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Edited Transcript of WNS earnings conference call or presentation 18-Jul-19 12:00pm GMT

Q1 2020 WNS (Holdings) Ltd Earnings Call

Mumbai Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of WNS (Holdings) Ltd earnings conference call or presentation Thursday, July 18, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Mackey

WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR

* Gautam Barai

WNS (Holdings) Limited - COO

* Keshav R. Murugesh

WNS (Holdings) Limited - Group CEO & Director

* Sanjay Puria

WNS (Holdings) Limited - Group CFO

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Conference Call Participants

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* Ashwin Vassant Shirvaikar

Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst

* Bryan C. Bergin

Cowen and Company, LLC, Research Division - Director

* David John Koning

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Drew L. Kootman

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Edward Stephen Caso

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Margaret Marie Niesen Nolan

William Blair & Company L.L.C., Research Division - Analyst

* Mayank Tandon

Needham & Company, LLC, Research Division - Senior Analyst

* Moshe Katri

Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst

* Puneet Jain

JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst

* Vincent Alexander Colicchio

Barrington Research Associates, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the WNS (Holdings) Fiscal 2020 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. Now I'd like to turn the call over to David Mackey, WNS' Executive Vice President of Finance and Head of Investor Relations. David?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [2]

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Thank you, and welcome to our fiscal 2020 first quarter earnings call. With me today on the call, I have WNS' CEO, Keshav Murugesh; WNS' CFO, Sanjay Puria; and our COO, Gautam Barai.

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

Today's remarks will focus on the results for the fiscal first quarter ended June 30, 2019. Some of the matters that will be discussed on today's call are forward-looking. Please keep in mind that these forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those factors set forth in the company's Form 20-F. This document is also available on the company website.

During this call, management will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliations of these non-GAAP financial measures to GAAP results can be found in the press release issued earlier today. Some of the non-GAAP financial measures management will discuss are defined as follows. Net revenue is defined as revenue less repair payments. Adjusted operating margin is defined as operating margin excluding amortization of intangible assets, share-based compensation and goodwill impairment. Adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets, share-based compensation, goodwill impairment and all associated taxes. These items will be used throughout the call.

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

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [3]

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Thank you, David, and good morning, everyone. Fiscal first quarter financial performance was once again solid, as our clients continue to validate WNS' differentiated positioning in the BPM marketplace.

Net revenue came in at $211.6 million, representing a year-over-year increase of 8% on a reported basis and 11% on constant currency. In the first quarter, WNS added 6 new clients, expanded 11 existing relationships and renewed 16 contracts. First quarter adjusted operating margin came in at almost 23%, and adjusted diluted EPS grew 23% versus the first quarter of last year to $0.72 per share. Sanjay will discuss the details of our first quarter financial performance in his prepared remarks.

Over the past several quarters, we have discussed on our earnings call WNS' ability to combine domain expertise, technology and analytics to co-create solutions and help our clients transform their businesses. Our collaborative approach continues to resonate well in the marketplace and is enabling our clients to navigate the increasing number of disruptive trends now impacting their businesses.

Today, I wanted to highlight a different aspect of our business, which has been gaining traction over the past few years and is helping position WNS as a top leader in the business process management space. This trend is our ability to service Internet-based, digitally native companies, the types of innovative organizations that are creating a major source of disruption for legacy business models.

Over 10 years ago, WNS began supporting Internet-based businesses by leveraging our specialized industry knowledge. The first significant relationship was with Travelocity, as you will recall, which outsourced many of its front-, middle- and back-office functions to WNS over a 6-year period and grew to become WNS' second largest client. While the initial goal of the engagement was cost reduction, as the relationship expanded, the focus shifted to higher-value objectives, including process transformation, improving end client satisfaction and driving revenue growth. This partnership gave WNS a unique view into the online travel industry, but also helped us understand how to create processes and utilize data and analytics to enable Internet-based digital organizations to better compete in the marketplace.

Over the past several years, WNS' ability to leverage our experience servicing Internet-based clients and to enhance these unique capabilities with domain-specific expertise across key verticals is being increasingly well received. We are co-creating custom solutions, which enable these digital disruptors to drive better efficiency, actionable insights and an improved end customer experience. In addition, clients are discovering that by partnering with WNS, they can enable their organizations to rapidly scale, while focusing their internal attention and resources on driving brand recognition, competitive differentiation and market share.

Today, WNS works with some of the most influential and innovative companies in the world. In fact, in fiscal 2019, we provided process management services to 5 of the world's top 15 Internet companies as measured by annual revenue. Our online clients are spread across verticals, including relationships in retail, payments, Internet services, social media, travel, hotels and ridesharing. The clients' business models are also quite diverse, including companies participating in the B2B, B2C and consumer-to-consumer marketplaces. Our ability to service these organizations is increasingly visible in the company's revenue profile.

In fiscal 2019, Internet-based clients represented 14% of WNS' total revenue, up from 6% in fiscal 2015. While there is a significant opportunity for WNS to continue to grow our footprint with leading Internet brands, there is a second benefit to servicing these disruptive organizations. By leveraging our knowledge of the online space, WNS is uniquely positioned to help legacy clients transform their business models by co-creating custom digital processes necessary to compete. This is becoming a clear differentiator for WNS in the marketplace of today.

