WNS (Holdings) Limited

Good morning, and welcome to the WNS Holdings Fiscal 2023 Second Quarter Earnings 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. As a reminder, this call is being recorded for replay purposes. Now I would like to turn the call over to David Mackey, WNS's Executive Vice President of Finance and Head of Investor Relations. David?

Thank you, and welcome to our fiscal 2023 second quarter earnings call. With me today on the call, I have WNS's CEO, Keshav Muragesh, WNS's CFO, Sanjay Puriya, and our COO, Gautam Burai. 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 30th, 2022. 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 20F. 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's CEO, Keshav Muragesh. Keshav?

Hey, thank you, David, and good morning, everyone. WNSS fiscal second quarter financial results continue to demonstrate the strength and resiliency of our business despite the challenging macro environment. Net revenue for Q2 came in at $289.3 million, representing a year-over-year increase of 13.7%, on a reported basis and 20.4% constant currency. Sequentially, net revenue increased by 5.3% on a reported basis and 8.2% on a constant currency basis after adjusting for foreign exchange. Our acquisition of Huram contributed approximately 3% to growth both year over year, as well as sequentially, and integration plans remain on track. In the second quarter, WRF added nine new logos and expanded 21 existing relationships. Sanjay will provide further details on our second quarter financial performance in his prepared remarks. Today, I would like to share a few illustrative examples of the positive impacts WNS's digital transformations are having for our clients. Last year, one of our larger insurance clients came to us with a requirement to reimagine several mission-critical business processes in order to help them improve their customer focus as well as market positioning. Key challenges for the client were elongated claims, meaning the life cycles around it, low customer experience scores, quality and scalability problems stemming from a heavy reliance on manual effort, and the need for an improved digital transformation roadmap. Critical processes in scope included claims management from a customer's first notification of loss to recoveries and settlements, policy administration, underwriting, sales and service, and the overall customer experience. Working closely and collaboratively with the client WMS was able to co-create an end-to-end digital transformation program designed to meet and exceed their key business objectives. You know, the final solution was developed using our design thinking workshops from our onshore as well as onsite innovation centers that we have spoken about in the past to reimagine key processes digital consulting to understand requirements, intelligent automation to reduce manual activity and enable faster processing with lower risk, predictive analytics to optimize business performance, and agile delivery to drive collaborative cross-functional execution with the client stakeholders. We deployed a combination of both proprietary as well as third-party platforms and digital tools leveraging artificial intelligence, RPA, machine learning, cognitive, intelligent automation, as well as gamification. As a result, WNS was able to deliver a 15% reduction in cost, an increase of approximately 20% in digital customer self-servicing, a decrease of almost 30% in claims processing time and an improvement in customer satisfaction scores from 6.8 to nine out of 10. This shift to digital has driven an increased scope of services with this client and has jumpstarted discussions for the addition of more complex and high value opportunities. Similarly, for a large UK utilities client, WNS was asked to help with multiple business challenges, which resulted from Brexit, the COVID pandemic, and more recently, the impacts on gas and electric costs from the Ukraine-Russia conflict. These disruptions resulted in spiking customer call volumes, long wait times, and low first call resolution rates, which in turn, resulted in very poor customer satisfaction scores. The