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Edited Transcript of WNS earnings conference call or presentation 16-Jan-20 1:00pm GMT

Q3 2020 WNS (Holdings) Ltd Earnings Call

Mumbai Jan 28, 2020 (Thomson StreetEvents) -- Edited Transcript of WNS (Holdings) Ltd earnings conference call or presentation Thursday, January 16, 2020 at 1:00:00pm 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

* Daniel J. Reagan

Cantor Fitzgerald & Co., Research Division - Research Analyst

* David John Koning

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

* Justin Micahel Donati

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Korey A. Marcello

Deutsche Bank AG, Research Division - Research Analyst

* Kyle David Peterson

Needham & Company, LLC, Research Division - Associate

* Margaret Marie Niesen Nolan

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

* Moshe Katri

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

* Samuel England

Joh. Berenberg, Gossler & Co. KG, Research Division - 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 Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Now I would 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 third 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 third quarter ended December 31, 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 terms 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. WNS continued to deliver solid financial results in the fiscal third quarter. Net revenue for the quarter came in at $228.2 million, which represents a year-over-year increase of 16% on both a reported and constant currency basis.

In the third quarter, WNS added 6 new clients, expanded 11 existing relationships and renewed 13 contracts. Revenue growth continues to be driven by healthy, broad-based business momentum across all our key verticals and service offerings. Third quarter adjusted operating margin came in at 22.8%, and adjusted diluted EPS grew 8.5% versus the third quarter of last year, coming in at $0.80 per share. Sanjay will discuss the details of our third quarter financial performance in his remarks. I would like to spend a few moments today discussing the evolution and progress of our sales organization.

The overhaul of the sales force was one of my first initiatives when I joined WNS back in 2010, along with verticalizing the company. Since then, we've been successful in dramatically improving the size, capability and the profile of WNS' sales organization. Obviously, the most visible sign of change has been the increase in the size of our global sales team, which has grown from 41 resources in 2010 to 109 at the end of this quarter. While this expansion has been significant, I believe the biggest change to our sales organization has been the upgrade of the quality and capability of our sales professionals. First, we have successfully separated the team into hunters, responsible for new logo generation; and farmers, tasked with expanding existing relationships, and aligned these 2 different skill sets with our vertical organization structure. Second, we have changed the hiring profile of our team members. Today, our sales resources each average more than 20 years of experience and are joining WNS from a broad range of sources, including direct from industry, global consulting firms, systems integrators, IT service firms, analytics companies and technology firms. Most have deep industry and domain backgrounds and proven track records selling solution-based services. Third, WNS has added niche, specialized sales skills in high-impact areas, such as analytics and technology, and to support our acquisitions of unique assets, including Denali and HealthHelp.

As a result of our investments, the current sales team looks dramatically different than the 2010 version and has enabled WNS to not only drive industry-leading growth over the past few years, but to also build a healthy pipeline for the future. Over the past 4 years, our existing sales team has helped WNS deliver superior revenue growth at healthy margins. The company has now added 104 new clients, expanded 172 existing relationships and renewed or extended 248 contracts. We also announced that the average ACV and TCV of signed deals continues to improve. As a result, in the past 3 fiscal years, WNS has posted organic constant currency growth averaging 12.7%, and we have just updated our constant currency guidance for fiscal 2020 to 13% to 14%, with 1 quarter remaining in the year.

While we are pleased with our past revenue performance, we are equally excited about our opportunities moving forward. Our new logo hunting pipeline continues to grow, and we are seeing a steady increase in the volume of large deals. These opportunities are increasingly domain-specific, transformational in nature, technology-enabled and outcome based. Many of these deals are adviser-led, and improving our positioning with these key influencers over the past few years has been a focus area for our sales and marketing organizations.

Today, WNS consistently receives high marks from the sourcing advisers and the industry analysts for our domain-led solutions, flexible and innovative approach and the ability to help clients drive market differentiation. As a result, we have seen a steady increase in RFP invitations from this channel. Our reputation for developing innovative solutions is also enabling WNS to participate in an increasing number of sole source conversations which do not follow traditional RFP processes. These deals are highly strategic in nature and involve WNS working closely with the client to co-create unique and disruptive (technical difficulty)

In addition to our strong new logo and large deal pipeline, our farming opportunity to cross-sell services to existing clients continues to improve. Over the past 4 years, we have increased the number of clients generating over $1 million of revenue with WNS from 82 to 128 . Today, 95 of these clients are under $5 million in annual revenue, and this provides us with a significant growth opportunity over the next few years as these clients mature and evolve.