Increasingly, we are being recognized as an innovator in the BPM space with the experience and capabilities to help clients address complicated strategic business challenges. This was, in fact, one of the key reasons we were recently selected as the long-term process partner for Convex Group, a brand new private equity-backed international speciality reinsurance startup. WNS will design, build and implement a unique Platform + BPM as-a-service operating model for Convex, which will span key operations for insurance, reinsurance, claims, finance and human resources. Together, WNS and Convex will work to create the insurance company of the future, which will redefine the insurance market and break free from legacy systems and processes.

Today, the overall demand environment of BPM continues to be robust and healthy. We also view the ongoing BPM business opportunity as defensive in nature, as most of the services we provide not only address ongoing business disruption, but also reduce cost. As such, we believe that our business should continue to perform well even if the macro environment were to soften.

In summary, WNS continues to be well positioned for long-term success in the BPM market. Our domain-centric approach to solutions which leverage strong capabilities in analytics, technology, transformation and process is resonating well with both existing as well as new clients and new prospects. This is resulting in healthy organic top line growth, solid revenue visibility and a robust broad-based pipeline of opportunities, which is increasingly marked by larger, more transformational deals. WNS remains committed to innovating, investing and executing on our strategic plans to create long-term sustainable business value for all our key stakeholders.

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

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [4]

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Thank you, Keshav. In the fiscal first quarter, WNS net revenue came in at $211.6 million, up 7.9% from $196 million posted in the same quarter of last year and up 11.2% on a constant currency basis. By vertical, revenue growth was broad-based with the Healthcare, Banking and Financial Services, Manufacturing, Retail, CPG and Travel verticals, each growing at least 10% year-over-year.

With respect to our service offerings, revenue growth versus the prior year was driven by strength in finance and accounting and industry-specific BPM. Sequentially, net revenue increased by 2.4% on both a reported and on constant currency basis. Quarter-over-quarter, revenue performance was driven by solid growth with both new and existing clients, which more than offset the seasonal impact of contractual client productivity commitments.

In the first quarter, WNS recorded approximately $3 million of short-term nonrecurring revenue, which was booked at close to 100% margin. Adjusted operating margin in quarter 1 was 22.8% as compared to 18.8% reported in the same quarter of fiscal 2019 and 20.8% last quarter. IFRS 16 favorably impacted quarter 1 adjusted operating margin by approximately 130 basis points, consistent with our comments and guidance provided on last quarter's call.

Year-over-year, adjusted operating margin increased as a result of the impact of IFRS 16 lease accounting, improved productivity including the high-margin short-term revenue and operating leverage on higher volumes. These benefits more than offset the impact of our annual wage increases.

Sequentially, adjusted operating margin increased as a result of the impact of IFRS 16 lease accounting, improved productivity, hedging gains net of currency movements and operating leverage on higher volumes. These benefits more than offset the impact of our annual wage increases.

Based on our quarter 1 margin performance and current visibility, we now expect full year adjusted operating margin to be in the range of 21% to 22%, representing a slight increase from our guidance of approximately 21% provided in April, which included approximately 125 basis points of favorable impact from IFRS 16.

The company's net other expense was $0.8 million expense in the first quarter as compared to $2.5 million of income reported in quarter 1 of fiscal 2019 and $3.9 million of income last quarter. Year-over-year, the $3.8 million impact of IFRS 16 lease accounting on interest expense more than offset higher interest income on larger cash balances and lower [of this] expense resulting from reduced debt payments. Sequentially, the reductions are the result of the IFRS 16 lease accounting impact and lower other income associated with onetime gain in quarter 4.

WNS effective tax rate for quarter 1 came in at 20.7%, down from 21.5% last year and up from 19.3% last quarter. Changes in the quarterly tax rate are primarily due to the mix of work delivered from tax incentive facilities and the mix of profits between geographies. For fiscal 2020, we continue to expect our effective corporate tax rate to be in the 22% to 23% range.

The company's adjusted net income for quarter 1 was $37.6 million compared to $30.9 million in the same quarter of fiscal 2019 and $37.8 million last quarter. Adjusted diluted earnings were $0.72 per share in quarter 1 versus $0.59 in the first quarter of last year and $0.73 last quarter. This represents growth in EPS of 23.2% year-over-year despite a reduction of approximately $0.02 per share in quarter 1 of this year as a result of IFRS 16.

As of June 30, 2019, WNS balances in cash and investments totaled $226.5 million, and the company had $61.5 million of debt. WNS generated $52 million of cash from operating activities this quarter and had $10.8 million in capital expenditures. During the quarter, the company repurchased 802,222 shares of stock at an average price of $57.67, which impacted quarter 1 cash by $48 million. DSO in the first quarter came in at 30 days as compared to 31 days last year and 30 days last quarter.

With respect to other key operating metrics, total headcount at the end of the quarter was 41,056, a sequential increase of over 1,000 people for the second consecutive quarter. Our attrition rate in the first quarter was 34% as compared to 31% reported in quarter 1 of last year and 34% in the previous quarter. Global billed seat capacity at the end of the first quarter was 33,695 and average billed seat utilization improved to 1.22.

