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WNS (Holdings) Ltd. (NYSE:WNS)

F3Q08 (Qtr End 12/31/07) Earnings Call

February 8, 2008 8:00 pm ET

Executives

Jay Venkateswaran - Senior Vice President, Investor Relations

Neeraj Bhargava - Chief Executive Officer

Anup Gupta - Chief Operating Officer

Vibha Padalkar - Executive Vice President and Controller

Analysts

Bryan Keane - Credit Suisse

Joseph Vafi - Jefferies & Co

Mark Marostica - Piper Jaffrey

Ashwin Shirvaikar - Citigroup

Julie Santoriello - Morgan Stanley

Mitali Ghosh - Merrill Lynch

Tim Fox - Deutsche Bank

Matt McCormack - FBR Capital Markets

Tim Rose - Robert W. Baird

Tien-Tsin Huang - JPMorgan

Joseph Foresi - Janney Montgomery Scott

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2008 WNS Holdings Ltd. Earnings Call. My name is Lacy and I'll be your coordinator for today. At this time, all participants are in a listen-only-mode. We will be facilitating a question-and-answer-session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to our host for today's call, Mr. Jay Venkateswaran, Please proceed sir.

Jay Venkateswaran

Thank you, Lacy. Good morning, ladies and gentlemen, and good evening to those of you joining us from Asia. Welcome to WNS's fiscal 2008 third quarter conference call. I am Jay Venkateswaran, Senior Vice President of Investor Relations at WNS.

With me I have Neeraj Bhargava, our Chief Executive Officer. We also have with us Anup Gupta, our Chief Operating Officer, and Vibha Padalkar, Executive Vice President and Controller. Today's remarks will focus on our recently announced results for the fiscal third quarter ended December 31, 2007.

Some of the matters we will discuss on this call are forward-looking, and you should 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 our Form 6-K filed with the SEC today.

During this call, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. You can find reconciliations of these non-GAAP measures to GAAP measures in our press release issued on Feb 7.

I will now turn the call over to Neeraj.

Neeraj Bhargava

Thank you, Jay and thank you all for joining today's call. In today's discussion, I would like to cover four key topics. First, I will summarize the results for this quarter. Second, I will discuss key strategic issues we face in today's business environment. Third, I will discuss our operational performance. And last, I will touch upon organizational development and other key strategic initiatives including the appointment of our new CFO.

Vibha will discuss our financial performance in detail including our increase in net income guidance for fiscal 2008. After our prepared remarks, Anup, Vibha and I will respond to your questions.

Let me start by summarizing the financial results achieved for the third fiscal quarter. Revenue less repair payment grew by 21.5% from December 2006, as we put last quarters' mortgage losses behind us. Gross margins excluding share-based compensation were stable at 32.9%, while SG&A cost declined. As a consequence, operating margins excluding share based compensation, related fringe benefit taxes, and amortization of intangible assets increased to 10.4% from 9.6% in the second quarter of fiscal 2008.

Overall, our numbers exceeded our expectations for the quarter. This has been a period of continued recovery after the reduction in mortgage revenue. We feel good about how things have shaped up, and are confident enough to raise net income guidance by $1 million for fiscal 2008.

Let me move on to my second topic, a discussion on key strategic issues. I want to highlight six key items that are sharply in focus in our current business environment. First, over 90% of WNS's revenue stream is made up of annuity based long-term contracts. We process mission critical transactions between our clients and the business partners or their end customers. [Sending] on offshore BPO services is not dependent on our client's annual budget, as we manage ongoing operations and not one-time project.

Offshore BPO program typically delivered cost savings within 6 months to 12 months and that makes our value proposition very attractive to clients in their [recessionary] environment. Our revenue stream is also more, sticky and less susceptible to budget cuts. Second, offshore BPO still remains a large untapped market with a potential to grow rapidly for a long period of time. Research reports such as the recent Everest NASSCOM study expect the market to grow as much as five fold over the next five years. And broadly, we see no slowdown in client interest and commitment to offshore BPO.

During the last quarter, we added four new clients, three in the consumer products industry and one a broad based services company. We also signed 11 expansions with existing clients. We'll discuss two examples, a consumer product line, who we serve in the US, recently added their UK operation to what they outsource to us. Another client of ours in the utility industry, who we serve in multiple areas, also outsourced their F&A function to us. Third, in sectors like insurance, manufacturing, utility, logistics and consumer products, our pipelines at their strongest, better than this time last year. The economic uncertainties present WNS a good opportunity to accelerate the penetration of these sectors as they face growth challenges and margin pressure.

Fourth, we have low exposure to the mortgage and banking sector among the lowest in our industry. Only about 5% of our revenue less repair payment comes from the mortgage and banking space. Fifth, we believe our travel business is well positioned to grow even in a recessionary environment. In response to queries from investors and analysts, we studied our travel revenues sensitivity, while, volume reductions could affect some of our existing processes. We believe that we have enough strength in our existing and new client pipelines to more than counter any potential volume loss.

Sixth, we have made remarkable recovery or rather progress in our analytics business, especially marketing which has now become an integral part of our knowledge services business.

As planned, revenue and profit growth from this business has picked up substantially over the last quarter. Given its current momentum, we expect the WNS knowledge services business to contribute about 15% of our overall revenue less repair payment. This business is expected to be a significant growth area for WNS in fiscal 2009.

Moving on to the third topic, I would like to highlight two key aspects of our operational performances over the last quarter. First, attrition increased from 36% in the second quarter to 39% of the third quarter on a comparable basis. This excludes about 6% in annualized attrition from our mortgage related reductions including our placement of people who could not be redeployed internally. Including this our attrition increased to 45% for the third quarter. We continue to work toward keeping attrition below the 40% level in the near-term and this remains the top organizational priority.