When we combine our hunting and farming opportunities, WNS' overall probably -- probability-adjusted sales pipeline is approximately 50% larger today than it was 1 year ago. This gives us confidence in our future growth opportunities and our continued investments in sales and solutions. Year-to-date, we have added 8 new sales resources and our current plans call for the team size to expand over the next few quarters. Recent hiring has focused on strategic offerings and more consultative skills, including transformation, digital technology enablement and new operating models. We are also adding vertically focused practice leaders in key geographies, bringing senior-level domain and market focus, especially for large deals and strategic client relationships. These client-facing investments are expected to enable WNS to further drive innovation and co-creation.

In conclusion, our business momentum remains strong, as evidenced by our revenue growth and expanding sales pipeline. Today, WNS remains well positioned to capitalize on the healthy and rapidly evolving BPM demand environment. However, we also understand that we must continue to invest in our business to ensure our ability to meet the needs of our clients over the next 10 years. This period or this decade will require increased deployment of both proprietary and third-party technology in all our solutions and the reskilling of our global employee base. It will also necessitate ongoing investments in consulting and transformation, advanced analytics and even deeper domain expertise to ensure we are able to work closely with our clients to co-create customized, differentiated business models.

The WNS focus remains on the long-term BPM opportunity and on superior execution, which will enable value creation 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 the guidance. Sanjay?

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

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Thank you, Keshav. In the fiscal third quarter, WNS' net revenue came in at $228.2 million, up 16.5% from $195.9 million posted in the same quarter of last year and up 16.1% on a constant currency basis. By vertical, revenue growth was broad-based with Travel, Consulting and Professional Services, Utilities and Healthcare, each growing more than 15% year-over-year. With respect to our service offerings, revenue growth versus the prior year was driven by strength in finance and accounting, customer interaction services and industry-specific BPM, which all grew 16% or more. Sequentially, net revenue increased by 3.4% on a reported basis and 3% on a constant currency basis.

Quarter-over-quarter, revenue performance was marked by healthy growth with both new and existing clients and by favorable currency movements, net of hedging.

In the third quarter, WNS recorded approximately $4 million of short-term nonrecurring revenue, which was booked at margins above company average. The majority of this revenue is related to volume spikes with clients in our Travel and Insurance verticals.

Adjusted operating margin in quarter 3 was 22.8% as compared to 23% reported in the same quarter of fiscal 2019 and 23.5% last quarter. Year-over-year, adjusted operating margin decreased as a result of the impact of our annual wage increases and unfavorable currency movements, net of hedging. These headwinds more than offset favorability from the IFRS 16 lease accounting change, improved seat utilization and operating leverage on higher volumes. Sequentially, adjusted operating margin decreased as a result of reduced productivity, including quarter 2 short-term revenue with minimal cost, which more than offset improved seat utilization.

Based on our margin performance year-to-date and current visibility into quarter 4, we now expect full year adjusted operating margin to be in the range of 22.5% to 23%. The company's net other income expense was $0.8 million net expense in the third quarter as compared to $2.8 million of net income reported in quarter 3 of fiscal 2019 and $1.1 million of net expense last quarter. Year-over-year, the variance is attributable to a $3.6 million increase in interest expense resulting from the IFRS 16 lease accounting change. Sequentially, the reduction in the net expense is due to increased interest income driven by higher average cash balances and lower interest expense resulting from scheduled debt repayments.

WNS' effective tax rate for quarter 3 came in at 20%, down from 20.7% last year and down from 20.2% 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 now expect our effective corporate tax rate to be in the range of 20% to 21%. The company's adjusted net income for quarter 3 was $40.9 million compared with $38 million in the same quarter of fiscal 2019 and $40.6 million last quarter.

Adjusted diluted earnings were $0.80 per share in quarter 3 versus $0.73 in the third quarter of last year and $0.79 last quarter. As of December 31, 2019, WNS' balances in cash and investments totaled $280.1 million and the company had $47.5 million of debt. WNS generated $62.5 million of cash from operating activities this quarter and incurred $4.8 million in capital expenditures.

DSO in the third quarter came in at 30 days as compared to 32 days last year and 29 days last quarter.

With respect to other key operating metrics, total headcount at the end of the quarter was 44,011, a sequential increase of more than 1,400 people. Our attrition rate in the third quarter was 26%, down from 28% reported in quarter 3 of last year and down from 32% in the previous quarter. Global billed seat capacity at the end of the third quarter was 34,211 and average billed seat utilization improved to 1.27. The infrastructure built-out planned for quarter 3 is now expected to impact our profit and loss beginning in quarter 4 of this fiscal year.