In our press release issued earlier today, WNS provided updated guidance for fiscal 2020. Based on the company's current visibility levels, we expect net revenue to be in the range of $855 million to $895 million, representing year-over-year revenue growth of 8% to 13%. Revenue guidance assumes an average British pound-to-U. S. dollar exchange rate of 1.26 for the remainder of fiscal 2020. Excluding exchange rate impacts, revenue guidance represents constant currency growth of 8% to 13%, all of which is organic.

We currently have 95% visibility to the midpoint of the revenue range, consistent with July guidance in prior years. Adjusted net income is expected to be in the range of $143 million to $153 million based on INR 69-to-U. S. dollar exchange rate for the remainder of fiscal 2020. This implies adjusted EPS of $2.75 to $2.95, assuming a diluted share count of approximately 52 million shares. Full year EPS guidance includes a year-over-year negative impact of approximately $0.06 per share associated with the adoption of IFRS 16. With respect to capital expenditures, WNS expects our requirement for fiscal 2020 to be up to $37 million.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Maggie Nolan from William Blair.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [2]

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Congrats on the good quarter and I love the commentary about the Internet companies. As you think about the work that you're doing with those companies and across your client base and you think about driving actionable insights for those clients, there's been a lot of talk lately about the security considerations around handling large amounts of data, et cetera. So can you talk to us a little bit about how your clients are thinking about that and how WNS is thinking about security as they handle these processes for their clients?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [3]

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Right. Thank you, Maggie. So let me try and address that, and I'll have Gautam add a little more. But the reality for our business now is, as we continue to make investments on the technology front as well as on the whole security front because at this point in time we've also created a very robust managed security services offering as well at the company, which is starting to resonate extremely well with the client base. The first thing I want to mention as a headline item is the conversation is now changing dramatically for us from outsourcing much more to automation, right? So with the help of technology, the quality of conversation that we are having with clients is very different compared to the conversation we had in the past. So today, it is all about helping every client appreciate that there is a tech business around which there's a wraparound of a domain and so many other things. And we, as a partner who understand that domain extremely well and who have made the investments in technology, can actually help them in terms of driving a much better actionable insight because of the fact that, as we've mentioned many times in the past, we embed analytics within our services.

Now obviously, from a WNS point of view, the whole area of security and the whole area of cyber itself is such an important part because we recognize the fact that we are not really in the BPM business, we are in the reputation business, which is that of our clients as well as of ourselves as well. So as you appreciate and understand better some of the things that we have done within the company in terms of investing in those areas and therefore helping our clients navigate the uncertainties that we are likely to see because of the threats that are out there in terms of cyber; and the way we have also returned our contracts with each one of these clients, also really helps us, first and foremost, provide cutting-edge actionable insight and impact, and at the same time, also dilute any liability that may arise from a WNS point of view as well because we are quite clear that we offer insight, we offer value-added services, but we are not actually either running the bank or running the insurance company or taking over what they should be doing.

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Gautam Barai, WNS (Holdings) Limited - COO [4]

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Also, just to add to what Keshav mentioned, besides the significant investment that the company continues and repeatedly makes across the Infosec policies and the technology associated with that, almost never do we allow storage and management of data on our premises and our servers, et cetera. This is all managed across the client locations, which then ensures that we do not have any breaches that some of the others could be faced with.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [5]

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Great. That's helpful context. The other thing I wanted to ask about, share repurchases have been a nice way for you to return value to shareholders over the years. Is there any change to how you're thinking about share repurchases going forward, just knowing that there could be some changes in terms of tax simplification?

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [6]

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So as we mentioned earlier that we already had approval from 3.3 million shares of share repurchase, and out of that, 1.1 million was done last time. Balance is right now in progress, where we have already repurchased about 800,000 shares. And so there's a way to go to complete the 3.3 million till the time within that range whatever we have provided to buy the stock. From a capital allocation program, it continues to be around the tuck-in acquisitions. From a capability acquisition perspective, it's going to be around the share repurchase program, our debt payment as well as investment into the business whether it's capital expenditure program from a delivery footprint perspective where we want to expand geographically as well as into the technology and some of the vertical and the service offerings, what we continue to do that.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [7]

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And just to add to Sanjay's comments, Maggie, I think when you look philosophically at the approach to share repurchases, the company's general approach has been to try and mitigate the impact of share creep through restricted stock issuances to employees through the share repurchase program, but also to make sure that we have dry powder to be able to buy back shares at an accelerated rate in the event that something happens, like it did in 2016 with Brexit. So I think the philosophy remains the same going forward. And to Sanjay's point, we don't view the share repurchase programs as having a material impact on the things that we can do with M&A and with other priorities for capital allocation.

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Operator [8]

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Our next question comes from Bryan Bergin from Cowen.

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Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [9]

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Wanted to start on margin. Some of the change drivers here, if you can kind of run through those again, FX versus the IFRS 16 versus the operational factors, particularly in gross margin. And then how should we be thinking about fiscal '20 margin cadence as you typically build throughout the year, but really factoring this 1Q strength.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [10]

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So your point was on a sequential or year-over-year on the margin?

