Keshav Murugesh - CEO Sanjay Puria - CFO Ron Gillette - COO David Mackey - Corporate SVP, Finance and Head, IR.

Mayank Tandon - Needham & Company Edward Caso - Wells Fargo Anil Doradla - William Blair & Co. Ashwin Shirvaikar - Citibank Brian Kinstlinger - Maxim Group Frank Atkins - SunTrust Robinson Humphrey Joseph Foresi - Cantor Fitzgerald Joseph Vafi - Loop Capital Puneet Jain - JPMorgan Bryan Bergin - Cowen & Co. Vincent Colicchio - Barrington Research.

Good morning, and welcome to the WNS Holdings’ Fiscal 2017 Third Quarter Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, we will conduct a question-and-answer session, and instructions for how to ask a question will follow at that time.

Now, I would like to turn the call over to David Mackey, WNS’s Corporate Senior Vice President of Finance and Head of Investor Relations.

David?.

Thank you, and welcome to our fiscal 2017 third quarter earnings call. With me today on the call, I have WNS’s CEO, Keshav Murugesh; WNS’s CFO, Sanjay Puria; and our COO, Ron Gillette. A press release detailing our financial results was issued earlier today.

This release is also available on the Investor Relations section of our Web site at www.wns.com. Today’s remarks will focus on the results for the fiscal third quarter ended December 31, 2016. 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 Web site. During this call, management will reference certain non-GAAP financial measures, which we believe provides 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 margins excluding amortization of intangible assets and share-based compensation.

Adjusted net income or ANI is defined as profit excluding amortization of intangible assets, share-based compensation and associated taxes. These terms will be used throughout the call. I would now like to turn the call over to WNS’s CEO, Keshav Murugesh.

Keshav?.

Thank you, David, and good morning, everyone. WNS is pleased with our fiscal third quarter, financial and operating performance posting solid constant currency revenue growth, stable margins and healthy cash flow. Q3 net revenue came in at $139.8 million representing a year-over-year increase of 2.9% on a reported basis and 11.4% constant currency.

Sequentially, reported revenue was down 2.7% or 0.6% on a constant currency basis. As we’ve reviewed on last quarter’s earnings call, Q3 sequential revenue growth was negatively impacted by depreciation in the British pound, projects which ended in the second quarter and seasonality in our travel vertical.

In the third quarter, WNS added seven new clients, expanded six relationships and renewed 16 contracts. Our business momentum, including the deal pipeline, contract signings and new project ramps remains broad-based and healthy, and while we remain vigilant regarding potential impacts to our business from Brexit and the U.S.

elections, to-date we have not seen these events altering our clients’ strategic outsourcing plans. In addition to solid operating and financial performance, we continue to make progress on our capital allocation programs.

In the third quarter, we repurchased over 1 million shares of stock and we have now bought back a total of 2.2 million shares in fiscal 2017. This represents over 4% of WNS’s shares outstanding at the beginning of the fiscal year. The other key component of our capital allocation plan which we have been discussing is tuck-in mergers and acquisitions.

Over the past 18 months, we have developed a robust pipeline of acquisition opportunities and have been selectively looking for strategic fits that enhance our capabilities and meet our financial objectives. Last week, WNS announced the acquisition of Denali Sourcing Services, a leading provider of strategic procurement BPM solutions.

Denali specializes in high-value, comprehensive Source-to-Contract procurement solutions including Category Management, Strategic Sourcing, Contract Management, Supply Management and Spend Analytics. In addition, the company has also developed proprietary smart technology platforms which deliver Spend Analytics and track client savings.

Today, Denali manages over $30 billion in spend on behalf of its clients including several of the world’s premier brands and high-growth digital businesses. According to industry analysts, the global BP of procurement market is estimated to be approximately $2.5 billion in size and growing between 11% and 15% annually.

Most importantly, the acquisition is highly complementary to our existing F&A capabilities filling a gap in our existing procurement service offerings. Together, we are now able to offer true end-to-end Source-to-Pay solutions to service the procurement marketplace.

The transaction also meets several key financial objectives including high growth, high margin, quickly accretive to earnings and fairly valued. In addition, revenues are over 90% recurring in nature; over 95% U.S.-based and significant opportunities exists for cross-selling of services.

Having worked with Denali as a partner for the past three years, we have firsthand knowledge of the strategic capabilities they bring to the table. We are confident in our ability to quickly and successfully integrate its talented team into the WNS family and take our combined offerings to the broader BMP market.

In fact, industry analysts have already responded positively to the impact of this acquisition on our finance and accompanying capability and positioning. Sanjay will provide you with additional details of the transaction in his prepared remarks.

I would also like to share with you today some of the progress we are making in both creating new offerings and accelerating traction in our research and analytics business.

This has been a focused area of investment for WNS over the past few years and it is exciting to see some of our new technology-enabled analytics solutions generating increased client interest.

One new offering we just recently brought to market is our social media analytics platform which caters to the digital social space and helps companies track, proactively measure and manage their social media brand equity.

The platform combines deep domain expertise and machine-leaning algorithms to help companies analyze and understand customer issues and thereby driven an improved end customer experience. I’m excited to say that this offering is getting a lot of attention and we have recently won our first two client engagements.