WNS solution, which leveraged our proprietary experience digital platform, as well as domain-centric resources, was implemented to address the client's needs across seven customer experience channels, including voice, email, chat, social media, messaging, web, and mobile. In a period of approximately 12 months, WNS was able to help redesign the client's web portal, significantly enhance their self-service module, embed analytics to improve interactions, optimize capacity, and reduce end customer effort. As a result, the WNS experience digital solutions drove an increase of over 50% in digital channel adoption, reduced customer wait time by more than 50%, increased customer satisfaction by double digits, and reduced total cost by 7%. In addition, WNS has been able to successfully leverage the success of this solution to drive contract wins with both new and existing clients across multiple verticals. We believe that these two case studies are representative of the meaningful business improvements WNS is now generating for all our clients with our digitally focused and transformational solutions. I would also like to provide you today with a brief update on our ESG initiatives. WNS continues to make strides in setting formal ESG goals, driving improved performance, reporting our progress, and integrating ESG into our strategic objectives. Recently, WNS joined the United Nations Global Compact in support of achieving the 2030 Sustainable Development Goals. The UNGC's social initiatives and environmental objectives are closely aligned with our company's values and the priorities highlighted in our most recent corporate materiality assessment. In addition, the company expects to sign our commitment letter with SBTI or science-based targets initiative this quarter, which will include formal plans to achieve a net zero standard. From an operational perspective, we continue to focus on reducing our carbon footprint wherever possible. Over the past year, WNS has now shifted our facilities to green electrical energy in the Indian states of Maharashtra as well as Karnataka. As a result, 81% of our overall power consumption in India is now green or renewables. Plans are already in place to expand this initiative to our remaining locations in India, as well as other countries where WNS has operations. We are also focusing on continuous improvement in our human capital management efforts, especially in the areas of training and employee development. We believe these investments are critical to the long-term health of our business. Providing a nurturing and healthy work environment and preparing our workforce for the future will enable WNS to continue to attract and retain top level talent and meet the changing needs of our clients. In fiscal 2022, the company provided over 4 million hours of training to our people globally, or an average of 86 hours for every WNS employee. In support of these efforts, the company spent more than $14 million on learning and professional development. From a reporting perspective, last month we released our second annual corporate sustainability report and launched a dedicated online ESG microsite. These sources now include additional important ESG information and help make the company's policies, data, and strategy easier to access. As we look into the second half of this fiscal year, we continue to see strong broad-based demand for BPM solutions as clients aggressively look to leverage technology and automation to improve their competitive positioning and reduce cost. This trend, we believe, will remain largely independent of the macro environment WNS is very well positioned to capitalize on these trends by leveraging our differentiated capabilities and ongoing investments in domain technology as well as analytics The company will continue to focus on superior execution best-in-class financial performance and Delivering long-term value for all of our key stakeholders including clients employees investors, suppliers, as well as the communities that we live in. I would now like to turn the call over to our CFO, Sanjay Puria, to discuss further our results and outlook. Sanjay. Thank you, Keshav.