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 $890 million to $900 million, representing year-over-year revenue growth of 12% to 13%. Our guidance includes $6.5 million of short-term nonrecurring revenue in quarter 4. This amount has been included because it is visible and committed as of today. Revenue guidance assumes an average British pound to U.S. dollar exchange rate of 1.31 for the remainder of fiscal 2020. Excluding exchange rate impacts, revenue guidance represents constant currency growth of 13% to 14%, all of which is organic. We currently have over 99% visibility to the midpoint of the revenue range, consistent with January guidance in prior years. Adjusted net income is expected to be in the range of $158 million to $162 million based on a INR 71 to U.S. dollar exchange rate for the remainder of fiscal 2020. This implies adjusted EPS of $3.05 to $3.12, assuming a diluted share count of approximately 51.9 million shares. Full year adjusted 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 continues to expect our requirement for fiscal 2020 to be up to $35 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 we'll take our first question 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 [2]

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Congrats on a very, very strong result. So we've seen a pretty impressive divergence here in growth between your top 20 clients versus the rest of the business. Maybe you can talk a bit about that. Where are we seeing that growth coming in from the non-top 20? And obviously, that bodes well for growth down the road. And then on top of that, we've also seen very strong performance in continental Europe this quarter. Strong performance in Travel and Leisure. Any color there will be helpful.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [3]

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Sure. So let me take that Moshe. I think as an organization, we're pretty happy with the breadth and the depth of the improvement that we've seen. When you look at our customer concentration levels, despite putting up really healthy growth, not only in the quarter, but on a year-to-date basis, we have not seen a significant change in the client concentration. As you mentioned, as a matter of fact, our top 3 -- our top 10 clients year-to-date are 43% of revenue compared to 45% of revenue a year ago. So what we're actually starting to see is the maturation of some of the relationships that we've been able to put in place over the last couple of years, and this is obviously what we hope to continue to see in the future. And Keshav in his prepared remarks talked about the farming opportunity here at WNS and having 128 clients generating now north of $1 million. This just gives us a bigger pool to fish in. And not all of our relationships, obviously, are going to be $20 million-plus types of relationships, but we're excited about the opportunities with the logos and types of clients and the objectives of those clients that we've been able to add.

Specific to your question about the Travel vertical, we were pretty happy, again, I think, with the Q3 performance. Sequentially, Travel was flat and, typically, this is a down quarter for us in the Travel vertical. That was really a combination of a couple of things, one of it being the short-term volume spikes that we discussed that were $3.7 million in the quarter. Some of that was associated with the Travel vertical. But we also had a few new logos that were added and some good expansion and growth within our existing clients. So really healthy quarter overall for the Travel vertical.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst [4]

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And then just as a follow-up. Given the pipeline strength and the visibility, do you think this is time for maybe an inflection point in terms of your long-term growth objectives down the road?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [5]

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Yes. Sure. Let me take that Moshe...

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [6]

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Keshav -- sorry, go ahead, Dave.

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

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No, I was just going to say, and you can certainly add in here, Keshav, I think when we look at the long-term objectives, obviously, we look at these relationships as things that are going to mature over several years. And the pace at which these relationships mature is not something we have a lot of control over. But what we have seen over the last 10 years in our business, to kind of go back to Keshav's comments about the growth in the sales force and the growth in our business, is a nice, slow, steady improvement in the organic constant currency revenue that we've been able to deliver. So certainly, given the type of business that we have and the fact that it is long term [and layers,] having a true inflection point might be difficult, but to see an opportunity if things continue to progress well for us, to continue to grow at an accelerated rate, is certainly there. And then that's, I think, what we're most excited about.

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Operator [8]

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

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Kyle David Peterson, Needham & Company, LLC, Research Division - Associate [9]

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This is actually Kyle Peterson on for Mayank. Just wanted to touch a little bit on the U.K. Obviously, the pound moved a lot in the quarter, but the year-over-year growth was still very nice. How much of that was currency impact versus -- are you guys seeing anything now the -- there seems to be a little less uncertainty around Brexit. Are you guys seeing any change, either qualitatively or quantitatively, behavior wise with some U.K. clients?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [10]

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Well, I'll take that. I think in terms of just the pipeline, in terms of customer behavior, as we've been saying for some time now, I think our unique value proposition has ensured that we actually haven't seen any negative impact around the uncertainty that people were talking about around Brexit. In fact, we have always said that this would be an opportunity, and we continue to see clients taking decisions, moving ahead and being very excited with our value proposition. So we don't expect the current situation to significantly change. But if at all, it could help some of the bystanders to start accelerating decisions. That's all.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [11]

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And maybe just to add on your first point from an FX perspective, the full year -- the revenue which went up, FX contributed $6 million. We spoke about nonrecurring revenue, which was in this quarter as well as due to the visibility we have for the quarter 4, both put together is $10 million and the balance is from the growth.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [12]

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Yes. And let me just add one thing relative to the U.K. in the third quarter, yes, obviously, pretty pleased with the 12% growth on a year-over-year basis. Interestingly enough, when you decompress that, when you look at the average dollar to pound rate for this quarter, it was just under 1.29, which is actually almost identical to where it was a year ago. So the growth that we delivered this quarter in our U.K. was entirely on a constant currency basis.