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Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [11]

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Year-over-year.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [12]

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Okay. So from a year-over-year perspective, specifically 2 contribution driving year-over-year: one was in IFRS 16 where we had 150 basis point improvement from a gross margin perspective; as well as we do mentioned about the nonrecurring revenue where broadly almost 100% (inaudible) to the bottom, so that has -- those contributed another 120 basis point. And balance is the impact of a -- from a currency perspective and the productivity and the volumes, the growth, what we have, offset by the wage inflation in the quarter 1 usually, which -- where the increments have been rolled out.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [13]

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Right. The increment -- I'm sorry. Go ahead, Sanjay.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [14]

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And from a full year perspective, as we mentioned that the operating margin is going to be around 21% earlier. And based on some of the nonrecurring revenue, the growth, what we have seen during the quarter 1, as well as some of the investment which were planned from a quarter 1 perspective has moved to quarter 2 and 3 and 4, which is going to be -- continuously be there. Factoring that, we believe -- we expect the operating margin between 21% to 22% range. Again, no change from IFRS 16 perspective. What we mentioned earlier during the last April guidance, that continues to be there. It's going to be around 40 basis in fact -- impact on the ANI, but on the operating margin, it's going to be 130 basis point higher in apple-to-apple comparison from the earlier year perspective.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [15]

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Yes. And just to add a little bit of color to Sanjay's comments, Bryan, in terms of the year-over-year impact first quarter from currency, actually a lot less than you would think. We're less than 50 basis points of favorability in Q1, both on a gross and an operating margin basis came from FX. So when you look at what's going on with the margin improvement, as Sanjay mentioned, some of it is not sustainable in terms of what happens quarter-over-quarter with the nonrecurring revenues and whatnot. But the reality is it is operational because it's not coming from FX. The second thing I'd like to add is in terms of the cadence of margin as we kind of move throughout the year, obviously, given some of the onetime items that we had here and the fact that we -- as Sanjay mentioned, we've had some investments that have moved out of Q1 into Q2, Q3. We do expect the sequential drop in the operating margin for Q2, which is not the normal cadence to our business, but again, I think kind of more of a normalized number for Q2 and then sequential increases as we go through Q3 and Q4.

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Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [16]

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Okay. All right. That's helpful detail. And I wanted to ask then on Convex Group deal. Does this meet your large deal criteria? And is this BPM as-a-service, is this offering reflective of IT development services that are requiring a different type of expertise, meaning are you finding required changes that are going to have to come in your resourcing approach? And how should we think about that IT development as an area of organic or inorganic investment?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [17]

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Yes. I mean I think we are -- I'm sorry, go ahead, Gautam.

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Gautam Barai, WNS (Holdings) Limited - COO [18]

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In terms of the large deals, yes, definitely, Convex has the potential to be a large deal for us over the next few quarters. In terms of the deal, it is predominantly a BPM as-a-service deal with a large technology part of implementation. What we see from -- due to the strength of our domain expertise that we have with the verticals, what we see is the resourcing mix that we have currently is absolutely suited to actually delivering the deal, and that will continue to be the norm from going forward.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [19]

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Yes. I don't think there's anything unusual here, Bryan, in terms of the skill sets required to deliver this. As Gautam mentioned and as Keshav mentioned in his prepared remarks, this is a startup. So we're really excited to have been selected as a strategic partner to help build this capability, and we're going to be building it across multiple processes within their business. But the real opportunity for us long term here is to watch this business grow and for us, as an organization, to grow with them. So -- and I don't know that it necessarily meets the large deal criteria day 1, but clearly, as Gautam mentioned, the opportunity for this to become a large deal and a large relationship is pretty significant.

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Operator [20]

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Our next question comes from Edward Caso from Wells Fargo.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [21]

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Congrats on another great quarter. I wanted to talk about maturity of the client base. I see that your top 10 is growing slower than the total. And if you could particularly talk about the insurance and utility area.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [22]

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Sure. So let me take that, Ed. I think one of the things that you'll see if you look at WNS over the last -- and this isn't just a couple-of-quarter trend, this is the last 4 or 5 years. We've been adding more large clients and more clients of over $1 million at an accelerated rate over the last 4, 5 years. And we also know that most of these relationships take 2, 3, 4 years to kind of hit that sweet spot for growth. So because we've been fairly consistent in our growth, what we've been able to do is continue to kind of grow, and more importantly, diversify this business in terms of customer concentration. So you're seeing reduced reliance on the top client, reduced reliance on the top 3, 5, 10 across the board. And this is great. You'll also see a similar pattern when you look at the concentration levels across services, across verticals, across geographies. So really excited. And when we talk about kind of broad-based healthy business growth, this is exactly what we're referring to. Obviously, when you look at the specific verticals and some of the things that are going on there, lots of moving parts. The utilities space has obviously been weak, and we've talked for better part of a year now about a large utilities client that's created some headwinds for us in that business and continue to present some challenges. But kind of under the covers, if you will, that business seems to be performing pretty well. It's just not getting the growth and the attention that it deserves, I guess, from the OpEx perspective based on both currency and that large client ramp down that we've been dealing with.

On the Insurance space, business is extremely healthy, broad-based across multiple geographies, adding new clients, adding new large clients. We talked about a very large deal that's been ramping about a little over a year ago now. We talked about the Convex deal here, so really happy with how we're positioned and how we've differentiated ourselves within the insurance space.

