Good morning, and welcome to the WNS Holdings Fiscal 2021 Second Quarter Earnings Conference Call. At this time, all participants are in a 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.

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?.

Thank you, and welcome to our fiscal 2021 second 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 second quarter ended September 30, 2020. 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?.

Thank you David and good morning everyone. We hope you and your families are safe and well. WNS is pleased with our second quarter financial performance and our ability to adapt our delivery and cost structure in this rapidly changing environment.

Net revenue for second - for Q2 came in at $214.4 million, which represents a year-over-year decrease of 3% on both a reported and constant currency basis. Sequentially, net revenue increased by $13 million or 6% on a reported basis, and 4% constant currency.

During the quarter, our delivery capability continued to improve, with supply averaging 98% of client demand. In Q2, as compared to Q1, revenue increased, attrition accelerated, and the company proactively managed components of our cost structure, including a one-time change to our corporate leave policy.

As a result, adjusted operating margins improved by almost 600 basis points sequentially to 23.4%. While we continued to see COVID related volume challenges with clients in a few of our key verticals, our overall visibility has improved to the point where we are now comfortable resuming annual guidance.

Although our ability to service client requirements has steadily progressed over the past few quarters, we still remain heavily reliant on servicing our global clients in a work-from-home model. Today, approximately 15% of our work is being performed in WNS facilities, with the remaining 85% delivered remotely.

As we have mentioned before, to minimize health risks to our employees and potential disruptions to our clients, the company is not planning to move large numbers of employees back into our offices until the pandemic is behind us.

In the interim, we remain focused on enhancing our remote cybersecurity protocols, and fine tuning a longer term hybrid model solution that will allow us to seamlessly move delivery between office and home. Looking forward, the business environment still remains somewhat volatile, with client behaviors varying by industry and by country.

From a demand perspective, we are expecting modest revenue pressure in the second half of the year in the travel, insurance, and utilities verticals, based on projections provided to us by our clients.

These forecasted reductions, primary for customer interaction services, are being driven by the potential for lower activity levels and known ramp belts. We expect these headwinds will be partially mitigated by volume strength in the healthcare and banking and financial services verticals.

Overall, the pipeline continues to be extremely healthy in terms of new additions, ongoing activity levels, and deal signings. We continue to see an increase in the number of deals closed, with the average deal size somewhat smaller than in previous years.

In the fiscal second quarter, we closed eight new logos, and expanded 17 existing relationships, while the pipeline side, deal flow, and contract signings are robust. We've seen some delays in the conversion of large sized deals into revenue.

This is not unexpected in the current environment, and it is important to note that while some of these deals are taking longer to ramp, they have not been canceled.

One thing that has become abundantly clearer over the past two quarters, is that the global pandemic is accelerating demand for technology-enabled process transformation or hyperautomation.

Both new and existing clients are increasingly looking for WNS to help innovate and lead the transition of their business models to enable them to reduce costs, increase operating flexibility, navigate through the impact of the pandemic, and drive sustainable competitive advantage.

In short, the goal for BPM partnerships, is shifting from managing disruption to creating disruption.

This trend is well aligned with WNS’ strategic investment programs, which remain focused on enhancing our capabilities in the areas of domain expertise, technology and automation, advanced analytics, consultative business transformation, and the reskilling of our global workforce.

Our investment approach has enabled us to create unique digital accelerators, platforms and fireworks - I apologize, frameworks, designed to deliver the hyperautomation clients require. In the past few quarters, we have rolled out three new digital capabilities, which I would like to highlight on today's call.

The first offering is called EXPIRIUS, which is our digital customer experience solution. EXPIRIUS integrates human-assisted design and WNS domain expertise, with AI device driven Omni-channel, conversational insights, and consulting-led customer experience strategies.

This solution enables brands to have analytics-driven, intelligent interactions with their end customers, which helps accelerate speed to market, improves customer satisfaction, and enhances brand loyalty. The second solution is Quote-to-Sustain or QTS, which helps companies to accelerate the shift to a digital finance function.

QTS enables CFOs to release working capital, minimize revenue loss, reduce total cost of ownership, and improve customer retention, by first expanding the scope of the cash collection cycle, and then automating the entire process.

The QTS solution integrates data, analytics, and intelligent automation, to create an end-to-end digital solution for the finance function. The final offering I want to discuss is called Skense.