Second, our teams continue to deliver high quality work to our clients on a daily basis. In recognition of our operation capabilities we've received eight recognitions and awards over the last four months including recognitions of our leadership position as a global BPO provider, as a leader in finance and accounting services and as a high quality provider of auto claim services in the UK.

We were also recognized for our excellence in innovation, quality management and Six-Sigma applications. Most importantly two of our clients received the prestigious DALBAR and J. D. Power awards for customer satisfaction where WNS services are substantial components of service delivery.

Let me now move on to organizational development and other strategic initiative, the last topic of my prepared remarks. As announced earlier we appointed Alok Misra as Group Chief Financial Officer. We're delighted to have Alok join our senior management team. He is an accomplished finance professional with 18 years of public company experience and a strong track record in the BPO industry. We see Alok playing a critical role in our continuing growth as a leading global BPO company. Alok joined WNS after holding the Group CFO position at MphasiS and EDS Company, where he has been a key member of the [inner] team. We expect Alok to join the company in the third week of February.

Moving on to other organizational matters, our total head count was 17,812 as of December 31. This represents a net increase of 722 people, during the third quarter. In the last two quarters, we have added a net head count of 1,100 people despite the reductions by mortgage clients. In January, we launched our Romanian facility and are now working with two key clients to leverage this capability. Offering European language services in Romania is key to expanding our global footprint.

In summary in this quarter, we have put the First Magnus loss behind us. Our profitability is getting back on track. We continue to delight our customers and be recognized for our operational excellence and help our clients gain more recognition. We attracted a seasoned professional like Alok as our new CFO. We have continued to grow in spite of our mortgage losses. Our pipeline is better than ever before and we are focused on growing even in a challenging business environment.

With this, let me hand the call over to Vibha, who will take us through our financial performance in detail. Vibha?

Vibha Padalkar

Thank you, Neeraj. Good morning and welcome again, to our third quarter earnings call. In my prepared remarks, I would like to discuss our financial performance in detail including our guidance for fiscal 2008, starting with our financial performance in the third fiscal quarter.

Revenue less repair payments grew by 29.5% to $74.1 million, despite reductions from mortgage clients during the quarter. Gross margins excluding share based compensation declined marginally from 33.3% in the previous quarter to 32.9% primarily due to the impact of exchange rates. SG&A costs excluding share based compensation and related fringe benefit taxes have decreased from $17 million in the second quarter to $16.7 million in the third quarter. This represents a decrease from 23.7% to 22.5% of revenue less repair payments for the respective quarters.

SG&A costs, decreased as we had provided for bad debts related to First Magnus in the second quarter. We also had the benefit of scale leverage. Despite our continued reduction in SG&A excluding share based compensation as a percentage of revenue less repair payments, we continued to expand our sales and marketing expenses in line with revenue growth.

Amortization of intangibles access increased from $0.5 million in the second quarter to $0.9 million in the third quarter, due to the reclassification of a software asset from fixed to intangible assets. You can expect amortization to continue at approximately $0.65 million per quarter.

Operating margins excluding share based compensation, related fringe benefit taxes and amortization of intangibles assets; were higher at 10.4% for the quarter, up from 9.6% in the previous quarter.

Now let's move onto our review of guidance for fiscal 2008. We reiterate our guidance for revenue less repair payments of between $290 million and $295 million. This represents a growth of between 32% and 34% despite the reduction in business by mortgage clients and the recent depreciation of the pound sterling against the US dollar.

We are raising our net income guidance, excluding share based compensation, related fringe benefit taxes, amortization and impairment of goodwill and intangible assets. This is now expected to be $34 million to $36 million up from $33 million to $35 million.

To conclude, I would like to reiterate that we are optimistic about our guidance for the year. At the same time, we continue to invest in growth-initiative to capture long-term opportunities. With this we have concluded our prepared remarks.

We'll now take any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Bryan Keane with Credit Suisse, please proceed.

Bryan Keane - Credit Suisse

Yeah, hi, I guess I was just looking for an update, I don't know if you mentioned it but on total seat capacity and kind of using the seats?

Anup Gupta

Sure, I'll take that. Our capacity on used seats stayed flat at 2.1 in the last quarter. We did add a new facility last quarter with 1,359 seats in Mumbai, because of which our capacity on total seats dropped marginally from 1.8 to 1.7.

Bryan Keane - Credit Suisse

Okay, and what should we model in for seat capacity and new seats going forward? What does the trajectory look like?

Anup Gupta

I think as we are working through our next years plans we will continue to ensure that we plan for new increase in inline with the business that we are seeing right with it this year.

Neeraj Bhargava

This is Neeraj, what I'll add here is that, in general you might have also seen announcements that we made on taking capacity in two special economic zones to increase our tax efficiency in case the government of India withdraws the tax benefits from April 2009. And we have booked a lot of capacity but we have left it flexible in terms of when we will actually build it out depending on how demand patterns evolve.

Bryan Keane - Credit Suisse

Okay, and then just looking at the adjusted operating margins going in to the fourth quarter if you kind of back in to the guidance. It looks like it's flattish to down a little. Is there any reason why I guess the margins might be flattish or down going in to in the fourth quarter or what's in those assumptions?

Anup Gupta

We are actually not excepting the margins to be down in the fourth quarter. I mean we have left a range of revenue and a range of margin there. So things have to play out on multiple fronts and how the British pounds behaves on a fewer [frontlines]. But that aside I think we are quite optimistic that we will either maintain or grow margins in the next quarter.