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Kyle David Peterson, Needham & Company, LLC, Research Division - Associate [13]

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Okay. That's helpful color. And then just one follow-up on kind of attrition. Had a nice tick down in the summer -- this quarter, guessing at least a portion of that is seasonal, but just wanted to see if there was any update or change you guys are seeing on kind of the war for attracting and retaining talent.

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Gautam Barai, WNS (Holdings) Limited - COO [14]

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Yes, this is Gautam. And what we are seeing in Q3, the attrition rates, it's a historical trend, which we have seen over the past 3 years, where in Q3, the attrition rates are amongst the lowest, [meaning,] more towards the year-end, et cetera. But we're also seeing our ability to attract talent in high-end areas to actually get more increased, and we're able to attract a lot more.

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Operator [15]

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Our next question comes from Justin Donati from Wells Fargo.

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Justin Micahel Donati, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

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In your prepared remarks, you talked about the need for continuing investments for the future. So can you kind of talk about how you plan to kind of balance that with the strong margin performance here this year and how sustainable that is moving forward?

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

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Sure. Let me take a little bit of that, Justin, and then we can kind of have Keshav and Sanjay contribute a little bit. But if you look at what we've been able to do over the last 4 or 5 years, we've always been investing in our business. And we've been able to largely fund that from improvements in our operating margins, from efficiencies, from volume, so on and so forth. Obviously, we have to kind of look and see what the FX rates look like for next year, but we do know that, for example, this year, we had roughly 100 basis points of nonrecurring margin in terms of having short-term revenue with much higher margins and having seat utilization delays throughout the year. But I think when we look at what next year means for us, the plan for WNS is really to continue to invest aggressively, and as Keshav mentioned, in things like transformation, consultative services, advanced analytics, sales, but to largely fund those investments with improving operations. So the plan is, I think, longer term, as we look forward to kind of keep the margins in this 20% to 22% kind of range obviously going to depend on where we sit at the end of the year, what our investment needs are for that specific year and what the FX numbers are. But that's kind of where we're shooting for right now as an organization.

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [18]

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Yes, I think that's very accurate. And from a big picture point of view, what I'd like to say is that the reason we want to continue to make these investments and potentially in some of these new areas is because we see the market opportunity continuing to be very strong for WNS. And we believe that this momentum, therefore, can be continued and not at the cost of margin.

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Justin Micahel Donati, Wells Fargo Securities, LLC, Research Division - Associate Analyst [19]

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Got it. And then can you just talk about what drove the step-up in revenue per employee this quarter and how WNS is moving up the value chain with clients?

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Gautam Barai, WNS (Holdings) Limited - COO [20]

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Yes. This is Gautam. And there are 3 reasons that the revenue per FTE has started going up and in terms of the deal sizes. The first one has been -- as Dave alluded earlier, has been the increase in volumes across some of our clients, both in the Travel and Insurance vertical, and a lot of that revenue came in without additional -- addition of headcount. The second one is a few of our existing as well as new clients, where we have large transformation programs underway, which are linked to milestone-based gain share or outcome-based pricing, we are executing ahead of schedule. And thirdly, earlier than planned go-live of new clients, which we won earlier in the year, allowing us to increase our share of volumes that we manage from them. What we -- what -- as alluded, what we are seeing is an increasing amount of clients that the transformation and automation needs far outweigh the traditional outsourcing models.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [21]

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Yes. And just one word of caution as well, Justin. I think when you look at revenue per employee, looking at a quarter is not always going to give you a healthy picture of our business. That being said, we have been expanding revenue per employee on average a little bit over 2% in the last 3, 4 years. So we do continue to expect more and more technology to be deployed in the services that we provide. As Gautam mentioned, we do expect more outcome- and efficiency-based revenues over time. And this should enable us to continue to drive growth rates that exceed the need for headcount.