Skense is a data extraction and contextualization platform powered by AI and machine learning, AI and can extract, categorizes and combines structured and unstructured data, to deliver real-time cognitive insights. It is platform-agnostic, customizable, and scalable.

We've currently deployed Skense for some of our retail, healthcare, and insurance clients, and this platform is now delivering clear business benefits, including reduced costs, enhanced data accuracy, reduced risk and increased ROI for our clients.

All three of the solutions I have mentioned, are followed by a combination of WNS proprietary technology, strategic third party relationships, and best-in-class process knowledge designed to align our capabilities with the future of BPM.

They also leverage WNS’ deepening expertise in disruptive digital models, including our experience servicing some of the world's leading internet brands. Our footprint with these innovative firms, continues to grow, and I'm happy to report that in fiscal 2020, 17% of our revenue came from internet-based companies, up from 14% reported in fiscal 2019.

This presented year-over-year growth of 38%. For the first half of fiscal 2021, internet-based revenues continue to contribute 17% of continuing revenue - of company revenue, that is.

In summary, we expect some ongoing volatility, given the current business environment, and must remain cautious regarding the potential for additional COVID-19 waves, further economic impacts, and changing client requirements.

Despite these challenges, WNS is extremely confident in our financial strength, differentiated capabilities, solid underlying business momentum, and proven capability to execute.

The company is properly positioned to help clients meet the need for domain-led hyperautomation, and we'll continue to invest in our business, given the long-term BPM opportunity.

While in the short term, COVID has created volume pressure and business volatility, our belief remains strong that the pandemic will serve as a catalyst for accelerating the adoption of BPM, and the shift towards higher end digital solutions and agile engagement models.

WNS remains focused on driving long-term sustainable value for all of our key stakeholders, including our employees, clients, and shareholders. I would now like to turn the call over to our CFO, Sanjay Puria, to discuss further our results and the outlook.

Sanjay?.

Thank you, Keshav. In the fiscal second quarter, WNS net revenue came in at $214.4 million, down 2.9% from $220.7 million, posted in the same quarter of last year, and down 2.8% on a constant currency basis. Sequentially, net revenue increased by 6.4% on a reported basis and 4.2% on a constant currency basis.

WNS estimates that in quarter two, dynamic related demand reductions impacted revenue by approximately 9%, and supply constraints reduced revenue by approximately 2% from our pre-COVID run rate. Demand reduction from pre-COVID levels, have been most significant in the travel, insurance, and utilities verticals.

In the second quarter, WNS recorded $4.1 million of short term non-recurring revenue, which was both at margins above company average. These one-time amounts were driven by business continuity pass-through charges, fees associated with planned rundowns, and shut down project work.

Adjusted operating margin in quarter two was 23.4%, as compared to 23.5% reported in the same quarter of fiscal 2020 and 17.5% last quarter. Year-over-year adjusted operating margin was pressured by COVID related revenue impacts, including lower demand and supply constraints.

The cost of getting business headcount and retail expenses associated with business continuity. These headwinds were offset by the one-time reversal of our lead provision, which increased margin by $4 million, proactive management of discretionary spending, lower travel and facility related costs, and favorable currency movements net of hedging.

Sequentially, margin improved due to increased revenue, reduced headcount levels, lower business continuity costs, and a one-time benefit from the reversal of our lead provision. This benefit more than offset the adverse impact of currency movement and hedging.

The company’s net other income expense was $0.7 million of net expense in the second quarter, as compared to $1.1 million of net expense reported in quarter of fiscal 2020, and $0.5 million of net expense last quarter.

Year-over-year, the favorable variance is attributable to lower interest expense resulting from scheduled debt repayments and reduced IFRS lease interest cost, which more than offset reduced interest income resulting from lower rates. Sequentially, the increase in net expense is due to reduced interest income, driven by lower interest rates.

WNS effective tax rate for Q2 came in at 23.5%, up from 20.2% last year, and down from 25.1% last quarter. Changes in the quarterly tax rate are primarily due to the mix of profits between geographies, and the mix of work delivered from tax incentive facilities.

The company's adjusted net income for Q2 was $37.9 million, compared with $20.6 million in the same quarter of fiscal 2020, and $26.1 million last quarter. Adjusted diluted earnings were $0.73 per share in Q2, versus $0.79 in the second quarter of last year, and $0.50 last quarter.

As of September 30, 2020, WNS' balances in cash and investments, totaled $366.5 million, and the company had $25.1 million of debt. WNS generated $56.7 million of cash from operating activities this quarter, and incurred $6.5 million in capital expenditures. In Q2, WNS also made scheduled debt payments of $8.4 million.