Bryan Keane - Credit Suisse

Okay, good. And then I guess just finally any comments on tax rates for the fourth quarter and going forward if you don't mind?

Vibha Padalkar

Yeah, we are not giving individual guidance quarter wise, but we would expect tax rates to be in the region of 16% to 19%. This quarter has been high because our profit from the auto claims segment is higher as a proportion, but we would expect it to go back to our normal rates next quarter and thereafter.

Bryan Keane - Credit Suisse

Okay, great. Thanks a lot.

Operator

And our next question will come from the line of Joseph Vafi from Jefferies & Co. Please proceed.

Joseph Vafi - Jefferies & Co

Hi everyone. Good morning and good results. I was wondering if you had any comments on your 6-K that you put out the other day on the AVIVA call option and some changes to those terms?

Neeraj Bhargava

Right, so the AVIVA call option mentioned two changes to terms, primarily first was that, the earliest we could transfer back the operation would be May 1, which essentially gives a one month extension beyond the April 1 base that we communicated earlier. And secondly, they could - well they haven’t given us notice, but they could give notice with a one month deadline as oppose to a three month deadline, which was our previous agreement. So, that’s the essential change we've had in our discussion with them and which came from them in a formal note to us.

Joseph Vafi - Jefferies & Co

Okay. Has that business in BOT entity is that - does that volume remain flat or what is it been doing over the last say few quarters?

Neeraj Bhargava

I think their volumes have remained flat. As you are aware that we had two operations, one in Sri Lanka, which we transferred back in June of last year, and the other in Pune, which is the one we're currently running. And the volumes have been consistently within a certain range, I mean it's not gone up too much, it's not gone down too much.

Joseph Vafi - Jefferies & Co

Okay. So, is there any other commentary that you would like to provide on the call option other than what was put in 8, 6-K?

Neeraj Bhargava

No, not at this stage, we have a strong relationship with AVIVA. They are in process of [bringing] out what they want to, and in this case we have a non-disclosure with them. So, we're not prepared to talk about anything further at this time.

Joseph Vafi - Jefferies & Co

Okay. Fair enough. Just wondered if you could kind of talk a little bit about pace and tempo of RFP activity right now, and I've heard from some other BPO vendors that the RFP activity is quite high. And if you could maybe talk a little bit about sales cycles if they are staying the same up or lengthening or shortening?

Neeraj Bhargava

Well, the RFP activity is quite high, in fact as I mentioned earlier in my remarks our pipeline has got better and it's looking really good, and that's a reflection of the RFP activity. Not witnessing any improvement or decline in the nature of the sales cycle, it is pretty much the same. Our clients are issuing RFPs, visiting us in long discussions with us about a variety of things and its pretty much business as usual.

Joseph Vafi - Jefferies & Co

Okay, and then maybe just one more question on the supply side, on the labor front. It didn't seem like, I mean, obviously your model is kind of more of a just in time hiring model on the headcount side, what are you seeing on the labor front as we enter calendar '08 from a competitive point of view from the captives and other maybe areas where you would see competition for employees?

Neeraj Bhargava

Well what we are seeing is that hiring especially for data oriented skills have become a lot easier, the labor market is softer and therefore we are likely to feel the rate inflation lower in the coming year. For voice things are pretty much similar to last year, in terms of the demand-supply pattern. But broadly we see softening of the labor market that gives us some optimization for keeping rate inflation lower.

Joseph Vafi - Jefferies & Co

Is that softening of the labor market just a function of slackening demand or do you think that captives are being less aggressive at this point in their hiring?

Neeraj Bhargava

Well anecdotally we believe the captives are growing much slower than they did. And that is one cause; second thing is that the mid-tier BPO companies are hurting a lot more, that’s part and arguably I also see some other sectors in the Indian economy slowing down in terms of hiring, and if you put all that together, it presents a pretty good picture to us.

Joseph Vafi - Jefferies & Co

That’s very good. Thanks for your comment.

Operator

And our next question will come from the line of Mark Marostica with Piper Jaffrey. Please proceed.

Mark Marostica - Piper Jaffrey

Yes, good morning. Nice job in the quarter. My first question actually relates to your travel business and just a follow up on the last question, I was wondering if you can give us more specifics around your pipeline in travel and may be compare it to the health of the pipeline overall in your other businesses.

Neeraj Bhargava

Well, firs of all our travel business for this current fiscal '07-'08 is bang on target, they are going to meet their numbers. They might even slightly exceed their numbers. So, they've done a very good job this year and met expectations. I think secondly, this traditionally has been our -- given our history also this has been a very strong team, and therefore they've done a very good job of getting expansions with interesting clients, with one of our key clients, they also managed to get a price increase. They also have recently added to their sales team two very strong professionals from the industry.

So if I add that all up together both from existing clients and new clients, our pipeline at this time is better than what it was last year. We did take into cognizance some feedback we got from many investors and analyst that, what if in the recessionary environment that could be hitting us; travel volumes were to slow down. Well we have looked at that, we have run sensitivity, and there is a possibility that some of our existing processes might be dumped, declining volumes we have got no indication of that. However what we have also figured out as we look deeper in to our pipelines is that with the same client there is expansion on new processes going on. And also there are enough new clients in the pipeline and if you add that all together, we are still bullish on the travel business and expecting it to expand next year.

Mark Marostica - Piper Jaffrey

And just a little more clarity on decline on volume. What is the percentage of your travel business is exactly volume or related or correlated with volume?

Neeraj Bhargava

Travel business has three broad components to it. First of all we do a very wide range of finance and accounting work. Some of it is transactional in nature and some of it is corporate finance and accounting. Second we are doing a range of work related to the reservations in customer service processes. And third is we support a range of operations for travel companies as well.