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Operator [22]

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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 [23]

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Keshav, I wanted to dig into that -- on that sole source commentary you had in the prepared remarks. Can you give us a sense on how much of the revenue base or the pipeline is sole sourced? And how does that compare to, let's say, 3 years ago? And then what type of uplift may that give you in the operating margin line?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [24]

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Yes. So I'll just give you a high-level comment on the comfort that we are having around the fact that our people now, thanks to the very unique positioning that we have, are able to actually build a lot of comfort with new prospects around actually crafting an entire deal, as a result of which we are the front runners in terms of ensuring that deal is actually won by us. In terms of where that was maybe 3 or 4 years ago, I think there is significant improvement from -- historically. And in terms of overall long-term margins, it'll actually will be salutary for WNS because when we craft these kind of deals, it means that our ability to actually control all the new areas that traditionally the client would have been investing in is very high. So it means it, first of all, allows us to take an end-to-end kind of position where the deal is concerned. We are able to actually plan milestones much better because we are in control of the whole deal. And the third thing is, the investments in terms of some of the new areas that quite often are -- create a little bit of uncertainty if there are multiple players involved are also in our control. So it allows the client to really focus on the kind of outcomes that we need to deliver to them as opposed to the inputs that we are providing. And that -- because of which our way of actually interacting with them, our pricing mechanisms are completely different. And I think, overall, it will be salutary, as you've already seen in the results that we've been delivering over the past few quarters.

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Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [25]

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Okay. Makes sense. And then just looking here, the spike in the [repair payment amount] this quarter, we didn't see the inflection on the Auto Claims side, but I'm just curious if this is any indication that may suggest just broader end-to-end deals in insurance or what may be driving that.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [26]

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Yes. I don't think there's anything -- I'm sorry, go ahead, Gautam.

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Gautam Barai, WNS (Holdings) Limited - COO [27]

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Yes. I would predominantly say this is more about the end-to-end insurance processing deals that we are seeing in that market space, and that's the core reason.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [28]

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Yes, but you're going to see volatility on a quarter-to-quarter basis in this auto claims business. We've seen it for 2 or 3 years now where it spikes up. We've got some additional activities and then the next quarter it peels back. So Gautam is right, the long-term future for us in auto claims is having this service as part of an end-to-end offering. But there's going to be quarter-to-quarter volatility in this segment based on the one-off types of clients and the one-off types of claims management that we're doing in this space.

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Operator [29]

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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 [30]

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Congratulations on the strong quarter. Appreciate the initial comments on how the BPM industry is evolving and WNS has taken steps to change with it. Keshav, let me start with -- and you've discussed this before, this notion of increasingly co-creating solutions with clients. Can you talk a little bit more with regards to -- are there specific industries where that's more prevalent and as you tap into some of these kind of non-traditional demand? How does the margin profile evolve?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [31]

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Okay. So I think the intent, Ashwin, really is to position ourselves with every one of our core verticals as a strategic partner that really operates as an extension of our clients' enterprise; as a partner that can be trusted because we understand their business domains as well, if not better than them, as a partner that has true global experience and has invested very solidly in analytics, technology, great people, new practices, things like that; and also are at the leading edge of going after some of the new offering areas, which quite often clients would find very expensive or disruptive to try and invest in all by themselves. So just step back and look at the situation. Here is a partner coming in offering all of this and, therefore, as the interaction moves towards one which is much more strategic, where we're interacting directly with the C-suite, with the CEO or the CFO and very empowered people, the ability for us to actually understand their business and come up with unique solutions which are created together as opposed to WNS alone forcing a solution, creates far better outcomes and impacts. And I'm sure over the quarters, we have spoken about a number of these examples. I mean, just look at the example of what we created with that large insurance company very recently, the start-up company with the large kind of investment out of the U.K. If you just look at how that was created, the kind of impact that has already been created jointly. Again, I won't say that it's us or the client. It's us jointly, and the client openly goes out and recognizes it. One is, in terms of the milestones that they set out to achieve, they have overachieved already. And as far as WNS being a partner to them, we are already operating at significantly higher kind of achievement percentages than what we had set out for ourselves in our plan as well, which means it's highly salutary. And with the mature kind of verticals, Insurance, Travel, logistics, shipping, all of these, there is ability to introduce these kind of offerings. And then there are some verticals which are probably less mature in the sense that they're still following some of the older models and they're catching up. The ability to introduce these models there would probably take a little longer. And I would say it's an opportunity for longer-term growth. But having said that, wherever we introduce these models and benefit the client, we are also benefiting because not only are we in far better control of the outcomes of operations, but we are also much more in control in terms of helping the client focus just on what they want done in their marketplace and not worrying about how we are delivering it, which means the additional benefit is profitability for us could be significantly higher.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [32]

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Yes. And I think at the end of the day, Ashwin -- at the end of the day, to Keshav's point, this is a mindset and a culture issue. I mean the fact that we're going in and actually trying to work with the client to create a solution that helps them specifically address their needs, I think, is somewhat unique in the industry. I think the tendency tends to be to want to sell a standard process or a standard off-the-shelf solution. And honestly, that doesn't tend to work for a lot of clients. So what we're seeing is that having the domain expertise, having the flexibility, having the innovation is allowing us to separate ourselves in the marketplace.