Another newly created analytics solution from WNS is called brand [indiscernible]. Initially, [indiscernible] CPG vertical, this online visualization application enables companies to create a holistic view of their brand by collecting data from disparate sources including market research, shipments, points of sale and panels.

In combination with our recent acquisition of Value Edge, we are excited with the progress we are making in deploying domain-led technology-enabled analytic solutions for the business process management marketplace.

These new offerings are helping WNS improve our own competitive positioning and are contributing to the solid growth in our research and analytics segment. Year-to-date, R&A has grown 13% on a reported basis and 19% constant currency. In our press release issued earlier today, WNS updated our full year guidance for fiscal 2017.

We currently expect revenue to be in the range of $564 million to $568 million representing top line growth of 6% to 7%. Excluding the impacts of currency and hedging, guidance reflects constant currency revenue growth of 13% to 14%. Visibility to the midpoint of the revenue has increased to over 99% consistent with January guidance in previous years.

Adjusted net income for fiscal 2017 is expected to be in the range of $90 million to $92 million or $1.72 to $1.76 per adjusted diluted share. To summarize, we believe WNS is effectively leveraging our domain-led approach to BPM to create differentiation in the marketplace.

In combination with our expanding capabilities in analytics, automation and technology and our other high-value niche offerings, we believe the company is well positioned to help make our clients more competitive.

WNS is executing well on our strategic plans, delivering industry-leading financial performance and putting our balance sheet to work with a goal of creating long-term value for our clients, shareholders and employees. I would now like to turn the call over to Sanjay Puria, our CFO, to discuss our financials.

Sanjay?.

Thank you, Keshav. With respect to our third quarter financials, net revenue came in at $139.8 million, up 2.9% from $135.9 million posted in the same quarter of last year and up 11.4% on a constant currency basis. Year-over-year, quarter three revenue was pressured by 18% depreciation in the British pound against the U.S. dollar.

By vertical, revenue growth was broad-based with the healthcare, shipping and logistics, retail/CPG and travel verticals each growing more than 10% year-over-year.

With respect to our service offering, revenue growth versus the prior year was driven by research and analytics, technology services, finance and accounting, and high-end customer interaction services. Sequentially, net revenue was down 2.7% or 0.6% on a constant currency basis.

As Keshav mentioned, quarter-over-quarter, revenue growth was adversely impacted by currency headwinds, net of hedging, projects which ended in quarter two and seasonality in our travel vertical. Adjusted operating margin in quarter three was 21.3% as compared to 22.1% reported in the same quarter of fiscal 2016 and 19.8% last quarter.

On a year-over-year basis, adjusted operating margin decreased due to the impact of our annual wage increases and currency movement, net of hedging.

This headwind was partially offset by reduced compensation costs associated with the India Payment of Bonus Act resulting from a one-time retroactive charge in quarter three of last year and operating leverage on higher volumes. Sequentially, adjusted operating margin increased as a result of hedging gains, net of currency and improved productivity.

These benefits were partially offset by our annual wage increases and a slight reduction in seat utilization. The company’s other income was $2.2 million in the third quarter, up from $1.9 million reported in quarter three of fiscal 2016 and $2.1 million last quarter.

The variance in interest income both year-over-year and quarter-over-quarter reflects the changes in our cash balances and effective interest rates on investments. WNS’s effective tax rate in the third quarter was 21.4%, down from 26% last year and 27.7% in the previous quarter.

Quarter three taxes include a one-time benefit of approximately $1 million resulting from a delivery location being profitable. Other changes in tax rate are primarily due to the mix of profits between geographies.

The company’s adjusted net income for quarter three was $25.2 million compared with $23.6 million in the same quarter of fiscal 2016 and $22 million last quarter. Adjusted diluted earnings were $0.49 per share in quarter three versus $0.45 in the third quarter of last year and $0.42 last quarter.

As of December 31, 2016, WNS balances in cash and investment totaled $152.6 million and the company had no debt. WNS generated $25.8 million of cash from operating activities this quarter and free cash flow of $22.4 million after accounting for $3.4 million in capital expenditures.

The company also repurchased 154,556 shares of stock in quarter three at an average price of $28 per share totaling $29.5 million. DSO in the third quarter came in at 30 days versus 28 days reported in quarter three of last year and 30 days reported last quarter.

With respect to other key operating metrics, our total headcount at the end of the quarter was 32,184. Our attrition rate in the third quarter was 32% as compared to 30% reported in quarter three of last year and 35% in the previous quarter.

Global billed seat capacity at the end of the third quarter was 27,142 and average billed seat utilization was 1.18. We expect the seat utilization metric will often fluctuate quarter-to-quarter based on facility build out requirement and hiring cycles.

Regarding our recently announced acquisition of Denali, I would like to provide you with a few details of the deal. Cash consideration from the acquisition is $40 million with adjustment for cash and working capital. We will fund this transaction with long-term debt at an interest rate of approximately 3%.

Denali currently employs over 200 cost and procurement professionals with the majority of the resources and delivery based in the U.S. Our updated guidance includes $3 million of revenue from Denali and the acquisition is expected to be slightly accretive to earnings in fiscal 2017 including transactions, integration and financing costs.