In the category one and category three, first of all there are lots of small processes, also resources tend to be lumpy in other words, if there is a 20% slowdown in volume it doesn't mean you can cut, you need to cut resources in 20%. Actually if they are cut they will be a lot smaller. The sensitivity is largely in the areas that are linked to customer demand which are -- which is the reservations and customer service related activity. If you look at even those areas and the fact that we have a lot of fragmentation in our processes and our clients, we believe about 20% of our overall travel business is sensitive to volumes. And so that's, that is the business where we took a very critical look and affects what out clients are telling us and as well as if there was a scenario where there is 10% or 20% decline in travel activity for life how does that affect us? Having taken all that into consideration and then look back what are those clients looking at expanding with us as well our new client activity. Our conclusion is that even in the difficult environment, we could be expanding in this sector.

Mark Marostica - Piper Jaffrey

Okay. Great, and I just want to follow-up on the attrition up tick in the quarter, is there anything specific you can point to there and then what are you doing to try to control attrition and to keep it under the 40% level? Thanks.

Anup Gupta

Sure, this is Anup here. Yes, we did -- as Neeraj mentioned we had a 3% increase in attrition and our core attrition going up to 39% in the last quarter. We are still below the 40% mark, which is our internal target, if we exclude the impact of mortgage related reductions. In the last quarter, we had 6% annualized attrition from a mortgage related business. And this was mainly because of, while we had a big internal redeployment program, for some people who we did not have roles we had to out place them. And as you can imagine, that does have some impact on the organization as well, which is why our overall attrition number went up.

Attrition continues to be a top priority for our management team and we have multi-pronged approach to address it. Like we have shared with you earlier the three-fold main levers we are working on across the organization, one relates to sourcing of candidates. We have a program underway, where we have increased the number of candidates resourced directly and also launched some referral programs. We are also sourcing from a lot more cities now, specially the smaller cities and having people come in working our facilities. We have a big initiative underway to train our supervisors, which is a first level of management and make sure that those people coaching to manage their people better.

We have a leadership and career development path program underway. And lastly, just making sure that we are increasing the batch points throughout our business, so that people get reassured that this is the place they can build their careers on. And on many of these, on most of these areas we made a lot of progress and we continue to track closely again.

Mark Marostica - Piper Jaffrey

And what are your specific goals there on the attrition metric then over the next few quarters?

Neeraj Bhargava

Well our overall goal is to get attrition to about the 35% mark and we are beginning to flirt with that by being in the 35% to 40% range, we've been in that for two quarters. It continues to be a tough market and in terms of retention as the Indian economy at least in the last one or one and a half years has presented people with many opportunities. But I think we are making progress on all the fronts in terms of how we recruit, a large part of attrition is also about recruiting rights. We are making a lot of progress on that by expanding our recruitment network and there is no silver bullet here, Anup and team are doing a fine job running a lot of retention programs. We are seeing uptick in those numbers as well and we are hopeful that over the next two to three quarters we will be consistent being at the 35% number or at least below 40%.

Mark Marostica - Piper Jaffrey

Thank you.

Operator

And our next question will come from the line of Ashwin Shirvaikar from Citi. Please proceed.

Ashwin Shirvaikar - Citigroup

Hi thanks. And congratulations on the quick recovery from First Magnus and that's a pretty good work there. The question is now how long could it take you to get back to the 14% to 16% operating margin that will reach you, you've done in past quarters and I know it's a slightly different environment with the rupee and so on but could you comment on that?

Neeraj Bhargava

Yes, thanks Ashwin. I think. I want to go back a little bit into where we were before the beginning of this fiscal year. We were clearly at the 14 to 15 or may be slightly higher points. And that was consistent with our guidance we gave at the time of our IPO where we were close to 14% and we said that we will increase will margins by 50 to 100 basis points every year. Since then the big change in our environment has been the way the Indian rupee appreciated and I think people on this call are aware of the sensitivity that has in terms of how our cost structure changes in response to that.

We have done a very good job in terms of managing our cost structure and keeping our margins at a fairly reasonable level. In spite of that, if you look at where we expect to be going, we believe that getting to the 12% operating margin mark is not something difficult at current currency levels. Following that, assuming the currency remains stable, or has very marginal changes, say 2% to 3% a year, we believe that we will then be back to taking them and the margins up by 50% to 100% basis points on an annual basis.

So, the 14% to 15% mark, getting to that very quickly, we don’t see that as feasible, but we see us getting to the 12% mark quickly and making progressive improvements after that.

Ashwin Shirvaikar - Citigroup

Got it, and what kind of hedging assumptions do you make to get there?

Neeraj Bhargava

Well, I think our approach to hedging, historically was that we hedged two to three quarters. We have been more aggressive now for fiscal '09 particularly with our billings that are changing trends with the British pound in the recent times. So we have hedged very significantly till March '09. And that gives us comfort that in spite of currency changes we will be able to maintain our handsome margins.

Ashwin Shirvaikar - Citigroup

Okay and my last question is on, where you are with SEZ usage. What kind of range might we expect for tax rate beyond March of next year?

Anup Gupta

Well, what we have guided with people in the past has been that it's a broad range of 15% to 20%. We expect it to be more likely closer to 17% going forward. And we think that rate we can successfully maintain or perhaps [big on] post 2009.

Ashwin Shirvaikar - Citigroup

Sorry, I missed this. 17% you said.

Anup Gupta

Yeah, we think we will be closer to 17% in that case.

Ashwin Shirvaikar - Citigroup

Got it. Okay, this is it. See you next week, thank you.

Anup Gupta

Thanks.