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Gautam Barai, WNS (Holdings) Limited - COO [23]

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Maybe just to add on the utilities space, right now, as Dave mentioned, though it's looking a little bit more pressure based on some of the headwinds over there, but our historic rate has been more concentrated from a U.K. and Europe market perspective, and that's where the opportunity for us is. Into the whole North America, where the investment has been done and we have been going after, it's just a matter of time of some closures over there. But it's just a temporary phenomena where we believe that there's immense opportunity to expand in this vertical.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [24]

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My other question is around what kind of larger deals are you seeing? Are say larger relative to recent years? And are their durations extending at all? And then if you could talk both in the recent experience and sort of what you see in the pipeline.

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [25]

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Yes. So Ed, I'll start the answer. So first and foremost, I just hope that from the previous answer, we gave you a lot of comfort around the fact that we are actually very positive about how each of our clients is trending and the fact that as we leverage some of the new initiatives, including Convex across existing client bases, you'll probably start seeing the concentration ratio change again. But I think what is most important is, your second question, the fact that we are actually seeing a very strong pipeline across all verticals driven a lot by the transformation agenda of our clients. And as we implemented a change in terms of how we go to the market also from a horizontal point of view, we're also seeing a number of finance and accounting deals, customer -- CIS kind of deals and analytics deals also lead the way in terms of the conversation.

Now obviously, as we look at the pipeline, the pipeline is filled with deals of all sizes. There are 4 or 5 very large transformational, high-impact deal where the client is looking to get a number of things done upfront and very quickly. Then there are the usual kind of suspects where it's a very niche transformational, high-impact kind of deal where it may be part of a multi-vendor arrangement where already there is somebody existing and the client is coming into WNS saying that, "You know what? You guys are different because you bring a completely different capability in some new areas," and that's feeding into the pipeline as well. But I think in terms of overall impact, I will say that this is probably one of the best times for WNS in terms of just scale, size and impact -- transformational impact of deals where all the investments that we've been making over the past few years are coming together very well and I think will continue to provide great impetus for the company over the next few quarters or a few years.

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Operator [26]

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Our next question comes from Mayank Tandon from Needham & Company.

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [27]

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Keshav, you mentioned the growth in automation. So could you just talk in terms of what percent of deals today are RPA deals and your win rate on those type of specific opportunities? In the same vein, how are you pricing these deals versus traditional BPM-type contracts?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [28]

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Okay. Again, let me just start by again giving comfort and confidence around the fact that our investments in this area and our investments in terms of just being the right partners beyond whatever we've done organically has been very well received in the marketplace and is resonating very well with existing clients as well as new prospects. So if you look at most of the industry advisor ratings, you will see that WNS from a technology point of view, not just the domain point of view, is now positioned as leader, right? And that actually gives a lot of comport, not only to us, but also to our clients and prospects.

Now as I mentioned, technology and automation is now power for the course, and therefore, in every one of the deals, whether the client demands it or not, it is something that we, in any case, bring to the fore and leverage it to the hilt in order to make sure that we are seen as a very strategic partner to our clients. I'll ask Gautam to talk a little bit about what he's seeing from an RPA point of view, what percentage of deals we're seeing which are technology-enabled. And I can only tell you that wherever there is technology and domain with embedded analytics coming in, WNS has a very, very high chance of winning that deal.

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Gautam Barai, WNS (Holdings) Limited - COO [29]

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Yes. As Keshav mentioned, almost every deal that we are winning today or are in competition in at the moment has a significant element of RPA as a part of the end-to-end solution that we're committed to drive. Our win ratio is significantly high in terms of even stand-alone RPA deals that we are asked to address. At the last measurement, it was north of about 65% to 70% as we look at it. In terms of different pricing models, a, they're embedded into the entire transaction-based pricing, but what we're seeing more and more is clients are extremely receptive to a gain share model in terms of benefits realized throughout automation.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [30]

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And Mayank, I just might add a little bit specifically, as Gautam mentioned that it's part of all the deals, so right now what we are seeing for the customer expectation is all about the outcome, what we're able to drive where RPA, analytics, everything is embedded as part of the solution, right? So it's part of the game now where the customers' expectation is about the outcome over the productivity. Productivities are being driven primarily around some of this development and it's not something that analytics -- take an example of analytics, we do talk about it's 12%, but actually if you see, it's more than 20% because it's embedded as part of our industry-specific BPM as overall solution.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [31]

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Yes. And just to add to that, Mayank because I think it's an important point. The commentary has been focused on RPA, but the reality is we need to elevate this discussion to technology and automation or technology tools or automation tools, period. Because the lines are blurring between RPA and machine learning tools and AI tools and natural language processing tools. And to Gautam's point, the reality is we've got some technology component on almost every deal that we're seeing. The real question becomes how much of that is going to get serviced through technology that's owned and proprietary from WNS versus how much of that's getting serviced through third-party strategic partnerships?

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Mayank Tandon, Needham & Company, LLC, Research Division - Senior Analyst [32]

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Great. That's very helpful. I'll leave it there.

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Operator [33]

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Our next question comes from Moshe Katri from Wedbush Securities.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst [34]

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Good quarter again. Just from a big picture perspective, maybe we can talk a bit about what you're seeing in the U.K. market and then also talk about the existing pipeline, maybe some details. How does it look versus a year ago? And then I have another follow-up.