DSO in the second quarter came in at 34 days, as compared to 29 days last year, and 39 days last quarter. The year-over-year increase in DSO, is a result of temporary payment term concessions provided to several clients, and some collections delays.

We are pleased to announce that the company’s annual general meeting held on September 24, 2020, WNS shareholders approved a new share repurchase program, authorizing the company to buy back up to 3.3 million shares over 36 months beginning April 1, 2021.

This is in addition to the 1.1 million shares remaining on the prior authorization expiring on March 31, 2021. With respect to other key operating metrics, total headcount at the end of the quarter was 41,466, and our attrition rate in the second quarter was 24%, down from 32% reported in Q1 of last year and up from 11% in the previous quarter.

The lower year-over-year attrition rate, reflects the impact of COVID-19 on global labor markets. Build seat capacity at the end of the second quarter remained steady at 34,610 seats.

The seat utilization metrics, which the company typically provides as a measure of infrastructure productivity, are not meaningful given the current work from home environment. As Keshav mentioned earlier, in our press release issued earlier today, WNS reinstated annual guidance.

Based on the company’s current visibility levels, we expect net revenue to be in the range of $830 million to $854 million, representing a year-over-year revenue decline of 7% to 5%. Revenue guidance assumes an average British Pound to US dollar exchange rate of 1.29 for the remainder of fiscal 2021.

Excluding exchange rate impact, revenue guidance represents constant currency revenue reduction of 7% to 4%. We currently have 98% visibility to the midpoint of the range, and guidance does not include any shutdowns, non-recurring revenue for the second half of the year.

We also must expect some ongoing business volatility over the next few quarters, positive or negative, which could impact client volumes, supply capability, contractor sessions, and new project ramps.

Full year adjusted net income is expected to be in the range of $121 million to $129 million, based on a 73.5 rupee to US dollar exchange rate for the remainder of fiscal 2021. This implies adjusted EPS of $2.33 to $2.40, assuming a diluted share count of approximately 52 million shares.

For fiscal 2021, we expect capital expenditures to reach up to $31 million. We will now open the call for questions.

Operator?.

[Operator Instructions]. Our first question will come from the line of Korey Marcello from Deutsche Bank. Please proceed..

Hey guys. Thanks for taking my questions. I just wanted to start out on the guidance. Obviously it looks like the guidance implies revenue growth gets worse in the back half before it gets better.

Can you just clarify the expectations on third quarter versus kind of the exit rate assumed in the guidance? And then maybe give some more clarification on some of the delays in the forecasted reductions you guys talked about?.

So the guidance is based on our visibility, what we have at this point of time, which is at 98% visibility to the midpoint of the guidance. And a couple of things which I’d like to highlight that doesn't factor, the short-term revenue, because if we don't have visibility, we don't include that.

It doesn't factor any further supply improvement beyond 98%. So this quarter, we’re at 98% of our supply. So it doesn’t factor any other further improvement. And it also doesn't factor some of the rebound in volumes because it depends on the client giving us a projection for the volumes in the second half.

And clients at this stage have been conservative based on the visibility, what they have based on the uncertainty out there. And I also would like the highlight that there is incentive to be conservative for the client, given a large percentage of rolling forecast was a client provided committed.

And accordingly, they have been conservative at this stage. From a Q3 perspective, we expect Q3 to be slightly lower as compared to Q2. But if you add the non-recurring revenue, which was there in Q2, which is not there in Q3 factored, so there’s going to be a gradual growth as compared to Q2..

Got it.

And then I guess looking at the headcount moderation, has WNS kind of fully right-sized the headcount at this point? Or given some of that - those demand headwinds, the forecasted demand headwinds in travel and insurance and stuff like that you mentioned, do you think there's some more headcount reductions and compensation reductions to come? Just trying to think about the margins and the cadence there.

Thanks guys..

So, where we see at the moment is, attrition has almost normalized at about the 23% to the 25% range, which is what we forecast for the next couple of quarters. We do continue - or we will continue to carry some amount of excess headcount over the next few quarters.

And depending on the volumes that we experience, we will start taking the (unintelligible). .

And just to add there, from a margin perspective, though attrition has normalized, as Gautam mentioned, but at the same time, we may have to start hiring (unintelligible) from a revenue growth perspective because of the mismatch in the geography and the location, as well as the skills and timing perspective. .