Operator

And our next question will come from the line of Julie Santoriello with Morgan Stanley. Please proceed.

Julie Santoriello - Morgan Stanley

Thanks, hello. Neeraj, I found that your comments in the beginning very helpful with the several points that you made and the first one being that 90% of your revenue is annuity based or more than 90%. In the current economic environment assuming that things get worse for any of the companies, any of your customers and in any verticals, where could you potentially be surprised to the negative?

Neeraj Bhargava

Well, I think the negative surprises, there is always an issue of something going dramatically wrong with the client and has happened to us ones. So, we're hoping that lightening doesn’t strike more than ones for us. But obviously, I would not include something like that in my comments. I think the negative surprise could come to a small extension in travel, which we discussed before. But we believe that, there are other options to that.

There are some other areas with work in -- the financial services related work we do in our analytics business. That may have some surprises, however, even in those areas we see our clients including some investment banks looking at increasing volumes with us.

So, I would single out those two areas as places where there could be some challenges, but at the same time we see the counter effect of some of our clients looking to increase work as well.

Julie Santoriello - Morgan Stanley

And the risk of analytics business is because it tends to be more project based?

Anup Gupta

Yes, it tends to be, but I don’t think its so much that it tends to be project based or if you look at the fixed income area for example, there have been situations where our clients are reducing their own core team. So, what has happened is that some team member's very small numbers, they do get free. But then we've also found that they got absorbed in other areas that opened up. So, its things that are changing at our clients level, in terms of some of their operations shrinking. That is where you really have some effects.

Julie Santoriello - Morgan Stanley

Okay, I see. What about things like clients wrapping up more slowly than expected? You are stalling some of that process or even canceling contracts. Can you just comment on the likelihood of those events?

Anup Gupta

No, we've seen no evidence of contracts being canceled as far as slowdowns are concerned. Well our business is blocking and tackling business anyway. When we are ramping up all the time there are challenges that come along the way in terms of how quickly you can ramp up. So it is pretty much the same, that's nothing different. Some times we grow faster than expected other times we go slower, and that's part and parcel in terms of how we manage our business and our guidance.

Julie Santoriello - Morgan Stanley

Okay. And can you comment on the upfront investment requirements that a customer has to make typically, I believe those aren't large by any means, but can you give us a feel for what the upfront investment is for a customer typically?

Neeraj Bhargava

Well customers typically tend to invest anywhere between $0.5 million to $2 million or $3 million as a part of their outsourcing program. But what tends to happens as I mentioned earlier in my remarks, that it doesn't start coming within 6 months to 12 months. So the payback is actually a very short time, this is what makes offshore BPO really attractive in today's time.

Julie Santoriello - Morgan Stanley

Right.

Neeraj Bhargava

Yeah, I think the other thing which I would like to add here is that in our business the payback is almost guaranteed, unlike some re-engineering projects which one would undertake. Because if you are moving the work offshore, the labor arbitrage difference is guaranteed, so the 6 months to 12 months payback is almost certain as you embark down on the [drill].

Julie Santoriello - Morgan Stanley

Great, there's an important point. Just lastly, can you comment on the competitive environment and the pricing environment? I believe you said days and price increases in travel. Can you talk about the pricing environment more broadly, and if you are seeing any changes on the competitive front from either pure play offshore, BPO providers or the multinationals? Thanks.

Neeraj Bhargava

Well our market's always been competitive and it's that same players that you see, that you have seen before, some global BPO companies, some IT services companies and [BPO] and some pure plays. I think we still continue to see the same of competitive intensity. As far as the pricing is concerned, we've had increases from three of our top 20 clients, some at the time of renewals and some other otherwise. And we are the forth one which is looking very likely, and even some our smaller clients, we've been very successful in getting the increase.

So, as far as we see pricing in general has settled into a reasonable range and as the work that we do gets more complex, we are able to make that case to our customers and in each of those cases that we are talking about, the fact that we are actually doing more complex work than what we did when we started, allowed us the liberty of asking for a price increase and getting it accepted.

Julie Santoriello - Morgan Stanley

Great, thank you.

Operator

And our next question will come from the line of Mitali Ghosh with Merrill Lynch. Please proceed.

Mitali Ghosh - Merrill Lynch

Yeah thanks, and congratulations on a strong execution this quarter. I wanted to follow up on some of the comments that you have made, first, in fact on prices itself, if we just continue from there. Could you comment on the kind of quantum of price increases that you are seeing and some of the recent ones that you mentioned? And also if you are seeing any changes in terms of pricing contracts, building in scope for re-negotiations if the Forex appreciates or depreciates in a significant manner?

Neeraj Bhargava

Okay. The First question on the quantum of pricing increases; typical price increases have been in the 4% to 5% range, however there have been very old contracts of ours where those prices were set in a very different environment, and also with the work that was less complex the increase have been significantly higher than that, sometimes higher than 10%. So, I would say on the average, 5% to 6% is a reasonable number to look at in terms of quantum of price increases we saw. I think you are -- could you repeat the second question again please?

Mitali Ghosh - Merrill Lynch

Yeah, I was just trying to understand if there are any changes in the way the pricing contract was structured, either with respect to significant changes in the Forex situation or are there any sort of gain sharing kind of clauses being put in. So just trying to figure out how pricing contract structuring may have progressed.

Neeraj Bhargava

What we have seen happen most often is that, we agree on range of currency band within which a price is valid, and then as we go outside the range it allows us and our client to then sit down and renegotiate the number again. And that's usually what we are pushing with our clients.