In our press release issued earlier today, WNS provided updated guidance for fiscal 2017. Based on the company’s current visibility levels, we expect net revenue to be in the range of $564 million to $568 million representing year-over-year revenue growth of 6% to 7%. Our updated guidance assumes an average British pound to U.S.

dollar exchange rate of 1.24 for the remainder of fiscal 2017. Excluding exchange rate impacts, revenue guidance represents constant currency growth of 13% to 14%. We currently have over 99% visibility to the midpoint of the revenue range consistent with January guidance in prior year.

Adjusted net income is expected to be in the range of $90 million to $92 million based on INR68 to U.S. dollar exchange rate for the remainder of fiscal 2017. This implies adjusted EPS of $1.72 to $1.76 assuming a diluted share count of approximately 52.4 million shares.

With respect to capital expenditures, WNS anticipates our requirement for fiscal 2017 to be approximately $25 million. We will now open up the call for questions.

Operator?.

[Operator Instructions]. Our first question comes from Mayank Tandon with Needham & Company. You may begin..

Thank you. Good morning.

Keshav, I had a question regarding just from a demand perspective if you could comment on where you are with some of these large deals that you’ve won over the past 12 to 18 months in terms of them hitting their sweet spot in year two and year three, and what does that mean for growth potential in '18 and '19 and just in terms of can you see acceleration versus what you’ve delivered in '17, or is that where you think growth stabilizes at current levels?.

Yes, thank you, Mayank.

So actually we’re quite excited about not just the deals that we’ve won over the past 18 months but also how some of those deals are getting positioned from an expansion point of view as we continue to see excitement with some of these clients as they visit our different geographies, understand even more about our capabilities and are therefore looking at newer areas that are now entering the pipeline.

So I would say at this point in time we are very well positioned in terms of the pipeline itself with some of these clients. Whatever we expected to happen in terms of revenue has started coming in.

In the case of some of the deals that we won over the past one or two quarters, we said that these are large deals and therefore the clients were actually spending time doing detailed assessments. We expect that some of the revenues will start coming in over the next few quarters.

Definitely augurs [ph] very well for the next two to three years but I think I just want to end by once again saying that in addition to the scope that they had signed off on earlier, we’re actually seeing added kind of interest in new areas and some of it driven also by some of the interesting acquisitions that we have made as well as some of the new offerings and capabilities that we have created, so very positive momentum..

Okay, that’s very helpful.

But just to be clear, I wanted to sort of get a better sense of the – I know you’re not giving guidance for '18 rather but just in terms of the sustainability of growth, can you sustain that low-double-digit growth level based on your deal wins and the pipeline conversion that you anticipate going forward?.

Yes, so at this point in time all things remain the same and subject to our providing guidance later, I see no reason why we should step off from the target that you spoke about..

Great. And then one final question on currency.

Just based on where the rate stand today, how should we think about currency headwinds in fiscal '18 in terms of revenue and also if you could comment on what your expectations are in terms of FX gains and losses as we move forward in the back half of this year and then into next year?.

Sure. So let me take that, Mayank. Obviously what we’ve seen over the last quarter or so is a pretty significant depreciation in the British pound coming out of Brexit in June.

When you look at the year-over-year implications for fiscal '17 versus fiscal '18, obviously we’re going to be looking at a headwind on a year-over-year basis although not as significant as one would expect.

If the British pound does stay where it is today at 1.24, which would give us about a half a year at that rate, we’re going to average right around 1.31 for the full year of this year, which means on a year-over-year basis holding the pound steady at 1.24 for next year, you’re looking at a little over 4% depreciation.

As it stands today, if nothing else changes in our business from a currency perspective on the top line, you’re looking at about a 2% headwind on a year-over-year basis. However, from a bottom line perspective, the offset to that is the fact that the Indian rupee has depreciated pretty significantly on a year-over-year basis.

So net result on the bottom line is there’s probably not much of an impact..

Sure, okay.

And just on the FX gains and losses, your expectations for the remainder of – for the fourth quarter of this year?.

I’ll take that. Where we are today based on the currency of the pound of 1.24 as well as the guidance what we had given for the fourth quarter is on the 1.24, we don’t expect any major movement from a FX perspective, as we have already hedged for the year and it’s not going to further impact the quarter four of the FX net.

Having said that, we also always depend on where the contracts on which date gets settled, because the currency is so volatile. So subject to those movements it will depend how much it gets settled and what date.

But we don’t expect this significant gain what we have got in quarter three, because there was an additional 1 million almost gain in quarter three because of the movement from quarter two to quarter three, so at least $1 million lower what we expect where we are today on quarter four..

Got it, thanks. Great job, guys..

Thanks, Mayank..

Thank you, Mayank..

Thank you. Our next question is from Edward Caso with Wells Fargo. You may begin..

Hi. Good morning, good evening.

Can you talk a little bit about the upcoming union budget? Is there anything in there that we should be keeping tabs on that might positively or negatively affect WNS?.

Ed, thanks for the question. We’ll have to wait and see what actually comes out in that budget.