In the fiscal second quarter, WNS net revenue came in at $289.3 million of 13.7% from $254.4 million posted in the same quarter of last year and up 20.4% on a constant currency basis. Sequentially, net revenue increased by 5.3% on a reported basis and 8.2% on a constant currency basis. Our acquisition of Gurum contributed just under 3% to both year-over-year and quarter-over-quarter revenue growth. Our sequential revenue growth was driven by broad-based momentum with both new and existing clients and an increase in short-term revenue. These benefits were partially offset by currency depreciation against the US dollar and reduced benefits from hedging. In the second quarter, WNS recorded $2.4 million of short-term revenue. Adjusted operating margin in quarter 2 was 20.4% as compared to 21.8% reported in the same quarter of fiscal 2022 and 21.1% last quarter. Year over year, adjusted operating margin decreased as a result of wage increases and return to office costs. This headwind more than offset operating leverage on higher volumes, improved productivity, and favorable currency movement net of hedging. Sequentially, margin decreased as a result of wage increases, return to office costs, and higher SG&A driven by investments deferred from part 1 marketing and professional fees, and bonus and incentive provisions based on improved performance. These headwinds were partially offset by higher volumes, improved productivity, and currency movement net of hedging. The company's net other income expense was $0.9 million of net expense in the second quarter, the same reported The same as reported in Q2 of fiscal 2022 and down versus $0.2 million of net income last quarter. Year over year, increased net income driven by higher interest rates was offset by interest expense associated with our long-term debt taken in Q2. Sequentially, the unfavorable variance is the result of reduced interest income on lower average cash balances driven by our GURAM acquisition and share repurchases and higher interest expense driven by the new long-term debt position. WNS effective tax rate for quarter two came in at 20% down from 21% last year and down from 21.1% last quarter. Both year over year and sequentially, the reduction in our effective tax rate is largely the result of shifts in our geographical profit mix and changes to the mix of work delivered from tax incentive facilities. The company's adjusted net income for quarter two was $46.6 million, compared with $43.1 million in the same quarter of fiscal 2022 and $45.9 million last quarter. Adjusted diluted earnings were $0.93 per share in Q2 versus $0.86 in the second quarter of last year and $0.90 last quarter. As of September 30, 2022, WNS balances in cash and investments totaled $265.3 million and the company had $79.5 million in debt. In the second quarter, WNS generated $34.5 million of cash from operating activities and incurred $7.9 million in capital expenditure. In addition, the company paid next $144.2 million towards our acquisition of VORAM, repaid $31.7 million of short-term debt, and took out an $80 million term loan for general corporate purposes. WNS also repurchased 358,000 shares of stock at an average price of $77.78, which impacted quarter 2 cash by $30.4 million. DSO in the second quarter came in at 30 days as compared to 31 days reported in quarter 2 of last year and 29 days last quarter. With respect to other key operating metrics, total headcount at the end of the quarter was 57,503 and our attrition rate in the second quarter was 41% as compared to 34% reported in quarter 2 of last year and 49% in the previous quarter. The elevated attrition rate remained concentrated at the junior-most level of the organization and focused on voice-based CX service in the Philippines resulting from the return to office mandate. As in prior quarters, we do not believe that the current attrition is currently impacting our ability to service clients or accelerate growth. The company expects attrition to continue trending downward over the next several quarters. Build sheet capacity at the end of the second quarter increased to 36,401, including both organic growth and the addition of Buram's infrastructure. In quarter two, WNS continued our progress towards in-person operations, averaging 52% work from office during the quarter. In our press release issued earlier today, WNS provided our revised full-year guidance for fiscal 2023. Based on the company's current visibility level, we expect net revenue to be in the range of $1.1 billion to $1.15 billion, representing year-over-year growth of 8% to 12% on a reported basis, and 14% to 18% on a constant currency basis. The acquisition of Gurug is expected to contribute 2% inorganic growth to fiscal 2023. And our top line projection assumes an average British pound to US dollar exchange rate of 1.12 for the remainder of fiscal 2023. Consistent with our guidance approach in previous years, We currently have 98% visibility to the midpoint of the range, which does not include any uncommitted short-term revenue or improvement in travel volumes beyond quarter 2 level. I also wanted to call out that our guidance includes the ramp down of a large healthcare process in fiscal quarter 4. Full year adjusted net income for fiscal 2023 is expected to be in the range of $186 million to $196 million, based on an 82 rupee to a US dollar exchange rate for the remainder of fiscal 2023. This implies adjusted EPS of $3.68 to $3.87, assuming a diluted share count of approximately 50.6 million shares. With respect to capital expenditures, WNS certainly expects our requirement for fiscal 2023 to be up to $40 million. We'll now open up the call for questions. Operator?