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Gautam Barai, WNS (Holdings) Limited - COO [33]

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Also, just to add, [given our -- the] understanding of servicing digital companies and understanding digital models, our co-creation from hyper-growth digital companies and addition of those as a client also adds a lot of [color.]

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [34]

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Understood, understood. And then on the quarter, if I think about it, volume spikes and FX aside, there's also outperformance versus your set expectations in addition to that. If you could comment on what led to that? And would it be a safe assumption to say that that's a faster ramp perhaps of deals already signed that's going to also benefit you as you head into fiscal '21? Would that be a fair assumption?

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [35]

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Yes. So Ashwin, it's a fair assumption to make. Definitely, other than the volume spike, it's farming as well as the new logos what we have added and, accordingly, some of the quicker ramp, even Keshav alluded, the large insurance, the client what we added and some of the outcome we are able to provide, it's just helping into the overall ramp. Definitely, the growth from the new logos as well as the existing ramp is going to help us from a next year perspective and -- but we'll have to just wait and watch, that even the quarter 4 is there, that how it shapes up. But we are very -- we expect really a good year based on the pipeline what we have today.

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Operator [36]

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Our next 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 [37]

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Keshav, you mentioned the pipeline is 50% larger today versus a year ago. So can you give us a little more detail on how that pipeline may have changed the nature of these deals versus several years ago?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [38]

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Yes. Yes, Maggie. So yes, absolutely. I think what I will say is, at this point in time, we are very excited about, first and foremost, our performance, our positioning as a company based on how we have invested and executed as well as the pipeline itself. And if you fast forward from 3 years ago, I will say that, first and foremost, most of this change in terms of the pipeline is being driven now by transformational kind of deals, not the traditional kind of deals that we have been known to participated in the past. So much more transformational in nature, much more end-to-end, where the entire gamut of domain vertical offerings and stitching together that, along with digital services and analytics are being seen.

The second is, in a number of these cases, these are completely new kind of deals, where while we come in and help the client with co-creating a solution, the outcome that is being proposed and planned for has traditionally not been the kind of models that WNS has actually done maybe a few years ago, but we've got so used to doing it now that it has become a par for the course at this point in time. And again, I would say that the focus and the delivery has been -- the execution has ensured that this pipeline is very broad-based across all our core verticals, very broad-based across all geographies. And it's also, in many cases, being driven by some of our core horizontal offerings. But again, I must say, at this point in time, we are getting far more comfortable around the fact that the deals are -- being driven by WNS are not around just simple efficiency gains or cost reduction themes, which were the traditional BPM kind of models. Today, it is much more about our ability to transform our clients' ecosystems, environments and help them with their kind of strategic outcomes. And that is actually driving a completely different health in the sales pipeline.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [39]

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I enjoyed the commentary on the sales force. I'm curious how the specialty sales force is integrated within kind of the existing sales teams and how they're participating in pitches? Are they on every client team and at every pitch, just given that many of these specialty areas like analytics that you're just talking about are now embedded in the majority of your engagements?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [40]

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Yes, I think that's an interesting question. I think one of the most exciting things that is happening at the company today is something that we called WNS Education. I think it's what we're doing around the whole skilling programs and the integration of new talent. So one is, how are we, first of all, making sure that the new people coming in are, first of all, becoming very relevant in each one of the new-age kind of deals. Gautam spoke about the Internet areas. You need a very different breed of salesperson to attack those deals upfront. But at the same time, we have very smart people who are available across the globe and who've done extremely well for us, and what we needed to do was to keep reskilling and upskilling them in terms of their ability to integrate into some of the new areas around technology, domain, analytics and things like that or maybe the new technology areas. And that's where WNS Education comes into being. So we're constantly doing programs to upskill and reskill our existing people. We are constantly making sure that the new talent that's coming in with a completely new capability are interacting closely with this bunch, and they're hunting together in order to make sure that the overall impact from WNS is the highest.

And I think a true test is when we actually interact with our prospects and our clients, including our existing clients, the feedback I consistently now receive is that the quality of interactions that we are having with your teams is completely different because, today, we are having your teams coming in and talking to us like advisers, strategic advisers, painting a picture of how we should actually go after new areas within our companies. And then at the back end, there's this other bunch of people who are also talking about all the wins that were achieved by WNS for them in the past and how some of that can then be integrated into some of the new offering areas. So I think a combination of all of this and the investment we've made in skilling and educating our folks really is transformational for the company.