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [35]

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Sure. Let me start by saying that from a U.K. point of view, we're not seeing any impact of all the usual suspects that we keep reading about and hearing about. In fact, I think most CEOs seem to have taken the view that they just have to get on with their business and not really worry about where politics is leading them. So from WNS' perspective, we continue to see a lot of traction, we continue to see some great conversations and we continue to see very strong wins as we've been reporting, including the insurance win that we just spoke about. So that's as far as the U.K. and the overall picture there goes. I mean then Gautam and Dave, do you want to talk about the rest?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [36]

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Yes, sure. I think to Keshav's point, the U.K. has been kind of a strength area for WNS for a long time now. And obviously, part of the reason we've been able to diversify our revenue portfolio away from the U.K. has been the function of currency. When you look at the growth that we've been posting in the U.K. on a quarter-over-quarter basis, on a year-over-year basis, it remains extremely healthy just on a reported basis. But you also have to understand that there is a currency headwind embedded in that as well. So U.K. remains strong for us in terms of new client adds, in terms of strategic positioning, in terms of overall growth. And we don't see that, to Keshav's point, changing going forward. And maybe both Keshav and Gautam want to address a little bit at a macro level the overall demand pipeline for WNS and kind of where we sit today versus where we were a year ago.

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Gautam Barai, WNS (Holdings) Limited - COO [37]

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Yes. Thanks, Dave. So Dave covered in terms of -- we continue to see a very healthy pipeline across our U.K. region. And what's also important is, given the size and the nature of the clients we are dealing with, it's across border, across Europe too at the moment, where we are seeing a lot more traction. But from a broad-based ecosystem, we are seeing a very healthy pipeline across the North American region and our APAC region also. So we continue to see a growing pipeline across all 3 regions.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst [38]

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Okay, that's fair. Then in terms of the follow-up, so obviously, the pipeline is healthy, you beat numbers this quarter. But you still have a pretty large delta in terms of your constant currency revenue growth guidance. Maybe you can talk a bit about that. Are we being extremely conservative? What would kind of prompt us to kind of maybe kind close the delta and maybe raise some of those metrics down the road?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [39]

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Yes. I'll take that. And I think the answer is pretty straightforward, Moshe. The reality is our approach to guidance remains consistent. The guidance that we provide each and every quarter is visibility based, and it's based kind of on our historic ability to close the gap between what we have committed at a point in time and what we don't. So the reality is, for example, we know that walking into the July quarter, having 95% visibility to the midpoint gives us a good chance for us to meet or beat that number. The reason we have such a wide range, if you will, is because mathematically for that number to be a midpoint, there's got to be as much upside as there is downside. The reality is we tend to know that based on how we guide, for the company to end up below the midpoint of guidance, something typically has to go wrong, something has to fall out of the bottom. Doesn't mean it can't happen, but the reality is that it should be more likely that we beat the midpoint of guidance than miss the midpoint of guidance. In terms of the kinds of things that would get us from the midpoint to the high end, as Sanjay mentioned earlier, we have absolutely no short-term nonrecurring revenue baked into our guidance, baked into our forecast for the last 3 quarters of this year. We did $3 million in the first quarter. We did $6.5 million last year. We did $19 million the year before. So the reality is we know we're going to get something. We just don't have any visibility or any direct ability to impact what that amount is going to be for the next 3 quarters. So the 2 wild cards, I would say, in terms of what gets us to the midpoint, what gets us to the high end of the guidance, what gets us beyond that, short-term revenues and how quickly new clients and new processes close and ramp.

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Operator [40]

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Our next question comes from Joseph Foresi from Cantor Fitzgerald.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [41]

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This is Drew Kootman on for Joe. Can you discuss some of the levers you could use to impact margins and what factors will drive you being at the high or low end of guidance by the end of this year?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [42]

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Sure. I'll take that, Drew. Obviously, when you look at how we guide from a margin perspective, we have a pretty high degree of visibility to what that number looks like. The wildcard really, at this point in the year, tends to be more about FX than anything else. And historically, based on the way we guide and based on the way we hedge through a combination of forwards and options, we should typically have more margin upside than downside. But again, I think the 2 wildcards to that margin would be the amount of nonrecurring revenue that we get and how much of it is things like gain sharing and the types of activity that we had in Q1 that came with no cost versus how much of it is incremental volume at a similar margin to our core business. And the second would be, again, how quickly new deals sign and ramp, which could have a positive or a negative impact on our business based on the size of the deal and the amount of transition revenue associated with that.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [43]

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Got it. And then it looked like Travel and Healthcare had some strong acceleration in the quarter. Can you guys touch on what you're seeing in both those verticals?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [44]

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Sure. I think overall, we've got good, strong broad-based growth in both of those verticals. Clearly, we've been able to do extremely well on the Healthcare side. A lot of that has to do with the capability and the positioning of HealthHelp. It's been a great asset for us. It's been a great growth driver for us. It positions the company the right way within the Healthcare space on the clinical side. So that's being really well received and we've seen both good, healthy growth coming out of that deal as well as a strong pipeline of opportunities. So it's kind of been a big ticket item, if you will, within the Healthcare vertical. But again, the Value Edge asset continues to perform well from an analytics perspective. And our core R&A activities within Healthcare remain strong. So feel really good about how the company's doing on the Healthcare side.