So just to clarify, Korey, yes, we do and are carrying excess resource right now. The plan is to do that through the balance of the year. I think if you look at the expectations for margins in the back half of the year, they’re kind of in that 19%, 19.5% range.

And to be very honest, the only difference between that projection and kind of the 20% plus where we’ve typically run, is the fact that we are carrying excess resource relative to the roughly 250 million a quarter that we've got baked into the back half of the year. .

All right. Thanks, guys..

Our next question will come from the line of Maggie Nolan from William Blair. You may begin..

Hey, this is Ted on for Maggie. Real quickly, wanted to ask about the financial services segments. I know you said you're at 98% supply, delivering around 98% of supply. Where do you stand in terms of the overall backlog of the financial services work? I think last quarter, you said 5% of the demand you weren't able to tap into.

How much of that has been included in guidance and kind of where are we at with that?.

So let me take that, Ted. Our current supply is 98%. That's where we average in the second quarter as well. That is our expectation for the back half of the year.

So, if you look at the portion of our business over the back half of the year, so if you look at the portion of our business overall that we're estimating at this point in time that we're not going to be able to service because we're in a work from home model, it is the 2% that is the gap between where we are today and where we could be if we were able to service everything.

So, as opposed to kind of that 95% or the 5% that we thought was kind of that high value couldn't do in a remote world, we've been able to address about 3% of that since the end of last quarter. .

Okay, thanks. That's helpful.

As a follow up, I just want to see, where do you see the most opportunity, I guess, to expand the number of processes you're performing for clients? What industries or service offerings are you particularly bullish on?.

The vertical that we’re absolutely bullish on of course is the healthcare vertical, in terms of life sciences side of the practice, the banking and financial services market space, and also our consulting and professional services business. These are the four verticals that we are absolutely bullish..

And just as a quick follow up, what's giving you that sentiment and outlook?.

In terms of our existing clients, in terms of the demand that they're placing before us. And secondly, in terms of our pipeline that we are seeing the deals that are flowing through the (hopper). Both of those gives us the confidence..

All right. Thank you very much. .

Thank you. Our next question comes from the line of Bryan Bergin - Cowen. You may begin..

Hi guys. Thank you. Wanted to follow up on the outlook.

Around the deal ramp delays, can you talk about what type of duration you're seeing those clients choose with this lower deal ramps? Are they putting the work off to 2021? Is it an indefinite period, or just somewhat shorter? I'm curious if you're seeing a potential wave of conversion here forming that may be released, or if it's more short-term and distributed..

Yes. This is Gautam. I’ll take that. In terms of the pipeline, of course it's an extreme healthy pipeline. We haven't seen it as strong as this over the last few years. In terms of any outsourcing program, the impact of (COVID) is the maximum where we’re starting to see the transition.

So what we are seeing at the moment is previously most medium to large size deals were transitioned over a two to three year period, but what we are seeing now is about a five year period. So clients are taking smaller bite-sized chunks in terms of transitioning. So that’s the only difference between pre-COVID and post-COVID there..

Yes. It’s more, Bryan, around the fact that - the deals are moving forward, right. They're not that they've been pushed out for six months or 12 months. They are moving forward, but they're moving forward at a slower pace, and they're moving forward with more measured components of process..

Okay. And then follow up on margin here. Can you talk about sustainable cost actions versus short-term benefits? Excluding the $4 million benefit you had here in 2Q, still solid level.

So I'm curious on the levers you used that are structural for you for longer term versus some of the shorter term actions, just really to help give us a sense for the potential ranges you expect here in the second half..

Sure. Let me take that, Bryan. So if you look at the margin in the second quarter, right, and obviously it was extremely healthy, almost 200 basis points of that improvement came from a one-time leave reversal that was really one of the things that we did as an organization to enable us to carry excess resource.

But by changing the policy, it necessitated taking a one-time accounting gift to the books, which was $4 million. That piece is clearly non-recurring going forward. So that 200 basis points of improvement will come up immediately.

The other things, when you look at what happened in the quarter, obviously from an improvement perspective, the mismatch between revenue and headcount improved dramatically, because revenue increased and headcount decreased, and that piece should be structural.

What I was referring to a little bit earlier when I spoke about the fact that we still have excess resource excess capacity, is the fact that margins aren't quite where they should be yet because of that mismatch.