Mitali Ghosh - Merrill Lynch

Right. And secondly on the travel vertical you gave us some data points there. Just wanted to understand that some of the new processes and the new clients that you spoke off in the pipeline; is there any trend there in terms of what are some of the new processes being outsourced or maybe some sub-segment that you are targeting now?

Neeraj Bhargava

Well, actually if you look at our clients, even some of our larger ones then you just make a matrix about which geographies they operate in and which processes they outsource to us? As you try to fill in those boxes what you find is that the same work hasn’t been given to us in another some geography, and in cases where we are doing some profit for other client, we are not doing that process for them. So just the degree of penetration we have even with some of our more matured clients like British Airways is very, very fast on the true potential. So we have account managers for these companies especially our larger clients or a high potential client.

And it's the constant education process of telling them look we're doing this for somebody else and plugging away. So, our sense today is that even if you take a look, take a very mature profits like revenue accounting. If you look at the U.S. today, and take a look at the top eight or 10 airlines, I would say not more than two, or maybe three are outsourcing their process to India as yet. If you look at on what we do and say, loyalty program management, again I would say that not more than 20% or 30% of the top 10 or 15 airlines, are off shoring their work today.

So, if you look at just the sheer fact that, penetration within the client across the board is so low that when your account manager in, you have the opportunity to expand. At this point of time, I think clients are getting concerned and they are listening to what they can do, and expansion with the existing clients is obviously the most, easy and also the least costly process to get to grow your business. So, that's an area we are quite bullish about.

Mitali Ghosh - Merrill Lynch

Thanks, that's very helpful. And just my last question on, we had discussed sometime back that there was large increase in your sort of $1 million plus kind of accounts and that is generally considered an inflexion point. Is there any update in terms of maybe, how many such clients you have and how that has changed in the last quarter or over the last year?

Neeraj Bhargava

Well, we typically provide the break up in our annual numbers which we will in May this year. So in general, this year we've seen two trends, one is that there have been more clients that have crossed into the $1 million to $2 million bracket. And more importantly there have been more clients that have crossed in the $2 million to $5 million or $5 million to $10 million bracket. And these are clients when you start with a small base, their growth rate is much faster also and that clearly bodes very well for our business going forward.

Mitali Ghosh - Merrill Lynch

Okay. Thank you.

Operator

And our next question will come from the line of Tim Fox with Deutsche Bank. Please proceed.

Tim Fox - Deutsche Bank

Hi, thank you. My first question is around the relative strength and your expansions in the quarter, I believe you state you did a 11. Can you talk a little bit about the expansions as it relates to any particular vertical areas? And just to clarify are these typically based on a renewal activity or are they a combination of renewals and just natural expansion with your customers?

Neeraj Bhargava

Tim so, I'll answer your second part of your question first, while my team is just getting over the list of expansions. All these expansions we are talking about are not about renewals, these are about new businesses or new processes that we got with existing clients, but this is all new work, now renewals. If I were to look at expansion the, I have a list of 11 years in front of me, the first four are from the travel area, three of those four are with our top five clients in the travel sector. We have two expansions including one really promising one from our assistant business in the UK. We have four expansions in our analytics business and we have interestingly two expansions in our banking and financial services business as well. So that makes a list of late.

Tim Fox - Deutsche Bank

Okay. Great, that's helpful. And regarding renewals, do you have any major renewals of any 10% plus customers coming up in the calendar '08 timeframe?

Neeraj Bhargava

No I don't think so.

Tim Fox - Deutsche Bank

Okay. And then just lastly I'm not sure if you have this in front of you, but if looking at the growth in some of your areas like analytics how can we think about the next year from a exposure from a vertical perspective? Overall percentage of business I think, suggested that BFSI is still under, 5%. But can you juts broadly point us to from a vertical perspective, what your overall revenue exposure is going to be over the next, say four quarters?

Neeraj Bhargava

Right. So, as we look at our business today in conjunction with what we had at the end of last fiscal. The travel business is about a third of our business. And clearly from a proportionate, it is declining because some of our emerging businesses as we referred to them previously are growing a lot faster, probably at the rate of 1.5 to 2 times our normal growth rates. So, there is a clear [sectoral] expansion happening in our business.

So, the travel number I expect it to be somewhere in the 30% to 35% zone this year, but clearly we see faster growth in the other sectors. It's important for us to break up BFSI into BFS and I. The BFS or the banking and financial services area is down to about 5% of our business. While we did see some paralysis in the form of customers not making decisions, we are finding that in the last month, especially since the beginning of January, we see them opening up a little bit more in terms of talking about expansion opportunity. In fact, this is not something we have included in the December client addition numbers. We've been selected within one, diversified financial services situation in January to be a partner of [Choice] and this promises to be a very large situation for us. So, we are beginning to see a positive trend in the BFS area as well. Insurance is really a very active market right now. We see a -- this is the best pipeline we've had in the last three years and we are very, very excited about the prospects we see there and therefore if I were to just put that together, I would say that the BFSI sector in spite of its problems would be roughly about 30 odd percent of our business even next year.

The real story for us is growth in other areas. We have had a dramatic growth in our utility area. We see growth in logistics as well, manufacturing clients are now getting added as well. And especially with the addition of Marketics our thrust in the consumer centric industries like the CPG and pharma, that's accelerated considerably.

So overall activity with travel and BFS to be very, we [emphasize] it to be a big segment. But the real story for us is sector diversification and strengthening of other verticals which are going to be a lot more promising for years to come.

Tim Fox - Deutsche Bank

Okay, thank you for that detail and congratulations on the quarter.

Operator

And our next question will come from the line of Matt McCormack with FBR Capital market. Please proceed.