Travel, for us, has been a little bit more volatile. I mean we've had good quarters and bad quarters and we've had good years and bad years. But again, I think this is WNS' DNA. I mean we are, at our core, a spin-off from British Airways. We understand the travel space and specifically the airline space extremely well. It's a function of what's going on within our existing client base quarter-to-quarter, but also the fact that we're looking at some larger, more transformational deals in the travel space that we think could help drive the right kinds of long-term accelerated growth for a vertical that's very large for us. So you'll see more volatility in the smaller verticals just based on size and law of large numbers, but we feel really good about how we're positioned in both of those verticals that you mentioned.

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Operator [45]

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Our next question comes from Dave Koning from Baird.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [46]

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And I guess, first of all, just a numbers question. I know you said FX, it looks like, on guidance, no impact to the year. I know Q1 was a little over 3% headwind. In the rest, the GBP is a little bit of a headwind as well. So I'm just trying to reconcile it. It feels thus in our model. We have, I think, right around 2% headwind for the year. I just can't figure out why it won't be a little bit of a headwind.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [47]

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Sure. So I think the simple reason for that, Dave, is that remember -- we got to go back a year now, but IFRS 9 has changed the treatment of hedging gains within our business. All of our cash flow hedges now sit in the revenue line. So the constant currency revenue guidance that we provide not only has the operational movements of the various currencies, but also has the hedging gains and losses on those revenue currencies as well as the currencies that are predominantly cost currencies like the Indian rupee. So the reality is if you look at our business, the core business, you're correct, we would have a roughly 2% headwind to revenue coming from operational movements, but we're picking some of that up based on the fact that our hedges are protecting us well and we've got probably a little bit less than 2% upside from where we were year-over-year in terms of hedging gains.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [48]

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Got you. Okay. I think that makes a lot of sense. Secondly, free cash flow has consistently, in Q1, been a weaker quarter. And I know that's just seasonal and it reverses itself the rest of the year. This Q1, for the first time ever, was kind of massive and I'm just wondering kind of what happened, if that might be a new trend.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [49]

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Yes, I don't know. There were a couple of factors over there. And you're right that, it's a little bit unusual from a quarter 1 perspective when we have bonus payouts and wage inflations and so on. But one number is the higher profitability. We spoke about the nonrecurring revenue and better cash from that. Also, from an IFRS 16 perspective, that is out from the cash from operations and it's being represented under the -- from financing activity, so that has further contributed. As well as some of the payments, it's going to be -- it's a matter of time. It has fallen to the quarter 2 and so on. So you may have a little bit pressure in quarter 2 from a cash from operations perspective. But primarily, it's being driven by high profitability, IFRS 16 and some of the payments falling in quarter 2.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [50]

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Okay. No, that's helpful. And then finally, just the F&A line was really strong. I think up 23%, like massive acceleration there. Is there anything in the market happening? Or is it more of just 1 or 2 clients just using your offerings?

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [51]

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Yes, this is something happening in the market. I think more clients are looking at F&A -- the pipeline of F&A is overall increasing more. Clients are looking at outsourcing some of this core work to partners. And the other interesting initiative happening in the market is WNS is winning a lot of those deals. And maybe I'll just add to that, after our Denali acquisition from a procurement perspective where we are able to add the capability on the sourcing side, that has also played well from WNS' perspective because we're able to offer an end-to-end services, what the client is looking for, as compared to the earlier scenario where we were more around the transitional side of it.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [52]

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And again, Dave, from an outsourcing, automation perspective, the reality is F&A is always going to be a great place for new clients to start. It's an easier entry into transformational deals than entering on the client-facing activities or entering into core middle-office operation. So it's not surprising that we see clients who are willing to look at more transformational deals starting those journeys with F&A.

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Operator [53]

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And our next question comes from Puneet Jain from JPMorgan.

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Puneet Jain, JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst [54]

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So our rough math indicates that Internet-based companies contributed more than 1/3 of incremental revenue over the last 4 years. Do you view WNS as differentiated in servicing these companies, this sector, that have helped drive above-average growth for you over the last many years compared to your peers?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [55]

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Puneet, I think you answered that question yourself. Yes, absolutely, and I think more than us thinking that, I think it's our clients who think that.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [56]

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I think it's pretty clear that we've got a reputation now in this space as someone who can service these companies in terms of providing the structure, providing the fuel for growth. But I think as Keshav mentioned in his prepared remarks, Puneet, I think what we're as excited about is the ability to leverage that knowledge in traditional business models to help these clients get to where they need to be. So really kind of an exciting time for the company in terms of how we've been able to leverage not just this Internet-based capability, if you will, and these types of processes, but also to integrate that with our domain expertise to be able to provide specific solutions that clients are looking for.

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Puneet Jain, JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst [57]

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Got it. And can you also give us example of services you offer to such companies? Where do that revenue show up in your services mix?

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Gautam Barai, WNS (Holdings) Limited - COO [58]

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Yes. The revenue actually is across the industry-specific side of the business and the F&A side of the business predominantly. And as Dave mentioned, there is a significant amount of transformation and embedded analytics, especially in all these deals, so that gets integrated into our industry-specific solution.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [59]

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Yes. Gautam is exactly right. You're not going to see a lot of CIS or stand-alone analytics for these kinds of companies. The solutions that we're providing tend to be more end-to-end in nature and more integrated in nature. So the biggest place you're going to see it is in the industry-specific BPO segment, where we've obviously had some very, very robust growth over the last couple of years; and to a lesser extent, Finance & Accounting, where some of these deals start, again kind of back to the conversation we just had.