And again, the hope is one of two ways to address that over the next six to 12 months is to not only increase the revenue, but also makes sure we're right-sizing the headcount in terms of not just total numbers, but also skillset required to deliver where the growth is.

So the only major issue in Q2 that's really non-recurring in nature, would be the $4 million from the lever (unintelligible). .

Okay. Thank you. .

Thank you. Our next question will come from the line of Mayank Tandon from Needham. You may begin..

Thank you. Congrats on the quarter. Keshav talked about the growth of internet companies. I was just curious if you could talk a little bit more about the impact of automation, RPA in general, how that's impacting your pipeline, conversion of deal flow, sort of longer term implications of that, more so now post sort of this COVID issue.

And then just generally more around digital transformation, how that's also playing into your growth long-term..

I think the consistent investments that we have been making on the domain based verticalized strategy in terms of the digital and automation assets, is absolutely quite favorably up for us. What we are seeing is the need for upfront digitization and automation that's consistently increasing.

And that tied up with the analytics engine that we spoke about, is working towards our advantage. So we’re able to drive a lot more of this automation effectively and what that is leading to is more business being discussed, more from an end-to-end processing capability..

Got it. Okay. Also on that note, I was - sure, Dave. .

I think it's just an echo, Mayank..

Oh, apologies. Okay. I was going to ask as a follow up question around the sales process, how that's evolved in the last few months.

Are you now starting to see a faster sort of deal conversion time? And then on that note, could you talk about the eight deals that you’ve won this quarter? What were the different verticals that you won that across? And just Keshav mentioned the deal sizes are smaller right now.

Is that just a function of clients treading more carefully? Or is there something else more systemic to the fact that deals are smaller today than they were pre-COVID?.

Sure..

Yes, the deals are smaller at the moment. It's only because of the fact that as we mentioned earlier, in terms of clients participating in the waves of transition over a longer period of time, given the extent of change involved during these transitions. So that's one of the key factors in terms of the smaller sized deals.

In terms of the verticals, it has been reasonably broad based across our healthcare vertical, across our shipping and logistics vertical, across our insurance vertical..

So, Mayank, I’ll just add a little bit here. This is Keshav. Actually these are very interesting times.

So while we speak about the second half and we speak about the guidance looking the way it is at this point in time, based on our depending so much on clients’ inputs, and obviously they’re being quite careful in terms of how they are giving it, the reality is that the pipeline actually has never looked better.

The quality of our pipeline across every vertical, across all geographies, has been the strongest that we've ever seen.

And as we come out of this pandemic, what we actually see is excellent conversations around the need to reduce costs, the need to transform their models digitally through trusted partners like us, through the model of hyper kind of automation, so to speak.

The fact that all of them are looking at models where physical kind of touch points are reducing and they're more than willing to look at models where outcome based models are capable of being accepted. And at the same time, they are all far more comfortable with work from home.

So these are some of the areas in the environment that we have now got comfortable with. They have also got comfortable with, while we are being conservative. At the same time, you have to understand that while all of them are looking at coming back, they're seeing delays in some of their own plans.

So for example, the airline industry started talking a little while ago about testing everybody before they got on a plane, right? Obviously that got a little bit delayed. Some airlines will go faster than others, but as soon as some of that starts happening, it means that the demand ramp may be much faster than we have baked in out here.

And Gautam and the others will have to really get out there hiring and stuff like that. So from our point of view, I must say that the model is still very exciting. There is conservatism built in by clients, which we have to depend on based on our visibility model.

But at the same time, there are many areas where potentially things could change if clients get a better handle on COVID itself..

Yes. And I think just to add to that, remember, like we said, we've seen great new additions to the pipeline. We're seeing deals moving through at at a very healthy pace. We're seeing - obviously you look at, we've signed 15 new logos in the first half of this year. That compares to 12 last year. So deal signings are ahead.

Where we're seeing a little bit of that snag is, to be honest with you, where the rubber hits the road, where it actually requires behavior change and action on the client debt. So it's easy to sign a deal.

It's easy to say we want to go, but when you start to actually sit down and assess, okay, well, what does this mean for our people? What does this mean for our process? What does this mean for our business? Now, all of a sudden, it starts to run into some challenges.

And that's not unusual for our industry, but in this environment, what we're seeing is that clients are proceeding a little bit more cautiously, especially as it relates to those very large deals that require end-to-end business transformation, and a lot of the right upfront thoughts and planning to make sure that the engagement is going to be successful..

That's a very helpful perspective. Thanks guys..