So at this point in time I think the various industry bodies have provided inputs to the union government as is normally the case every year, but we’ll actually have to wait to see what the budget says before we decide what are the impacts to the industry or to the company..

And maybe following up a little bit on Mayank’s question, trying to get a sense – you’re saying that your clients continue to move forward but are they actually making decisions here or are they sort of holding off making the sort of the final go decisions on both new work and extensions and so forth?.

Well, actually as we review the business we have not seen clients actually hold back in terms of their decisions. We have actually seen strong momentum in terms of the pipeline as well as the way decisions are coming through.

And like I said, in fact we’re actually seeing in the cases of some of the deals that we signed enhanced kind of discussions on new areas of expansion.

So I will say that from a WNS perspective, we are continuing to see things as business as usual and very positive and I think that’s also resulting in these minor little upgrades in terms of the top line that we’re announcing..

Have you – again another trump question and I know it’s early.

Any thoughts here on the Ryan [ph] tax plans that may impact you positively or negatively?.

Ed, again, we’ll have to just wait to see what announcements are actually made. I think from our point of view we are quite comfortable with the fact that business process management is such a strategic tool companies use to make business impact that CEOs on the other side will continue to leverage this tool longer term.

So in terms of specific actions that could be announced, maybe announced, that is being speculated about in the media, I would prefer to just wait and see what actually comes out though I’ll not say at this point in time most of the reading that is coming out appears to be more impacting the IT services sector and less of the business process management side..

Great, thank you. Thanks for the good news..

Thanks, Ed..

Thank you..

Thank you. Our next question comes from Anil Doradla with William Blair. You may begin..

Hi. Good morning, good evening, guys. Just a couple of questions. So when I step back and look at your operating margins kind of the 1918, 1920 [ph] or somewhere there. Can you help us understand what would be the normalized operating margins? And this is basically from a longer-term approach.

Does this business lend itself to be a 23%, 24% operating margins as the mix shifts or do you think we’ve reached the normalized operating margins?.

Anil, you have seen that for this year as well as for the few quarters, the operating margin is somewhere around 19% to 20%. And as we have already earlier also mentioned that from a long-term directional perspective, it’s a high-teen margin business.

Even if excluding the FX gain, it’s always in the range of the 17% to 18% on a constant currency basis, because we continuously keep on investing into our business with new offerings. What even Keshav spoke about that it’s a digitalization technology, robotics and other stuff.

So directionally we believe it’s a on a constant currency with a high-teen margin business..

Okay, great. And Keshav, you talked about being very vigilant post-U.S. elections and Brexit, but on the other hand based on your commentary over the last couple of minutes, you said that you’re not really seeing anything much. You believe IT would be more impacted than BPO.

Can you share with us what due diligence that you guys have done over this very short time to make whatever conclusions because there’s so little information? Have you spoken with your auditors, tax consultants? Can you help us understand how deep you’ve gone to understand the pros and cons of these issues?.

Look, obviously I think the ultimate test is really behavior of prospects and our clients, Anil.

And so if you just look at – the way the experience we are having is very solid kind of travel and visits from prospects and clients, maintaining rigor around dates as well as meetings as well as decision taking on some of the businesses that we’ve been talking about over the past few quarters or few months or whatever.

So I won’t say that’s the most important indication of what I’m saying here. And as I talk to my sales people, as I talk to my client partners, they seem really upbeat in terms of the impact that they are seeing in terms of the strategic messages from WNS going into our client side.

Now having said that, we also do have in our interactions with the analyst community, with the advisor community and the tax folks and let me tell you from their perspective they are also waiting to see, they are also waiting to read the tea leaves at this point in time.

So at this point in time we are not basing any of our analyses based on any of the speculation but more on what we are actually seeing in terms of decisions, excitement and positive momentum on the ground..

Okay. And one final question, if you don’t mind me sneaking in. You said that the IT guys will be more impacted than the BPO guys.

Why do you think so?.

No, I didn’t say that. I said all the media attention appears to be around impacts that the IT services guys could have, because when you look at all the pronouncements and some of the new steps that have been taken, it’s all around H-1B costs, around H-1B Visa issue and things like that.

And the reality of our business is we create jobs in all these countries, we create onshore, near-shore kind of delivery centers and we are dependent at all on these visas. So from that perspective I think for us it is going to continue to be decisions taken by CXOs on the other side.

And for the rest we’ll have to just wait to see if there are any announcements that actually come out that could impact us before we comment on them..

Great. Thanks a lot. Great job and looking forward for fiscal '18..

Thank you..

Thanks, Anil..

Our next question comes from Ashwin Shirvaikar with Citibank. You may begin..

Thank you. Let me add my congratulations on this quarter..

Thank you, Ashwin..

So I guess what many of the questions asked so far I think are trying to get is scenario analysis and what your clients are saying to you with regards to Brexit, with regards to U.S. election impact and so on. From a cautionary standpoint, I just want to ask whether your own planning assumptions are changing.

Are you giving yourself some more wiggle room, some more playing room as you plan for fiscal '18?.

That’s an excellent question, Ashwin, considering that the team has actually come out recently from a strategic planning session and let me tell us for us it’s business as usual. We are not giving ourselves wiggle room or potential to give excuses.