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Puneet Jain, JP Morgan Chase & Co, Research Division - Computer Services and IT Consulting Analyst [60]

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Got it. And one like housekeeping question. It seems like your depreciation expense increased a lot in this quarter compared to what it was previously. Was that related to accounting change, lease accounting or maybe something else that drove higher depreciation expense?

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [61]

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Yes. So Puneet, you're right, that's primarily because of IFRS 16. Earlier what was being taken as a rent are now, based on the accounting change, that's being reflected as a depreciation into the depreciation line.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [62]

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Yes. And just so you know from a depreciation perspective as well as to Dave's question earlier from a cash from operations perspective, that number in Q1 was $6.5 million.

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Operator [63]

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Our next question comes from Vincent Colicchio from Barrington Research.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [64]

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Yes. Keshav, on the Convex deal, it looks like you're doing some fairly high value-added work. I'm just curious, are there any meaningful restrictions on your ability to leverage that work with others?

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Gautam Barai, WNS (Holdings) Limited - COO [65]

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This is Gautam. No, not at all. In fact, the client is extremely supportive in helping us actually taking it to the market because this is not a deal that is limited only to the Convex Group, because the way we are implementing it, it has the potential to redefine the market space within insurance in a number of areas.

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Vincent Alexander Colicchio, Barrington Research Associates, Inc., Research Division - MD [66]

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Okay. And then a question on the M&A side. You guys haven't done a deal in some time. Curious, first of all, could you remind us what's most interesting to you now and what the pipeline looks like?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [67]

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Sure. I'll take that. We must state at the end that for us, making sure that we have all the right ingredients in place to continue to grow our business is very, very important. And therefore in a few areas where we believe that buy instead of make makes more sense, that's where our M&A focus really is. It's, at this point in time, still very focused on making sure that we are looking at capability creation as opposed to very large transformational kind of acquisitions, so as more tuck-in as opposed to transformational. I'm delighted to say that at this point in time, we have a very strong pipeline of possible M&A kind of deals that are going across 3 or 4 key areas, and Sanjay will talk about all of them. I must also say that discussions with many of them are actually at a mature level at this point in time. But again, we will do a deal only when everything comes together. All right? We will not do a deal at any price. It will be done based on the right value and the right timing.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [68]

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Yes. And just to add what Keshav said that there's a very healthy pipeline, multiple conversations on, and that's one of the very important strategy from our capital allocation program perspective. And even Dave alluded that nothing's going to come -- a compromise on a price from an M&A perspective. Some of the very specific areas where we are focused are on the analytics, on the technology front as well as on the F&A side, including some space in the insurance, some of the Healthcare, other areas what we have been working upon. But as Keshav said, it's all about the right time, right size and the right value.

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Operator [69]

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And our next question comes from Ashwin Shirvaikar from Citi.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [70]

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So good quarter, good execution. I just wanted to ask sort of stepping away from the quarter. You guys have done, let's call it, low double-digit top line growth, solid margins, modest margin improvement for a long time now. Is there something you could be doing to ratchet up even the top line growth, margins? Is there something in the landscape you can think of that might change meaningfully the profile of what you do?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [71]

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I'll start and have Dave and the others take a stab at it. Obviously, from our point of view, at this point in time, it is -- whatever we're talking about is all visibility based, Ashwin. And therefore in the number that we have out there is based on the consistent philosophy that we normally follow.

But having said that, if you paid attention to all the discussions we've been having across this call itself and you see how relevant we are now becoming to a larger set of stakeholders, including some of the new age kind of businesses. One of the things I want to mention is that a number of these new-age clients born in the Internet kind of clients, born in the cloud kind of clients, many of them are growing at a tear and for them, therefore, they need to have very strong partners who understand their domains very well, who they trust inherently and who can scale dramatically with them very quickly. I think, at this point in time, we are scratching the surface there in terms of some of the demand trends of some of the areas that we're involved in. Obviously, from a limited point of view, WNS is seen as a leader in that space, is seen as the most compelling partner, is already seeing huge potential in terms of how we have positioned ourselves. But if I was a betting man, I would say that in the medium to longer term, as some of these kind of initiatives take off at a much bigger scale, then actually getting to a higher growth rate is very much possible, right, I mean, all other things being equal.

And at the same time, you're also seeing some of the traditional businesses that we are used to growing at a lower rate now starting to experiment with completely new models. We just spoke about Convex. In the past, we have spoken about other clients as well. And therefore as traditional clients also take the advice of WNS and take out elements of their business and move them to completely digital-enabled technology-based businesses, again, I think while they will benefit a lot, the growth rate and margin profile of WNS in the medium to long term can also benefit over a period of time. So that's how I would position this answer at this point in time. But again, we are very disciplined about earning every dollar of our revenue.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [72]

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Got it. Not joking, but I want to ask Keshav, are you a betting man so that should we be, for at least this year's perspective, thinking of higher growth rates in the future, I guess? Is it -- does it look more like mid-teens? What does it look like?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [73]

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Ashwin, you have the guidance that we declared there -- out there, and that's what we will stand by for now.

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Operator [74]

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Thank you. 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.