Thank you. And our next question will come from the line of Ashwin Shirvaikar from Citigroup. You may begin..

Thanks. Hey, good to hear from you all. Thank you for the insights so far. My first question was, with regards to work from home, it seems, based on your comment that either clients might have transitioned from saying it's something they need to something they're comfortable with. Perhaps they want to incorporate more or less permanently a hybrid model.

The question is, what are some of the new metrics that we can look at that you're perhaps incorporating into your terms and conditions, in your contract when you sign these deals as it relates to a hybrid or a work from home model?.

Yes. This is Gautam. What we are looking at is a set of two or three matrices. One is in terms of the productivity matrices, which is linked to the amount of - because from a work from home perspective, there’s always going to be a bit of a lag compared to work from office.

So those productivity matrices are being worked upon with the amount of people based on the PCP scenario, structure between work and home and work from office, and the interoperability across these two functions. That's the first one. The second one is in terms of the automation associated with these functions.

As you mentioned, that more and more number of clients are looking at a large amount of upfront digitization and automation. So the way we are able to transform that particular piece of the process, that’s the second piece that you're putting in that metric with our client. And the third one is more end-to-end processes.

That’s taking precedence at the end of the day. So these three matrices, we are tracking a lot more at this moment and potentially some of those are going to make it into longer term contracts..

Got it. No, thank you for that. And then I think in response to one of the questions earlier, it might have been David mentioned that it's only when you're signing deals, but it's been the rubber hits the road. The transition is a little bit slower, right.

So either technologically or process wise, what are some of the things that you are doing or can do to make clients more comfortable? Do you need to make investments to make that happen? Is that incorporated in your outlook?.

Yes. It has to be in terms of - and even if you look at the last six months, Ashwin, what we’ve seen as we have transitioned hundreds of roles across new clients and existing ramp ups, which have actually gone down extremely well. So the ability for remote transition, remote model process mapping, all of that is going absolutely smooth.

In terms of automation also, and when we talk about automation or hyperautomation, all the tools and investments are clear and we continue to make them.

And we’ve been able to actually - what is interesting is, in this time over the last six months, we have tied up the contractor productivity that we have to deliver through automation, et cetera, to all our clients. And we've actually been able to achieve all of that for every single account that we have forecasted. So I think that's going to plan.

So all of those investments we continue to make and they’re being budgeted for..

Yes. And I think to my comment a little bit earlier, Ashwin, the slowness, the cautiousness that we're seeing from clients, isn’t really a function of a remote transition or not having the skills or not having the capability. I think it's just a function of the environment. The bottom line is, the client's business is volatile.

The environment overall is volatile. Our in-office, out-of-office is volatile. And as a result, I think for these things that are extremely important and extremely strategic, clients are just proceeding slowly. I don't think it's a capability issue or a technology issue..

Right. Understood. I have a tiny question that I want to squeeze in if you don't mind. The DSOs, they - you made some progress on recovering DSOs towards a normalized level.

Do you think we might get towards more of that 30-day type of thing that you achieved in the past in a quarter or two?.

So, we definitely made a considerable progress because in the Q1, when the whole dynamic started, the client approach for the concession from a payment out perspective or for the delays, say that direction, things are stabilizing as compared to Q1 now, and that's where we got 34 days back.

But we believe that over a couple of quarters, still it's going to be in that range ballpark because these clients are approaching from a payment concession perspective, or they're asking for more of an extension and some delays are there. So it’s going to say some while, a couple of quarters or more till that timing is back to the 30 days normal.

Understood. Thank you all..

And our next question comes from the line of Puneet Jain from JPMorgan. You may begin. .

Hey, thanks for taking my question. So your implied margins for second half, it seems like they are below second quarter level, even if you exclude leave benefits in 2Q.

Given you expect to continue to realign your headcount with revenues rest of the year, shouldn't we expect margin improvement from 2Q levels? And related question, did you disclose how much was non-recurring benefit to second quarter revenue was?.

Yes, so on the topline, the non-recurring revenue was $4 million. On the margin side, the non-recurring benefit was also $4 million in terms of the leave reversal. If you look at the back half as compared to 2Q, you’re right, Puneet, there is implied margin pressure and margin pressure beyond the $4 million that's related to the leave reversal.

The two items that I would say are the biggest components of that, which again present margin opportunities for us is one, we've included no short term revenue in the back half of the year, which carries a higher margin profile.