At this point in time what we are looking at and what we are enthused about is the growth trajectory that the business is seeing.

And if you look at all the actions that we have taken, we believe at this point in time that even our stock has been undervalued and among other things we’ve also been quite progressively focusing on our capital allocation programs. So buying back stock which means that we see value in our business and the company.

The fact that we’re investing in all of these new areas, we’re not holding back on sales and marketing spends, our teams are continuing to fly all over the world, host our clients and we’re continuing to see decisions being taken. So for us we expect it to be business as usual and the focus really is on growth, growth and growth..

That’s good to hear. So you mentioned client visits and so on, trips out to see you guys in India and in other locations; those continue. I guess maybe a better indicator of what clients are actually doing, so intent is one thing but actually doing is contract ramp.

Can you comment a little bit on the – because you have a number of good size contracts that you have signed in the last, let’s call it 12 to 18 months.

Can you comment on how those contract ramps are progressing?.

Let me take that, Ashwin. I think as Keshav alluded to earlier when you look at what’s going on from a demand standpoint, we’re really excited that we haven’t seen much of a change in our pipeline or in our client behavior over the last 12 months.

And the reality is that it’s not just the frontend of the pipeline in terms of client visits, in terms of RPFs, in terms of interactions that kind of give us the long-term view into what our business could look like 12, 18, 24 months down the road.

But we’ve also seen good movement of the deals through the pipeline and we’ve also seen good solid signings. When you look at where we are year-to-date in terms of new customer adds, we’re ahead of our pace from last year. When you look at the ramps of our new businesses, as Sanjay alluded to, we’ve actually been nudging up our guidance every quarter.

And the reality is when you look at the short-term nature of how a project ramp affects our business, that’s the only way for us to nudge us our review guidance is to have something that we’ve already won or something that we have in hand move faster than what we expected, because the reality is otherwise there’s no upside to revenue acceleration.

So I think what the team is trying to say here that at this point in time when you look at our business momentum, it’s solid, it’s healthy and it’s across the business from first interactions through ramps with existing customers..

Understood. How should we think about the headcount sort of rejiggering, there seems to be a little bit less of India, a little bit more of Philippines, South Africa? Is there anything to read into that? And Keshav by the way I completely agree with what you just said about the stock..

Right. So Ashwin, that’s an excellent question and you had said – you spoke about client visits to India, so I just want to say, actually the client visits are to all our facilities across the globe and that’s really interesting because that keeps all of us really busy in terms of hosting our clients all over the globe.

So as you have seen, as they look to move some of the complex kind of work into WNS based on the confidence that they have around our abilities, some of it is actually starting in some other geographies included in South Africa, our location in Europe or China or maybe Manila. And thereafter the heavy-lifting is moving to India I would say.

So the reality is what we’re seeing is broad-based kind of growth, broad-based decision taking. The fact that all our delivery centers are being kept extremely busy and as Sanjay had mentioned earlier, a lot of the CapEx programs going into actually creating appropriate infrastructure across the globe and not just India..

Got it. Thank you, guys..

Thanks, Ashwin..

Thank you..

Our next question comes from Brian Kinstlinger with Maxim Group. You may begin..

Hi, good morning.

Can you quantify the revenue in '16 for Denali and how that compared to 2015? And then is there a seasonality in their business?.

So for Denali what we have already mentioned in the guidance it’s 3 million for 2.5 months. There’s no seasonality from this business perspective.

It’s much stickier and almost like 90%, 95% is like a sticker business; no discretionary kind of revenue year-over-year as it a very high end sourcing management on what they provide from a procurement perspective..

Right.

My question is, is revenue growing, is it flat, so what was – so looking backwards, what was Denali’s revenue in '16 versus '15?.

Fiscal '16 on Denali, it was approximately – including pre-acquisition was somewhere in the range of $16 million to $17 million..

Is that growing or is that flat, is that declining?.

It’s continuously growing almost like a 15% to 20% range. That’s what we have seen because the base would have been small, but with our acquisition and what the opportunity we have to take this capability to all our existing clients, we believe that it’s an enough good opportunity going forward for us..

And is their business entirely essentially recurring like yours or is it a more project based on churn, just to understand that a little bit better..

It’s not project based as I mentioned, it’s not discretionary project. As we said, it’s bifurcated of three categories like category management, sourcing management as well as a supplier management. It’s more stickier, annual recurring business and not discretionary..

Brian, if you look at what Denali’s main service businesses are, over 90% of the revenue is in annuity; it’s recurring in nature. And the reason is because essentially what Denali has done has taken over strategic functions within the procurement organization for their clients.

So it’s replaced or it’s outsourced functions and runs very similar to how our business runs in terms of model and approach to servicing the client..

Great. And then again I think it’s unclear what the current administration might do in terms of regulation. But there’s been discussion of reduced regulation in financial services.

Does this have any impact positively or negatively on Denali’s demand?.

I wouldn’t see it as having a major impact, Brian. Their exposure to banking is pretty limited..

Okay. And then lastly, I was confused on one of the first questions on the fourth quarter FX discussion.

Are you saying it should be 1 million lower in the fourth quarter compared to the third quarter, or are you saying it’s going to be nominal overall in the fourth quarter?.

