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WNS Holdings (NYSE:WNS) was established as a back office branch of British Airways (OTC:BAIRY) in 1996.The company since then has grown into a seasoned BPO player specializing in airlines and auto insurance claims. Its people are not only trained in managing the back offices of their customers, they also handle auto claims that include payments to the local car repair shops.

The company is incorporated in Jersey, Channel islands. Don't confuse it with New Jersey!!!.


AIRLINES BUSINESS
Broad level service offerings include:

1. Customer interaction: customer complaint resolution, loyalty program management.

2. Passenger revenue accounting: refunds, fare audit, ticket coupon matching, sales accounting.

3. Cargo operations and accounting: scheduling, booking, flight planning, mail revenue accounting.

4. Revenue management: seat allocation, processing meal requests, yield maximization through inventory management, fare filing, fare construction and quotation.

5. Reporting and analytics: aircraft load factor, costs, market share, revenue and competition reports.

6. Other miscellaneous services: updating employee records, calculation of medical leave and overtime for staff.


INSURANCE CLAIMS BUSINESS:
They offer comprehensive accident management services which include:

1. Arranging for repair of automobiles through a network of repair centers.

2. Offer claims management services where they process accident insurance claims for their clients.

3. Their employees receive telephone calls reporting automobile accidents, generate electronic insurance claim forms and arrange for automobile repairs in cases of automobile damage.

4. They also provide third party claims handling services including the administration and settlement of property and bodily injury claims while providing repair management and rehabilitation services to their insured and self-insured fleet clients and the end-customers of their insurance company clients. their service for uninsured losses focuses on recovering repair costs and legal expenses directly from negligent third parties.

Warburg Pincus, acquired a controlling stake in their company in May 2002. Since then they have experienced rapid growth and significantly expanded their operations. Their revenues have grown at a compound annual growth rate of 47.4% to $352.3 million in fiscal 2007 from $162.2 million in fiscal 2005. Their revenues less repair payments have grown at a compound annual growth rate of 49.0% to $219.7 million in fiscal 2007 from $99.0 million in fiscal 2005.

They have established delivery centers in four locations in India, in Sri Lanka and in the UK. Their employees have increased to 15,084 as of March 31, 2007 from 7,176 as of March 31, 2005.For fiscal 2007 and 2006, their five largest clients accounted for 55.2% and 41.0% of their revenue and 45.7% and 52.8% of their revenue less repair payments.

Paid $133mn in auto claims : As part of its BPO practice of auto insurance claims, the company directly deals with the auto repair shops and pays them for the auto repair claims generated by its clients.In 2007 the net revenues by the company was $352mn , the revenues without auto claims was $219mn. The difference of $352mn and $219mn is $133mn, which the company paid to the auto repair facilities.


CONTRACT WITH AVIVA

Aviva is one of their five largest clients whom they have granted an option by which Aviva can give a six month notice and they could take over the Sri Lanka facility. On Jan-1/2007 Aviva did exercise this option and effective July 1,2007 they have taken the control of that facility. WNS thus lost all its revenues from Sri Lanka facility.

Sri Lanka accounted for for 1.9%, 3.3% and 1.1% of their revenues, respectively, and 3.0%, 4.5% and 1.7% of their revenues less repair payments, respectively. AVIVA’s call option regarding the Pune facility, if exercised, would require WNS to transfer the facility at Pune to AVIVA on or after December 31, 2007. AVIVA may give them notice to exercise its call option regarding the Pune facility at any time on or after July 1, 2007. For fiscal 2007, 2006 and 2005, the Pune facility accounted for 5.2%, 6.5% and 5.1% of WNS' revenue, respectively, and 8.3%, 8.8% and 8.4% of their revenue less repair payments.

WNS is not commanding its customer. One of the basic things that is important for long term growth of its business is how much control does it have in dealing with its customers. It is said that customer is king, in fact the Japanese consider customer as God, but only to the extent that they are good for the business.

For example, let's say I am operating a construction business and agree to build a new house for $300,000. After couple of months I get a similar contract from a new customer. As I see a long term relationship with the new customer, I agree to do his house for $290,000. I should still be able to charge my first customer $300,000. In case of WNS this is not entirely true. One of the risk factors of WNS states that -

If our clients agree to provide us with a specified volume and scale of business or to provide us with business for a specified minimum duration, we may, in return, agree to include certain provisions in our contracts with such clients which provide for downward revision of our prices under certain circumstances. For example, certain client contracts provide that if during the term of the contract, they were to offer similar services to any other client on terms and conditions more favorable than those provided in the contract, they would be obliged to offer equally favorable terms and conditions to the client. This may result in lower revenue and profits under these contracts. Certain other contracts allow a client in certain limited circumstances to request a benchmark study comparing their pricing and performance with that of an agreed list of other service providers for comparable services. Based on the results of the study and depending on the reasons for any unfavorable variance, they may be required to make improvements in the service they provide or to reduce the pricing for services to be performed under the remaining term of the contract.

