand from clients looking to leverage this geography, as Sanjay mentioned either from a local market perspective or from a near shore delivery center for either the UK or potentially areas like Australia. I think they present huge opportunities. So very excited about South Africa as a delivery destination for WNS, very excited about the health and success of that acquisition that we did two years ago and again taking the right philosophy towards how we approach that geography as well as some of our other strategic geographies.

Ron Gillette

I was going to say South Africa, the client show a lot of interest in that and it's rewarding decision to increase our network of delivery centers there. I believe that we have made the right investments and delivery centers around the world to meet our clients’ needs for now and the future. So again South Africa adding to the comments of the rest of the team, very good location for a strong client interest. It's key part of our future.

Manish Hemrajani - Oppenheimer

In fact looking at your revenue for used seat, I think it's at all time high is I believe? How much of that do you attribute to productivity gains and how much to a geographic mix shift?

David Mackey

Our revenue per used seat has been going up and I think a lot of this has to do with, it's actually a combination right? If you look at our delivery metrics clearly the percentage of work that we deliver out of lower cost geographies in the past two years specifically India has come down so if South Africa is expanded, as Poland as expanded, as the U.S. or Romania has expanded our revenue per employee has gone up. I think the other thing we have been able to do is through some of the things that Ron touched on whether it's technology based or headcount based we have been able to get more efficient on the processes that we manage for these customer. So most of them are leading to improved utilization, improved productivity on a used seat basis which we’re excited about.

But it's still for us, it's work in progress. We think there is still room for opportunity. We think there is still room to do better than what we’re doing now both from a revenue per utilized seat as well as from an overall seat utilization perspective. So these are clearly two metrics that we are focused on. When you look at the companies, revenue per employee we have been steadily improving that metric over the last couple of years and it's something that we’re keenly aware of and focused on going forward because at the end of the day this is what’s going to allow us to expand margins.

Operator

Thank you. The next question we have comes from the line of Ashwin Shirvaikar from Citi. Please go ahead.

Ashwin Shirvaikar - Citi

So good quarter, good EPS guidance. I guess my first question is how are you thinking of the INR impact likely given the Indian elections coming up and say the rate driven to 55 from 60 what would be the impact?

Keshav Murugesh

First I will take a stab at this question and Sanjay will add on that our guidance assumes and makes an assumption on INR against the dollar. On the revenue side there is an assumption on the pound sterling against the dollar and from an operating point of view I think we’re just focused on running the company, driving value for our clients as well as for our shareholders. We have a robust hedging program in place which we believe is extremely well positioned from an overall point of view to take different kind of risks on the Forex side.

Again I’m very clear that we’re not here to speculate on where currency will move but we believe we are extremely well positioned and protected based on a long term philosophy that we have taken around our business.

Sanjay Puria

And just to add to that you know there maybe certain the fluctuation based on you know the election result, but we really don’t speculate to protect the organization. We have our hedging program in place and right now the ANI, the guidance what we have provided is based on assumption of 60 rupees to the dollar and as and when things move we believe the hedging program will protect that and it will update the guidance as things -- as we get more visibility about the exchange rate.

David Mackey

I think similar to prior years though Ashwin, when you look at as Keshav mentioned the hedging policy that we have in place, combination of forwards and options. We walk into a year typically 90% hedged to the downside and giving us an opportunity to ride some of the upside the way we combine forwards and options. So even if the rupee does go to 55 the impact to ANI would be far, far less than obviously the wrong move from 60 to 55. The impact for us at this point in time would be more about the hedges that we layer on for fiscal ’16. So we feel pretty good about the level of protection we have on our margins and our profitability for this fiscal year.

But certainly don’t want to see the rupee appreciate in value to where it impacts our ability to continue that level of protection moving forward.

Sanjay Puria

And just to little bit add on that specifically not only the rupee but you know the other currencies are also there which keeps on moving maybe on the different directions and accordingly we really need to look in totality that you know what the currency impact is going to be there and right now we have built in certain some of those assumptions while providing the guidance.

Keshav Murugesh

That’s a very, very valid point because we do have exposure to Australian dollar, the zar, you know all of those as well which are also becoming relevant.

Ashwin Shirvaikar - Citi

So the second question is the situation with Travelocity, you explained a couple of times last quarter and this quarter. My understanding based on my checks is that you’re already ramping the other OTA client, that’s going well based on my checks. So is the impact on revenues, is that mostly a timing issue with regards to the relative deramp and ramps and if I was to fast forward 3 to 6 months the situation might look a lot better from a growth perspective?

David Mackey

I think Ashwin when we talk about our guidance and talk about our visibility. We have 90% visibility to the midpoint which reflects what we have committed at this point in time. We feel I think as Keshav has said in his prepared remarks, extremely excited about the long term opportunity with our OTA [ph] partner. The reality of that situation however is that we have complete visibility to the ramp down with our existing clients and we have a significant opportunity with the new customer. So we have got to go compete, we have to go win that business but we like the capability we bring to the table. We like the opportunity both in terms of size, scale and positioning for the company and we have got to go win that business. So it's like any other deal but we do believe that this creates a full year fiscal ’15 headwind for us. It would be very difficult if not impossible for us to replace the revenue we’re going to lose from our existing OTA that being said over the next couple of years we believe this has significant potential for sizeable growth and can be a good driver for the company.