Yes, Brian, based on the exchange rate assumptions that we have embedded in the guidance, we would expect that the gain or loss on hedging that shows up above the operating margin line in our P&L Q4 should be somewhere between $4 million and $5 million..

And then when we look at next year, are we still at that kind of range if rates hold for a few quarters, or do we have a major step down?.

No, if rates hold typically what would happen remember because we layer on our currency hedging over a two-year period, what tends to happen then is if rates stabilize at some point, then the benefit, the gain or loss tends to phase out over a two-year period.

So if you look at in any given year what the hedging gain or loss is, you can typically assume in a stable currency environment that that hedging gain or loss will phase out over a two-year period..

Suggesting that will still or going to have a significant gain even if rates hold for next year?.

Absolutely. There will still be a gain on hedging if things stay the same although it would not be the same magnitude as where we are today. Just so you know, we’re currently about 80% hedged for next year..

Great. Thank you..

Thanks..

Thank you. Our next question is from Frank Atkins with SunTrust. You may begin..

Thanks for taking my questions. I want to ask another question about the Denali acquisition.

Can you give us any color on the margins relative to WNS core business and then any comments on culture and is the management team staying on?.

Yes, let me start. I’m sure the others will like to add on. So actually from an overall margin point of view, it is a very stable margin and accretive toward WNS’s margin. So from our perspective, it ticks a box perfectly.

In terms of just how we can leverage this particular offering, we believe that it plugs a hole in our entire F&A suite and not only does it allow us to get deeper with our existing clients, it also creates the exciting opportunity for us to go after new clients within other verticals where we have not leveraged the whole procurement area as of now.

And in terms of the management itself, I’m delighted to say that we have worked with these people for three years now. So they know us, we know them extremely well. We have worked together on a number of deals together. We deliver together on a number of deals.

And at this point in time I’m happy to say that the management team of Denali is fully invested in WNS, understand our culture very well and we believe will be us for the long term..

Okay, that’s helpful. And then wanted to ask about the travel vertical. Can you remind us of the seasonality of that vertical? And as you look forward, there’s been a couple contracts that you’ve announced.

How might that effect the travel vertical?.

Sure. Let me take that, Frank. I think as we’ve talked about when you look at the Q2 to Q3 impact on our travel business coming out of the seasonality that they see in their business, we do expect this to be somewhat structural going forward. Our travel business is running about $30 million a quarter.

So if you look at a $2 million move, you’re looking at roughly a 6% shift from Q2 to Q3 in the travel vertical. That seasonality comes from the fact that our clients don’t do their best quarter in the calendar fourth quarter because most travel is booked prior to that. So this is something that we’re going to continue to see.

It’s going to be structural. You can expect a 5% to 6% headwind in the travel vertical in fiscal third quarter of every year and then we would expect that revenue to tick back up Q4, Q1, Q2 as things move forward.

This is now the nature of our business given that we’re more exposed to end client demand trends and it’s something we’re actually familiar with and comfortable with, because this is the same pattern we used to have through our travel vertical back when travel velocity was a meaningful client for WNS..

Okay, that’s helpful. And last one from me; had some nice growth in research and analytics.

Can you talk about how the pace of growth impacts margin?.

Yes, let me take that. I don’t think for us, Frank, it typically does affect the margin profile. What we look at is the major either driver or inhibitor to margins in any given quarter or given year.

It’s the percentage of work we have in transition mode, because the one thing that does tend to affect our margins at a corporate level is that first six to nine months of a relationship where we’re helping clients manage the transition bubble so that they don’t have excessive costs as they move from an internal to an external environment.

Unless that transition as a percentage of total revenue changes materially, mix shift in any given quarter shouldn’t have a major impact on our business. So our research and analytics business has a better margin than some of our business units although it’s not significantly above, it’s definitely above.

And the reality is that the numbers that we’re talking about here are not going to move the needle in a material way.

The growth that we’ve seen is steady, consistent, it’s slowly accelerates and as a result while transition as a percentage of revenue has been moving up, it’s not been moving up to the point where you’ve heard us discuss transition as a reason for margins to not be healthy.

So steady as she goes, business as usual and as long as growth continues to accelerate at a slow and steady pace, you really should see a margin impact..

Thanks so much. I really appreciate it..

Thanks, Frank..

Thank you..

Our next question is from Joseph Foresi with Cantor Fitzgerald. You may begin..

Hi. I was wondering if you could talk about just at a larger level, the verticals and their outlook for next year. I know you talked about some areas where you’re seeing some strengths. Maybe you could talk about some area where you’re seeing some weakness, obviously excluding the conversation we had about travel and R&D. Thanks..

Sure. So let me take – I’m sorry, you want to go ahead..

Yes, let me just start and then Dave you could just add on. But I think from our perspective as we look at our business and as we look at the exciting kind of offering program and the capabilities that we have created in every one of our verticals, I expect to see broad-based growth as well as excitement across every one of our core verticals.

So obviously insurance, travel, utilities, the retail areas have traditionally been exciting and have always held attention. But what I’m also seeing is new energy and activity on the healthcare space where we are very, very positive about the future of that area as well as what we’re seeing on the entire shipping and logistics areas.