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Operator [41]

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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 [42]

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Great job. I guess my first question, just what's been interesting, your FTE-based revenue growth, it was over 20% this quarter. And it seems like that just keeps accelerating. And 5 years ago, we might have said, "Oh, we'd rather see the transaction-based or non-FTE-based grow." But what's actually seeming like it's happening is that's accelerating, at the same time, margins are lifting and revenue growth is as strong as ever. So maybe you could talk a little bit about that dynamic because it all seems just very positive.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [43]

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Yes, I think it is, Dave. I mean as we've talked about on the last couple of calls and certainly over the last couple of years, one of the things we still continue to see is that most new clients want to start their relationships in an FTE-based model. So from our perspective, if we don't have a mix of headcount-based models, of transaction-based models, of outcome-based models, we may have a bottleneck to growth down the road. Certainly, we believe, over time, you're going to see this industry shift heavily towards transaction and outcome. Clients aren't going to want to pay to put bodies on processes, they're only going to want to pay for results and for outcomes. So this is certainly the future. But we also understand, as Keshav mentioned, that clients are in various stages of their journey. And for every existing client that we have that's comfortable giving up control of their process and moving to a transaction or outcome-based model where WNS is held accountable for results, we have a new set of clients coming in on an FTE basis who are still making sure that we're capable of delivering on the promises that we've presented to them during the sales process. So I think having this balance, having this healthy distribution across is extremely important to the business when we look at the long-term growth opportunity.

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David John Koning, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [44]

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Great, great. Okay. And I guess my follow-up. Just -- you've talked a little bit about how Travel was really strong, and some wins and a little bit of onetime revenue, but is the backdrop of Travel volumes is, in general, good too? Because I know the last quarter or two, just the travel industry, I think there was a little pressure, a little uncertainty with Expedia, et cetera, but has that kind of rebounded a little bit across of the travel just industry?

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Gautam Barai, WNS (Holdings) Limited - COO [45]

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Yes, it has. So besides the clients that you named where we are seeing an increase in volumes, what has also been prevalent in the Travel vertical has been addition of new clients, which have been broad-based across OTA, airlines and other lines of business that has also started increasing the volume of that particular vertical.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [46]

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Yes. As Gautam said, Dave, we're pretty happy with the fact that this wasn't just increased volume with some existing clients or a short-term spike, this is -- there's also some good seeds that have been planted here for longer-term growth. And it's not just the quarter. If you look at the Travel vertical on a year-to-date basis, it's up over 20%. So while we're certainly going to see volatility, and we certainly can, in any given quarter, be a little bit more exposed to the volume volatilities with some of our larger clients, the backdrop is some of the challenges and some of the pressures in the travel and the airline industry are the kinds of things that tend to push clients towards process management, process outsourcing services. So a little bit of a double-edged sword there.

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Operator [47]

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Our next question comes from Korey Marcello from Deutsche Bank.

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Korey A. Marcello, Deutsche Bank AG, Research Division - Research Analyst [48]

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I just had a couple of clarifications. The pipeline comment being 50% larger than last year, is that directly comparable to the comment I believe you guys made this time last year about average ACV being up 35% year-over-year? Is that directly comparable? Because a pretty nice acceleration there, I guess.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [49]

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No, that's really -- it's a slightly different view of the pipeline. Certainly, the fact that there are larger deals in there helps contribute to an overall larger pipeline, but this metric that we've provided you or this statistic that we've provided you this quarter was just to give you a sense of what the overall pipeline in total looks like. So that encompasses not only larger TCV/ACV, but also encompasses a larger number of deals as well.

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [50]

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But Korey, having said that, our comfort and confidence in our performance, positioning and our pipeline is very strong.

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Korey A. Marcello, Deutsche Bank AG, Research Division - Research Analyst [51]

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Yes, that makes sense. Just as a follow-up, another clarification. On the short-term revenue, I think you said that was mainly booked in Travel. And then where do you expect to record the short-term revenue for fourth quarter? And then I guess, just as a last one, any update on the M&A pipeline? We haven't heard anything there in a while.

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [52]

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Yes, for the fourth quarter, the short-term revenue, what's already baked into the guidance, again, it's primarily -- is coming from Insurance, Travel and some of the other verticals because it's a combination of the budget flush, specifically from analytics, Value Edge and some of the short-term projects around. That also includes some of the efficiency and the productivity settlement, but it's going to be primarily in the Insurance and Travel and some other verticals. Also from an M&A pipeline perspective, as we have always spoken about, from a capital allocation, it's always towards a capability acquisition. It's a matter of the right asset, right time and the right valuation, but continuously progress is there, and we are pretty much satisfied with the pipeline what we have today.

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Operator [53]

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Our next question comes from Joseph Foresi from Cantor Fitzgerald.

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Daniel J. Reagan, Cantor Fitzgerald & Co., Research Division - Research Analyst [54]

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This is Daniel Reagan on for Joe. I have a more macro question. So as we begin the calendar year 2020, I was hoping you could provide more color on what you're seeing from clients in terms of spend expectations in the BPO space as a whole.