Matt McCormack - FBR Capital Markets

Yeah, hi good morning. My first question relates to the volume related revenue that you have. Is there anything structural in your long-term contracts that would protect you if you do in fact start to see lower volumes? And for example should we expect that the pricing per transaction to increase to insulate you over the near term. Can you speak to that?

Anup Gupta

Yeah, typically what happens in our volume sensitive business is that the customer gives us a forecast for three months and typically they agree to adhere to our resource allocation in terms of how much build up we need to have in terms of operation capacity for a three or four month period. We get some notice on how much or what sort of volume declines we need to prepare for and given that we have growth, we can move people around as well as attrition. It give us enough flexibility from a cost side. So, as far as we are concerned in the volume sensitive areas we haven’t seen any material trends of change at this point of time. And we see volume trending in the right direction.

Matt McCormack - FBR Capital Markets

Okay. And in terms of your KPO offering, which has now become a pretty large part of your overall revenue. Could you breakout what specifically the components of those services lines are. So, how much is that analytics, how much is financial analysis and if there is any difference in the expected growth rate of the specific KPO offerings?

Neeraj Bhargava

We believe we have the most diversified and the strongest KPO offering in our industry. We have a business and market research outsourcing, which we've been doing for nearly five years now and that’s the key part of our offering. That work we do mostly for market research companies and also for some companies in consumer centric industry. So, that’s one category.

The second category is analytics or data mining which is basically, we had a business in that area as well as Marketics added a lot to it. That business is essentially unlike market research which deals with light data that business deals with historical data. We mind customer data, find our pricing trends, ways of cross selling, managing risk of customers. So, that’s another category business where the customers typically tend to be consumer centric companies with CPG, pharma. We have clients in high tech industry there as well. So, that the second category.

The third category is what we term as business research, which is largely targeted towards professional services company. So, we have recruitment companies, we have consulting companies as our clients. The fourth category is financial research, where we do have investment banking and also some information services companies as our clients.

The fifth one is work we do in the procurement area on largely doing spend analysis. And the last category is a very small business, but something with very high prospects in the legal process outsourcing area. This is a sparely diversified business and if you were to access vulnerability to client demand here the only vulnerable area is what may happen in financial research, that is a smaller portion of our business. So, as far as we see the overall revenue stream here quite robust at this point.

Matt McCormack - FBR Capital Markets

Okay. And then my last question, you expanded into Romania recently, could you talk about other areas for global delivery that you are looking and in light if the current currency rate environment is altering any of your plans? Thanks.

Anup Gupta

Sure. I'll take that. Obviously expanding our global footprint is a key strategic priority for us and the Romanian facility I would say is the first step in that direction. We are looking at as we have announced previously we are looking at Philippines very closely and finalizing our plans in that to do something in that geography. We will make an announcement on that at the appropriate time, but most importantly we do not expect that launch to have any material profit impact on us. Beyond that, we are looking at options in Latin America and those are at a early stage evaluation right now and I would say would get accelerated only based on our client demand or if you get some large enquiry in that area.

Matt McCormack - FBR Capital Markets

Okay. Thank you.

Operator

And our next question will come from the line of [Tim] Rose with Robert W. Baird. Please proceed.

Tim Rose - Robert W. Baird

Hi guys, nice quarter. Just a couple of questions on the segments. It looks like profitability was very good in your auto claims BPO business. I'm assuming you exceed your expectations. Could you just kind of comment on where margins should be going -- we should look at going forward in both the large BPO business and your auto claims business?

Neeraj Bhargava

Yeah, typically our margins of our large global BPO business are twice in quantity of our auto claims business. This trend has been a bit different in the last two quarters, because of two reasons. One reason is that we had a problem with our mortgage business that led to our global BPO profit coming down. Second is that our auto claims business was also very strong, particularly in the last quarter we had one client, where there was some revenues that were previously incurred got recognized in this quarter as well.

But what we are seeing is that, from quarter four onwards as the mortgage situation is behind us, the trend of the global business being twice the contributor of profits compared to our auto claims business will be back. We should be looking at the contribution of global business to be doubled of what we get from the auto claims business in that quarter. Since the last two quarter are an anomaly, we expect that to settle down.

The other important part is also that the foreign exchange given the strength of the British pound in the last two quarters played a very big role in the profitability of the auto claims business being higher.

Tim Rose - Robert W. Baird

Okay. That’s very helpful and then just a couple of housekeeping questions. What was the organic growth in the quarter?

Neeraj Bhargava

Sorry, the overall growth in the quarter?

Tim Rose - Robert W. Baird

Yeah, organic growth.

Neeraj Bhargava

Well all growth was organic and we grew at about 3.2% in the quarter. This was in spite of the effect of the mortgage situation.

Tim Rose - Robert W. Baird

Okay. And what are your currency assumptions embedded in guidance?

Neeraj Bhargava

Yeah. The currency assumptions embedded in the guidance is 39.5 rupees to $1 and sorry, going forward and also from a British pound standpoint it is $1.95 to a British pound.

Tim Rose - Robert W. Baird

Very good. Thanks and a nice quarter.

Operator

And our next question will come from the line of Tien-Tsin Huang from JPMorgan. (Operator instructions) Please proceed.

Tien-Tsin Huang - JPMorgan

Hi, thanks, just a couple of questions. First SG&A down sequentially as expected, didn't fully catch the bad debt comment. Is the 3Q rate a clean level or base that we should grow from?

Neeraj Bhargava

Well, just to explain the bad debt, we had taken a bad debt charge in the second quarter. Right and that was treated as a part of SG&A.

Tien-Tsin Huang - JPMorgan

Right. So the …

Neeraj Bhargava

So given that we didn't incur that in this quarter; that meant to the decline in SG&A as well. Besides that we also had our SG&A getting more efficient too.