So overall I would say from a vertical point of view we have chosen – we believe the right verticals and we’re creating the right kind of excitement and offering programs there to drive growth in a broad-based manner across the foreseeable future.

And separately as we continue to drive momentum around finance and accounting, research and analytics and our customer interaction offerings, again these are areas where we’re seeing good momentum but more importantly fast closures taking place over the past few quarters as well. So overall I will say stable but broad based..

Okay. And then just how should we think about margins in the context of headcount growth and seat utilization, particularly as we move out? I mean obviously it looks like headcount growth has slowed.

Is that a new normal and how should we think about those two metrics as far as margins are concerned going forward?.

Sure. I think for us, Joe, the focus is long term doing two things. One is continuing to improve our seat utilization and effectively leverage our global delivery centers. I think the second thing is relative to headcount, more a focus on making sure that we’re improving revenue per employee than focusing on just a pure headcount number.

So you’re right. When you look at this year and you look at the headcount growth, it’s clearly disconnected from the acceleration in our business. While revenue per employee is only up about 1% on a reported basis for this year, when you look at revenue per employee on a constant currency basis, we’re up about 7%.

And this is indicative of being more productive in our business, it’s indicative of leveraging technology and automation and how we deliver services. And it’s also indicative of expanding our global delivery footprint.

So I think the long-term objective for our business is to continue to drive revenue per employee up, at the same time long term continuing to improve that seat utilization metric.

Now we’re getting to the point where we’re never going to be back to our seat utilization of 1.3 but to nudge that number in the right direction over the next couple of years is something that we’re focused on. And there is some operating margin leverage there.

The real question is at what level do we need to continue to reinvest in our business to make sure that we’re not missing out on opportunities in a business that’s still early inning.

So we know there are margin levers that we can pull over the next three to four years but the current plan is to make sure that we’re investing at the right pace and that’s why we’ve guided people to that high-teens margin business. And for us this also represents industry-leading levels.

So these are aspirational margin goals for many of our peers and for us to maintain adjusted operating margins in the 18%, 19%, 20% range is something that we think sends a very strong message to the marketplace..

Got it. And then the last one from me, just curious about what your thoughts are on industry growth rates going forward. And we spent a lot of the call talking about some of the positive areas, but what do you see as the major challenges for particularly BPO over the next two or three years? Thanks..

Yes, let me take that. I think the market continues to be underpenetrated, demand trends continue to be showing nascency. We still see a lot of interest in our services and as disruption continues to gain ground of the market, we see prospects and clients get quite excited about the potential of the BPM model.

And as you can see that the companies that have invested in some of these models, like WNS, have been growing ahead of what I would call NASCOM’s projected growth rate as well. From our perspective I believe that double-digit growth rates and maintaining double-digit growth rates in the medium term is definitely possible.

But having said that, I think a lot of it will actually depend a lot on the specific actions and investments that individual companies make in order to provide compelling solutions to their clients.

And what will drive this growth will be disruption, it will be analytics, it will be the high-value services like finance and accounting and moving away from more traditional contact center kind of services to customer interaction services understanding the client’s business and business domains extremely well and providing solutions to clients as an extension of their enterprise.

And I think that’s where WNS scores..

Thank you..

Thanks, Joe..

Our next question comes from Joseph Vafi with Loop Capital. You may begin..

Hi, guys. Good morning, good evening. Just one quick one from me. If we look back at new client wins here over, say, the last four or six quarters, any noticeable trends or changes in those new client wins in terms of customer size, geography, function, or average deal size that stand out, that may be useful for us? Thanks..

Let me start there and I’m sure Dave and Sanjay may want to add on something.

But we have obviously calling out details of some of these wins over the past few quarters and as I’ve said before, what has been really strong from our WNS perspective has been that these have been very broad based coming across all our core verticals, driven a lot by some of the higher value services that may be horizontal offering but then thereafter having the ability to penetrate across the entire client base.

So we may start with F&A or analytics but be able to go across the entire industry suite of services as well. And in terms of size, we’ve actually seen a number of larger sized deals enter the fray as we have called out in the past.

So where it is finance and accounting or analytics-led deal, the size and scope could be smaller but the opportunity size and the stickiness of revenue longer term is high.

If it is a contract stopping with the ISV of the industry side, it could be significantly larger and much more complex, global in nature and going across multiple years but having the ability to go across the horizontal services.

And so we’re actually seeing it as very broad-based, different size of deals but generally we have seen that we have been able to win a larger number of large deals with ACVs in the region of $5 million to $10 million across the last few quarters..

Joe, I would just add to that in terms of areas of strength and some things that we’ve seen that have changed for us. Some of it a function of WNS focus and some of it a function of the industry, but we would definitely have seen better traction in our business in both the U.S. and parts of Asia than traditionally. So the U.S.

has been a much stronger market for us, as Keshav mentioned, both research and analytics and finance and accounting have been stronger. And as was discussed a little bit earlier, we’re seeing demand more broadly based in terms of where we deliver out of.