And the second is, we're assuming that we are not going to be able to continue to bill business continuity pass-through costs to our clients in the back half of the year. Of the $4 million of short-term revenues that we got in Q2, $1.5 million of that was business continuity pass-through charges.

That number was down significantly from Q1, where we had $6.5 million of pass-through - of short-term revenues, of which $3.5 million was business continuity pass-through. So what we're seeing is that as we progress here, clients are going to be less and less willing to accept these one-time or short-term charges to keep their businesses afloat.

And as a result, our expectation in the back half of the year is that we're not going to be able to pass on business continuity costs to our clients. .

Understood..

And maybe just putting, if I may, an (interval) there, along with that, we have to have a hiring program continue because of some of the mismatch of the skills and from a location perspective to add. We’ll continue to have some of the carrying cost to the attrition, but still we expect it to continue till the year end..

Understood. And just a follow-up to a prior question. So you are signing new deals, but they are not ramping up as fast as they would have pre-COVID. How do we reconcile those comments with unchanged visibility of 98% assumed in the guidance? I'd expect visibility levels to be lower if ramp rates are lower. .

Because, Puneet, when we provide our visibility, it's based on what our clients have committed to. So if a client has not committed to a transition and does not have a formal schedule or plan in place, we don't include it. This approach in terms of visibility base is extremely consistent with how we've done it in the past.

The thing that's changed is that whereas maybe a year ago, if a client had decided that phase one was going to be $1 million, what we're seeing now is that phase one may only be $500,000. And as a result, we're including that in the guidance, but we're including at the same visibility rates, but at a lower dollar amount..

Got it. All right. Thank you. .

And our next question will come from the line of Dave Koning from Baird. You may begin..

Hey guys. Great job.

And I guess, first of all, my question, just on revenue, what it - I guess, is there a certain level of revenue that you know is coming back right now? And I guess where I'm kind of going with that is like travel, for example, is going to be down 40 million or so, and as people travel and everything, you'd assume that would come back.

On top of that, it seems like you have these implementations that are delayed. They're going to come back at the same time as all the rest of your pipeline gets implemented at their normal pace.

And it seems like we're setting up for a couple of years of just kind of explosive growth as all three of those things kind of collectively happen at the same time.

Is it fair to think that - this is clearly a transition year for probably everybody, but is it fair to think of it that way, that you should have outsized growth at some point in the future as different parts of this all come back?.

Yes. Dave, this is Keshav. That's an excellent question. You know, personally, as we discuss this inside the company, we actually think all of this is a pause, just a delay.

And when you just step back and look at how clients look at this whole situation, everyone talks that COVID could be managed in seven months, eight months, nine months or whatever, and therefore people make plans. I think the key is that the business drivers pre-COVID, continue to remain in place.

If anything else, have actually become far more intense. Some of the areas of differentiation that we brought to the table, have actually become far more compelling, far more attractive to the customer set across the globe. And for us, I think at this point in time, clients are just taking a more conservative view of how they give us their guidance.

As you said, on the travel side, right now if everyone is Zooming, nobody's going to fly I guess. But everyone is talking about new models to encourage people to fly. And when that happens, things will go back to normal. The same you will see with hotels.

The same you'll see with cruise lines at some stage, and the same you will see with logistics or with the retail side, as people move from essential to non-essential services. As people stop traveling on the roads, you'll see more insurance claims going up, things like that.

So from our perspective, I think what we have done in terms of guidance, has just taken what we are hearing from clients, and making sure that we are providing a consistent model of visibility to the Street.

But overall, I will say that people have completely changed the way they’re looking at their businesses, their business models, the way they will accept technology, the way they will accept new business models, the way they will react to discussions on transformation.

And I think we are being set up for a very, very healthy long-term kind of growth for the sector itself. And WNS, I think, will lead..

Yes. Great. That’s helpful. That seems to make a lot of sense. And I guess the second question, just when we think of your massive cash balance, and I mean, you had huge cash flow conversion this quarter, just outstanding, 10% of market cap is cash.

Now, do you think, are there acquisitions out there that could augment growth? Is that kind of the next leg?.

Yes, Dave, again, I’ll start and have Sanjay finish off. But we've been quite transparent about our capital allocation program. And yes, we will be opportunistic in terms of M&. We have spoken in the past about buybacks and stuff like that, but M&A is an important area that we're continuously looking at. We are scouring the market at this point in time.