Keshav Murugesh

I must also add that you know you should also know that this new OTA, this second OTA is obviously a leader in the marketplace, has had multiple vendor servicing them and over the past few quarters have actually started consolidating this vendors outside so it's now down from 15 to 6 and we’re one of those six valued vendors in there also presenting a case for a very different format that they are used to, which is actually very, very exciting for them as well. So while we’re confident about our capability and the way we have positioned ourselves as Dave said, we have to earn every dollar and we will report and keep you updated as we do that.

Ashwin Shirvaikar - Citi

I will definitely pick that up in my checks as well which is why I had asked the timing question. So thanks for the insight on that. My last question is going back to that renewal, that seems to be the client that keeps on giving. So can you explain when you go from a FTE basis to a different basis using more automation or other factors? What is the cash flow impact on the business?

Keshav Murugesh

Couple of things are over there, when you move from FTE to no-FTE based you know it's just not like a pricing discount but we have to also deliver the productivity through some of the automations and the initiative is what we will be driving and accordingly it leaves us an opportunity from a margin expansion perspective. Sometime not maybe very quickly but in a long term definitely yes, and accordingly definitely it helps us to keep on improving the margin as well as the cash flow.

David Mackey

And I think again to your question Ashwin about fiscal ’15 impact, we have baked in the revenue headwind as a result of this. We have also baked in a pretty healthy margin headwind as a result of this. So we know it's going to take some time to get this back but we feel it's absolutely the right thing to do for our business long term. It's the right thing to do for our client and this should allow us to actually protect margins in the long run much better than a pure FTE based model.

Operator

We have one more question and that comes from the line of (indiscernible) from RW Baird. Please go ahead.

Unidentified Analyst

Most of my questions have been answered but I was just kind of curious about the transition you had talked about from two transaction in some of the outcome based revenue models. If I look at the numbers it looks like it's been declining the last three quarters, is that the result of some of the ramp downs we have been talking about or are we just not seeing some of those transitions yet. Just trying to figure out how to look at this kind of going forward.

Sanjay Puria

Yes I think your understanding is correct, some of this is impacting because of the ramp downs specifically what we mentioned about the OTA as well as during the year earlier we did mention about the M&A activity with some of our clients and those ramp down was specifically in the transaction based pricing which has related to that but having said that the large extension we spoke about some of this client will give us an opportunity to really improve some of those metrics when we move from FT to transaction based pricing going forward.

David Mackey

So remember what we discussed a little bit earlier, Adam, when you look at the maturity level of a client. When you have a large customer like our OTA client that’s ramping down, these are mature processes, these are already moved to transaction based or outcome based models. When those types of activities ramp down it's going to affect those types of services, the flipside is when you look at the new clients that we have added in the ramp up from those customers those are largely being done on an FTE basis.

So the kind of the combination of what’s been falling off and what’s been coming on is really what’s driving the fact that the percentage of work in transaction based or outcome models going down for the company.

Keshav Murugesh

I will just say that you know the focus at the company is to really drive the latter model, much more transaction priced, much more non-linear models. Much more technology enabled models and those are the key areas that Ron is really driving at the company to help us in terms of first of all stickiness of the revenue model as well as ensuring that margin predictability and growth is possible. In the short term however the exciting phase of winning all these new clients and starting them off maybe on FTE basis but then moving them to other model is something that we also have to go through but I think all of it is really positive for the long term health of our company.

David Mackey

And I think to that point Adam we haven't talked a lot about it but our operating margin and our ANI performance has been good and it's been good inspite of some of the things that we have been doing to invest in the long term health of our business so we have talked a lot about over the last couple of years, seat utilization and the investment that we have made and the infrastructure and how that’s created a drag on our margins. One of the other things that has happened in our business kind of under the covers if you will is as we have moved work from a delivery perspective away from India and towards South Africa, towards Poland, towards Romania because some of our existing clients like these geographies as an alternate solution or because some of our newer customers like this as an entry point. What’s happened is this is actually created a little bit of pressure on our margin. So the mix of services in terms of geographies has created some margin pressure for us. The mix of services in terms of what’s FTE based versus outcome based has created a little bit of pressure.

We think this is a temporary issue and the good news is we have been able to grow revenue, expand margins despite some of these pressures. So if these things abate and as our delivery mix normalizes and our customer base matures we think these present long term opportunities for margin expansion.

Unidentified Analyst

If I could one more quick one on delivery centers, I think you guys had previously talked about looking at some of the special economic zones in India. Any update there on the move there and maybe how we should look at the tax rate for the next year, any of the benefits you might see there.

Sanjay Puria

We’re leveraging all the capacity what we have created in a special economic zone specifically for all the new business and the business expansion for the year. Having said that there -- we will be in the tax trade of 16% to 17% which is going to be similar what we delivered during this year but as Dave mentioned that along with the special economic zone the tax benefit what we may have, the mix of the geography is changing and accordingly there maybe a profitability mix change due to this geography mix change and some of the tax benefit in the special economic zone may get offset by some of this geographic mix as well as some of the additional interest income and the exchange gain profitability what we will have.

David Mackey

I think Adam; the company’s philosophy is these are short term issues for us. So when you look at what the long term opportunity is in our business. It's still going to be leveraging offshore centers for customer solutions. At the end of the day this is going to go to lower cost geographies and automation and the reality is we have made an investment into the special economic zones in India that as we grow in India we’re able to leverage those centers, we’re able to improve our delivery mix, we’re able to improve our seat utilization and long term able to drive down our effective tax rate. So this is the investment that we have made and we think this will bear fruit over the next 2 to 3 years.

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.

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