Passive foreign investment company : The company may be deemed as a passive foreign investment company, what this means to an ordinary American investor is that he or she has to file Form 8621 "Return by a shareholder of a passive foreign investment company or Qualified electing fund". He also would be taxed more heavily because the US tax laws are clearly designed to deter US persons from investing in mutual funds outside the US where the income or gains of the foreign funds are not subject to current taxation, as are the gains and other income of most domestic mutual funds.

In addition, the tax law clearly seeks to deter US persons from using a foreign corporation as an investment fund. For example, if 11 (or more) US persons own equal shares in a foreign corporation, it will not meet the definition of a controlled foreign corporation and none of the shareholders would be subject to current tax on the income of the foreign corporation. But - if that corporation is also a PFIC, the shareholders will be subject to severe tax treatment on any distributions from the PFIC unless -

(i) The PFIC elects to be subject to the SEC and the IRS reporting requirements or unless

(ii)The shareholder elects to pay tax on the undistributed current income of the PFIC (which requires the co-operation of the PFIC) or unless

(iii)The PFIC is listed on a national securities exchange and the shareholder elects to pay tax on any increase in the market value of the shares from one year to the next. If you are more curious about the tax consequences of investing in PFIC then click here.


EXPOSURE TO MORTGAGE INDUSTRY

They offer an integrated service delivery solution called Digital Loan Management, or DLM, which combines automated mortgage processing with offshore delivery. After the recent downfall in mortgage industry, people tend to raise a red flag after seeing the word mortgage in any company's 10-k report. I guess WNS might be in a position to leverage its cost cutting mantra in gaining more business from its existing clients as they aggressively cut costs and restructure their business.


NUMBER OF EMPLOYEES

As of March 31, 2007, they had 15,084 employees, of whom approximately 11,429 were employees who execute client operations, whom they refer to as associates. Approximately 11,011 associates are based in India, with approximately 204 associates in Sri Lanka and approximately 214 associates in the UK. Most of thei associates hold university degrees. As of March 31, 2006 and 2005, they had 10,433 and 7,176 employees, respectively. So where are the rest 4,000 employees that are not based in India. I guess I have to contact its investor relations department to get that data. The attrition rate was a whopping 43%.

Strong European Revenues: Usually the biggest market for IT outsourcing or BPO companies is USA. But in WNS's case Europe accounts for 62% of revenues.

This figure has come down from 70% in 2005. This makes WNS less susceptible to weakening US dollar.


PRICING MODELS

• Per full-time-equivalent arrangements typically involve billings based on the number of full-time employees (or equivalent) deployed on the execution of the business process outsourced.

• Per transaction arrangements typically involve billings based on the number of transactions processed (such as the number of e-mail responses, or airline coupons or insurance claims processed).

• Cost-plus arrangements typically involve billing the contractually agreed direct and indirect costs and a fee based on the number of employees deployed under the arrangement.

British Airways, its largest customer, has entered into a new contract that is valid till 2012. The major change in the contract was transitioning from a “per full time equivalent basis” to a “per unit transaction basis.” This change could have the effect of reducing the amount of revenue that they receive under this contract for the same level of services. The change to a “per unit transaction price” basis also allows them to share benefits from increases in efficiency in performing services under this contract.


FISCAL 2007 RESULTS FOR OPERATING SEGMENTS


WNS GLOBAL BPO
Revenues: $195mn Operating income: $27.3mn


WNS AUTO
Revenues: $158mn Operating income: $5.1mn


MAJOR LITIGATIONS

On June 6, 2006, they received a notice from the Indian Service Tax Authority requiring them to explain why tax authorities should not recover from WNS service tax amounting to Rs. 173.12 million ($4mn USD) for the period March 1, 2003 to January 31, 2005 in respect of the business process outsourcing services provided by WNS to certain clients.

In addition, the notice asks WNS to explain why penalty and interest should not be levied in connection with this tax.WNS has filed their response to the notice. No final order has been passed by the tax authorities since then.

WNS 1-yr chart:

Source: WNS Holdings: Back Office Powerhouse