I can tell you that we have actually done a few due diligences as well. And we - in some cases, we have walked away from deals because we did not feel they served the purpose for us.

But from our point of view, I can tell you that we are very actively looking at this area across various verticals and horizontals, as well as some digital areas that can help us accelerate, but we will do things at the right time, right place, and the right valuation..

And maybe just to add from a capital allocation perspective, if you recall, we still have our balance 1.1 million shares repurchase program pending. And we expect to initiate that in the second half of the year..

Yes. I think the other thing that's interesting, Dave, and Keshav kind of talked about, we're - that the M&A pipeline is extremely healthy, and that we are in active conversations, active discussions.

Similar to what we've said in the past, we also are seeing that there are some pretty healthy opportunities, not only in the traditional M&A route, but also in the capital carve out route, which is exciting for us. .

Great, guys. Well, thanks. Good job..

And the next question will come from the line of Sam England - Berenberg. You may begin..

Hi, guys.

The first one, just on the new digital capabilities, I was just wondering if they’re based on proprietary software, or is it a mix of obviously proprietary software? And how are they differentiated from what peers are offering in the same area?.

Yes. In terms of your first question, it's a mix of both. It's proprietary and through partnerships that we are putting together our hyperautomation and digital strategy. In terms of the dependency that comes with the domain associated with each one of those small offerings that make the biggest difference.

For example, if you're driving and stuff, in terms of - just a specific example is our (unintelligible) solution that you have implemented in the shipping and logistics vertical that actually drives hyperautomation using the domain depth and the strength of shipping and logistics industry. That’s the differentiator for us in the market space. .

Yes, I mean, the bottom line is, Sam, when you look at the digital solutions and the approach to digital transformation that's out there, you're going to see a lot of companies that have capabilities in analytics and capabilities in technology and automation and process expertise and global delivery.

The real question is, how well do you understand the specific vertical or sub-vertical that your client operates in? And what's your capability to bring all of these components together to help solve a business problem and create the kind of market differentiation that they're looking for? And I think that's one of the areas that WNS has always excelled.

Essentially third-party partnerships, third party tools, our own proprietary tools, are just kind of more components of what we're going to be able to deliver in terms of how we're able to execute on these types of initiatives. So it's really at the end of the day, how you bring all this stuff together to solve the problem..

Okay, great. Thanks. And then the next one, I was just wondering if you've seen any evidence of any of your competitors sort of dropping the ball during the pandemic in terms of client service and delivery, and whether that's created any opportunities for you over the past six months? I know it's something, I think you mentioned back at Q1..

Yes. And we have been looking at some of the issues that some of our competitors have faced over the last six months that is actually clients where (unintelligible) in a multi-vendor scenario, which included us.

We have been able to consolidate more work from different vendors and also have some of the new deals that we have brought on board until the end of summer, of the inability of our competitors to services those deals..

Yes. Like, like we said, Sam, when you look at the number of new logos that we've added, when you look at the client - number of client expansion, the numbers are great. They’re extremely healthy. The one challenge that we've seen is that things are just moving a little slower and a little smaller than they have historically.

But as Dave mentioned earlier, I think this really bodes well for the future because the bottom line is, as long as they do continue on a path for the next three to five years, at some point, these are going to become larger and larger deals, larger and larger engagements. .

Right. Thanks very much..

Thank you. And our next question will be from the line of Vincent Colicchio from Barrington Research. You may begin..

Yes. I'm curious.

In the travel vertical, do you expect to make any progress in terms of adding processes to help offset - with existing clients, to help offset some of the volume pressure?.

Yes. What we're seeing is two or three goals. we're seeing an increased amount of activity that in the finance and accounting space within the travel vertical, an increased amount of work that we’re taking on, both for vendor consolidation and the same CI space that we see.

So at the end of the day, from a travel perspective, we are generally focused on end-to-end domain capability and we service the end-to-end spectrum, both within the airlines or the OTA..

And what is driving this sequential strength in the UK? Is that simply the utilities vertical, and is this a trend that should continue?.

Yes. For the second - I’m sorry. Go ahead, Sanjay..

Yes. So from the second quarter specifically, initially I think one of the major driver was in the first quarter, if you saw, we had 92% as an average from a supply perspective. In Q2, we achieved 98% from our supply. So that was one of the specific reason.

And it also - from a utility as well as that vertical, which were more concentrated on the UK site and it helps provide that growth..

Okay. Thank you. Nice quarter guys..

And at this time we have no for the questions in the queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.