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

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Well, early for us because in terms of overall guidance, we give guidance in April. But let me just give you a sense of why we are excited about the market generally. We actually believe that the focus now is much more on transformation. This is the age of transformation. Clients are getting much more excited with working with partners who can help them with new thinking, with helping transform their business models. And I think based on the investments we've made as well as some of the new areas where we have led the market now, I think there's a lot of excitement in terms of clients wanting to work with us. So I will say that there's a significant shift in terms of clients not just wanting cost reduction anymore, not just looking at efficiency gains anymore, but really looking at exciting new models to survive, sustain and manage the disruption that's out there. And in that game, I think WNS has come out as one of the most credible players that can help them with that transition. So transformation is the key, and that's where I think we will continue to lead and will create more excitement going forward.

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Daniel J. Reagan, Cantor Fitzgerald & Co., Research Division - Research Analyst [56]

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Perfect. And then I just wanted to ask. So over the years, the structural level of margins have increased. I'm wondering for the fiscal year '20, what would -- what factors would put you at the high end of your margin guidance?

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [57]

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I think -- yes, I think, at this point, Dan, it's really going to be a function of FX. I mean the guidance that Sanjay provided for this fiscal year is 22.5% to 23%. So we're in a pretty narrow range at this point. Really, for us to go outside of that band, given where we are today, given only one quarter left in the fiscal year, probably not much can do that. If there's one item that could make that number move, it would probably be the FX.

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Operator [58]

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Our next question comes from Sam England from Berenberg.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [59]

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Just a couple for me. The first one, I just wondered how much bigger you think the sales team needs to get in the future. And are there any geographies or markets where you're still underweight in terms of salespeople?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [60]

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Well, actually, that's an interesting question. I don't think we calibrate based on the numbers. I think for us, it's more a case of constantly looking at the productivity of the salespeople while also focusing a lot on the new age skills that are required for sales. Again, it's more a function of how underpenetrated the market is, the nature of how the demand is being seen out there, the fact that clients are facing huge amounts of disruption out there in the marketplace and, therefore, their need for a very credible strategic partner that can help them manage this transition. So as long as that demand continues to be there, and we are at the forefront of being the company that can help them, we'll continue investing in many areas, including sales. But at this point in time to say -- to actually put a number for sales people is not something that we have planned for, but we'll continue to invest wherever it makes sense, including in sales.

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David Mackey, WNS (Holdings) Limited - Corporate Senior VP of Finance & Head of IR [61]

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Yes. And I think important to understand that we are investing ahead of the curve. We know it takes a year to, in some cases, 2 years to make a salesperson productive. So a lot of what we're doing here is laying the groundwork for continued revenue growth in the coming years. But that being said, I think, to Keshav's point, when we're looking at where we're hiring, geographically, it's broad-based. But as he mentioned in his prepared remarks, certainly, the focus from a hiring perspective is on having additional capabilities across the organization, specifically in consultative skills, transformation skills, advanced analytics skills, so -- automation and technology as well. These are the areas that we need to continue to augment the teams with and continue to add the right types of people to drive long-term growth over the next 5 to 10 years.

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Samuel England, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [62]

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Great. The next one was just around the wage increases and wage inflation. I just wondered whether that was being driven by general market wage inflation or whether it's a reflection of a slightly different hiring mix, more promotions than you'd expected. What fed into that wage inflation?

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Sanjay Puria, WNS (Holdings) Limited - Group CFO [63]

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So right now, we expect this to be the average general market-driven. We are not expecting anything unusual, including the promotion and other stuff.

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Operator [64]

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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 [65]

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Yes, Keshav, I'd be curious, what are the top 1 or 2 things you say -- that you'd say you hear from clients and prospects on -- on how your sales force differs from your largest competitors?

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Keshav R. Murugesh, WNS (Holdings) Limited - Group CEO & Director [66]

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I think the first is their understanding of their traditional business domains, the business that our clients belong to, and the complex nuances that those businesses are going through. I think that's the biggest appreciation that our prospects and our clients have for our salespeople. The second is the fact that they understand, listen and solve their problems as opposed to just giving them long-winded lectures on what is the art of the possible. The important thing is they really get down to solving a problem and giving them whatever outcomes are required fairly quickly. And I can tell you, in this era of disruption where timing matters so much, having people who can understand domain, who can understand a business problem, who can solve it and who can also integrate all the new technologies that are required and future-proof them are in significant demand, and they are premium. And I think we have a lot of those people essentially because we invested in those kinds of people, and we continuously invest in them through our internal education programs.

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Operator [67]

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At this time, we have no further questions in the queue. This will conclude today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.