Tien-Tsin Huang - JPMorgan

Okay. The 3Q sounds like is a clean level then, does it grow from going forward.

Neeraj Bhargava

Sorry.

Tien-Tsin Huang - JPMorgan

It sounds like then this third quarter is a clean SG&A base that we can work from going forward. Am I correct in thinking that?

Neeraj Bhargava

Exactly. Yeah, absolutely.

Tien-Tsin Huang - JPMorgan

Sure, thank you. The question on travel and there are a lot of questions about volumes, we cover up Master Cards, it sounds like volumes been holding up pretty well. There has been a lot of talk about airline consolidation; I think it has been an ongoing conversation, but just maybe if you can just comment on the risk of airline consolidation in your business. My sense is that it's a pretty low risk, but just wanted to confirm?

Neeraj Bhargava

Well we see airline consolidation as an opportunity particularly in the US because, given the four airlines that have been mentioned as a merger candidates, we work with only one of those four. And we are hoping that, if there are mergers that happen, the other party can learn from wonderful experience that our client has had with us and give us more business.

Tien-Tsin Huang - JPMorgan

Okay. You see it as an opportunity. And just last question on, just IndyMac, what are you assuming in your outlook for that client?

Neeraj Bhargava

Well, IndyMac has been a good client. We continue to work with them and they are paying their bills on time and are very confident in terms of how we interact and deal with them. Our exposure to them is between 1% to 1.5% of revenue.

Tien-Tsin Huang - JPMorgan

Okay. Got it, thank you.

Operator

And our next question will come from the line of Joseph Foresi with Janney Montgomery Scott. Please proceed.

Joseph Foresi - Janney Montgomery Scott

Hi, I was wondering if you could just first talk about First Magnus relationship. I know it's already sort of done away with, but have you completely reassigned all the people on that relationship and can we assume that any headcount growth going forward is going to be additions to the top-line?

Neeraj Bhargava

I think the answer to the second question is, yes. We have [revamped] two programs with people we had with First Magnus. One was an internal redeployment program and second was an outplacement program. A bulk of the people chose to get redeployed within the company and some of them, where either the skills set or the intent was to work somewhere else, we ran a very supportive out placement program for them. We are done with both these processes. There maybe a handful of people left, but those are people also we have enough opportunities for them to find roles. So, you should assume that we are, we've got a clean slate now and it is a more normal set of financial statements you should see next quarter.

Joseph Foresi - Janney Montgomery Scott

Okay. And how is your thought process on hiring change at all given the rise in the rupee is there more of a focus now on utilization?

Neeraj Bhargava

Our business as it is, we have significantly lower bench than what you might experience in IT. This is someone described in the call earlier more just in time. Clearly, even within that context utilization can be improved provided you are also improving attrition. So I think we are very focused on addressing the root cause, which is ensuring that attrition comes down so that the utilization that or rather the bench we have to keep to support its clients in the event of attrition is made as even lower. But the bench is typically now businesses don't tend to be very large.

Joseph Foresi - Janney Montgomery Scott

I'm just looking at the British Pound. Maybe you can just run through again what the affect is on the top line and when you know maybe we should start thinking about how it affects your present guidance?

Vibha Padalkar

Yeah. We have now actually hedged all the way for the next 12 months. We have actively hedged not just the British Pound but from the other currencies also, and of course the Dollar. And we use a combination of options and forward, so we don't expect to see any significant fluctuation as of -- due to the Forex fluctuations on our bottom line and that would be the same for the next year as well.

Joseph Foresi - Janney Montgomery Scott

Okay. And just lastly, I know we talked a lot about demand. But are you seeing an increase in business due to cost savings. And if you are, can you may be quantity, clarify and I guess maybe give us some idea what metric you are looking at, that would tell you that and how long it typically takes these relationships to ramp?

Neeraj Bhargava

Well, typically the ramp up programs we run with our clients are between six to nine months from the time that you start your program to getting the clients to a full ramp up situation. When a client has fully ramped up, and that means they have done away with some with some of the duplicated costs they have during the ramp up. They start seeing savings ranging anywhere from 30% to 50%. And therefore if you -- and that becomes more like a new steady state cost structures, so from that standpoint incurring some costs in those six to nine months could get more longer term benefit; is a very attractive value proposition for our clients, and in spite pf spending that money, typically clients start to break even in anywhere between 12 to 18 months.

Joseph Foresi - Janney Montgomery Scott

And any color on may be the metric that you guys use internally to track the demand side of things and how that sort of trended? Thank you.

Neeraj Bhargava

Well, typically we maintained our pipelines and look at the activity across different stages of the pipeline, right from the enquiry stage to things that are near closure. And on all those metrics, right now we are tracking quite well. This quarter in particular we've made a very good start and we are hoping that the momentum continues and that allows us to be feeling good about next year.

Joseph Foresi - Janney Montgomery Scott

All right, thank you

Operator

And this concludes the question-and-answer session. I would now like to turn the presentation back over to the CEO, Neeraj Bhargava for closing remarks. Please proceed.

Neeraj Bhargava

Thank you all for taking the time to attend this call and supporting us from the last two quarters as we put the First Magnus loss behind us. And just to summarize again. Our profitability is back on track. Our customers are continuing to be very confident about our capabilities and our operational excellence. And I'm relived to have a very seasoned professional like Alok coming as our new CFO and overall we are excited about our pipeline and we believe that we can grow even in a challenging [environment]. Thank you very much.

Operator

Thank you for your participation in today's conference. This concludes your presentation, you may now disconnect. Good day.

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Source: WNS (Holdings) F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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