So our reliance on the UK, our reliance on India as a development center, our reliance on some of the traditional strengths of WNS has definitely come down and it’s exciting to see that we’ve seen good acceleration in areas where traditionally WNS has not been as strong..

Great. Thanks very much, guys..

Thanks, Joe..

Thank you..

Our next question comes from Puneet Jain with JPMorgan. You may begin..

Hi. Thanks for taking my questions.

Can you talk about your – or the offshore BPO industry’s ability to pass some of these incremental expenses stemming from regulatory changes to your clients? Now that the value proposition goes beyond offshore cost saving, do you think clients will be willing to absorb some of the incremental expenses, if regulations change?.

Puneet, that’s a very interesting question, so thank you for that. I think clients are kept updated about what is happening from an offshore cost perspective. They appreciate I would say the challenges of some of these changes. And we’re able to negotiate and pass a bit of it back to them in a partner like manner, they accept it.

But I think there are enough levers that we have in our business to be able to actually absorb some of these changes and more importantly the quality of our conversations when these things happen is all about changing the bases of the contract.

So over a period of time as opposed to focusing clients on FTE-based kind of models, really using all of this to move them towards outcome-based models which I think a lot of clients are very happy to do based on the kind of stability that they’ve seen with WNS.

And thereafter when it is completely up to us to decide on how we want to deliver those processes, at the same time absorb these costs and we’ve in fact even enhanced margins. So I must say that this is not something that is new.

This has been going on for a while and while all of this has been happening, WNS has been delivering what I would say are industry-leading modules..

And maybe, Puneet, just to add what Keshav alluded even if you have seen those regulatory changes which happened in fact last year regarding the India Payment of Bonus Act and when you see the margins still – our operating margin are being delivered at a 20% range.

So, yes, there are enough levers to deliver or to absorb those costs out of the productivity which is continuous journey for us..

Understood. And can you also talk about some of the levers in the business model that could help you offset, say, about 200 basis points in margin headwinds as hedges roll off over the next few years? I assume your rupee rate for out years should be better than what it is going to be in fiscal '17.

Is that enough to offset headwinds from hedges going away?.

I think it depends, Puneet. It depends on the magnitude of the move, it depends on whether the depreciation in these currencies is temporary or structural. It’s something we have to watch. We know that excluding the hedging gains and losses, our business is run between the 19% and the 20% adjusted operating margin over the last four or five years.

So our margins have been stable despite a lot of the moving parts, if you will. And that includes having a pound that’s gone from 2 down to 1.25. So there are – as I think you’re alluding to, there are natural hedges to our business and natural hedges to at least what’s gone on with depreciation in the British pound.

In terms of other levers in our business, I think both Keshav and Sanjay have touched on some of the things that we know we can look to going forward just to help offset margin pressures as and when they occur and moving to higher value services, like research and analytics, moving to technology enabled offerings and higher revenue per employee, continuing to leverage global delivery to put our solutions out there for clients, these are all things that we have in our toolkit as we look forward in terms of margins.

The biggest question I think relative to some of these – and also by the way transactional and outcome-based model. But I think the biggest question is what will the rate of client adoption look like for some of these newer approaches and newer models.

And if client adoption continues to be at a healthy clip, then we should see some ability to offset any margin pressure that we have in our business..

Got it. Thanks..

Thank you. Our next question is from Bryan Bergin with Cowen & Co. You may begin..

Hi. Thank you.

On the share repur program, can you remind us what the remaining availability is on the current program and then how we should think about that as far as repurchases over the medium term?.

As we already announced earlier that the shareholders have approved 3.3 million of the share buyback and out of that, we have executed 2.2. So the balance 1.1 at the right time we have still an opportunity to do that.

Having said that, going forward on a capital allocation program perspective based on the merger acquisitions and other deals in the right stock price, we have an opportunity to go to the shareholders to take extra approval for the share buyback..

Okay.

And then just as your delivery mix changes by location, how should we think about that from a tax rate perspective?.

Tax rate going forward directionally we believe it’s going to be in the range of 26 to 27 percentage, because even location – in the geographical we do have in certain locations the exemption from the export perspective. So with this mix as well as going forward, we are pretty comfortable. We expect the tax rate to be 26% to 27%..

All right, thank you..

Thanks, Bryan..

Thank you. Our next question is from Vincent Colicchio with Barrington Research. You may begin..

Yes, one question from me.

Is there any change to the competitive front? Are you seeing the IT services firms getting more aggressive given their issues, or are you seeing any new entrants?.

Yes, that’s an interesting question. As we look at, I think the client base really understands extremely well the difference between what we bring to the table and what the IT services companies bring to the table, one. And that itself is very, very positive from a WNS point of view.

Independently, I would also say that from our perspective we have – traditionally in many of our deals anyway seen in addition to the pure plays and the system integrators, every now and then an IT player who’s present there, but most of the times what they’re doing is really positioning themselves defensively against some of the IT players.

So while one or two of them may act a little more aggressive in specific deals in order to hold on to a client, it has not been – we have not seen any impact to our business generally from aggressive action with IT service players based on what they may be going through at this point in time..

All right, thank you..

Thank you..

Thank you. At this time, we have no further questions in the queue. This will conclude today’s conference call. Thanks for your participation. You may now disconnect..