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star then 1-1 on your touchstone telephone. In the interest of time, and to enable everyone on the call to participate, please limit your query to one question and one follow-up. And our first question comes from Brian Bergen with Cohen. Your line is open.

Hi, guys. Good afternoon and morning. Thank you. I wanted to just start with client contract behavior. Can you talk about sales cycles and pipeline conversion? And have you seen any notable change in activity over the last three months? Or has it been consistent? And can you also comment specifically on what you're seeing in the UK and the Europe client activity too?

Hi, this is Gautam. And from the first part of the question, what we are seeing is the contract cycles are starting to reduce at the moment in terms of closure rates. What we are seeing is the pipeline continues to be exceptionally healthy across most of our verticals. Second, what we are seeing is the clients are reducing the time in terms of decision making. And thirdly, they want to go down the path of aggressive ramps at the moment. And this is across the board, whether it's the US or the UK, the increased demand continues.

Okay, that's good to hear. And then just on margin, can you break down in the second quarter kind of underlying margin change versus FX driven? And as you think about the second half, how are you projecting gross margin levels and I guess Really, again, the underlying margin change versus FX, and did you have any change in that for your AOM target?

Sure. Let me take that, Brian. When you look at the impacts to the quarter, and I would assume you're looking at this sequentially for Q2, FX for us was actually a little bit of a tailwind on a net basis. Obviously, what we saw was most currencies depreciated against the U.S. dollar and And I think as most of our analysts and investors know, we have more exposure on the cost side of our business to foreign exchange than we do on the revenue side. So obviously, even though we saw significant depreciation in the British pound, our exposure on the rupee and the Philippine peso is much higher. So as a result, we had about 50 basis points sequentially of tailwind on the FX side. If you look at the real drivers for the margin pressure sequentially, it's the higher SG&A costs. And as Sanjay mentioned, which relates to the deferrals and investments from Q1, which we discussed last quarter. And as Sanjay mentioned, the ongoing wage increases that we see and the recovery from COVID as we shift our business to increasingly back to work from office. When you look at the back half of the year and the implied guidance and margin, what you'll see is that sequentially, both on a gross and on an operating basis, margin expansion, right? So when you kind of break this down in terms of the first half of the year versus second half of the year, we do see some of that pressure abating. And when you look at the first half of the year, we've averaged just under, I believe, 21% on an adjusted operating margin basis. The implied guidance that we have for the full year is for the second half to average closer to 22.

And maybe just to add that, you know, from an FX perspective in the quarter to your portion is going to be neutral because we are well hedged from the balance of the year.

Okay, great. Thank you. Thanks, Brian.

Our next question comes from Maggie Nolan with William Blair. Your line is open.

Hi. This is actually Jesse on for Maggie. I had a similar question on the clients. You guys have talked about the Internet-based client segment before. How have those conversations changed in the last few months?

Hi. We have not seen any material changes in terms of the conversations with these clients. The committed ramps that we have been forecasting have gone on smoothly. The transition of a lot of the work that we were taking in has been going smoothly. So where we see is the demand continues to be strong, even within this sector, because where we play within the sector is specialized skill sets and specialized processes.

Yeah, I think that... I just want to add that, you know, I know there's a lot of noise out there about an upcoming recession and the fact that it could affect a number of businesses as a result. But the reality that we are seeing, as Gautam mentioned, is first and foremost, you know, continued decision making, you know, in terms of clients and prospects both for new processes as well as in terms of new business where as opposed to following the traditional long sales cycle, we were actually surprised to see clients taking decisions faster. And so we're hoping that trend will continue as clients probably prepare for a recession in the longer term. So that's one. The second thing that we are very enthused about is that the investments that we have made over the past many quarters actually plays in extremely well into a weak macro or a potential recession. And therefore, we actually think the opportunities for our business are much greater than the risks. And I think a lot of it is being borne out by the kind of conversations we are having with our existing clients who are now scampering to get more processes through the door quickly. as well as new prospects who are saying, you know, can you help me, you know, make this transition, you know, faster than ever. So I think the weak macro, first and foremost, is a real driver for accelerated adoption of BPM, we believe. We believe that digital demand is not discretionary in nature, and in fact, the cost-saving element is now going to start playing a bigger you know impact and therefore for prospects and clients to interact with companies like us who have actually invested in the back end in all of these things is actually very positive from you know us and as well as their point of view as well as we also realize that the switching costs uh is very very high for any client And therefore, their ability to actually grow with us and their need to grow with us is actually higher. So stability of services also is very, very high. So overall, I would say that at this point in time, while we may all be talking ourselves into a recession, the reality is it's all working extremely well for WMS.

Yeah. And just to add a little bit of color to Gautam's comments earlier, Jesse, When you look at the Internet-based clients, I certainly think we might have a different philosophy if what we were doing for these customers was primarily on the CX or customer support side. But when you look at the types of work that we've been doing for Internet-based customers, whether it's procurement-based, whether it's finance and accounting, whether it's core operations, we don't see that same level of volatility. So we believe that not only are our service offerings playing extremely well into the needs of these businesses, whether they're growing or not growing, but also that we have very limited volume volatility with respect to these clients.

I appreciate the very comprehensive answer there. I had one follow-up on talent. So what would you attribute the decline in attrition to? Do you think it's a function of employees staying put these days? Do you think it's from the wage increases? What's going on there and informing your expectations over the next few quarters?

Yes, in terms of the decrease in attrition over the last few months, We definitely expect the trend to continue. We do expect a little bit of volatility in certain job families. But overall, we do expect to start seeing the reducing trend. One of the bigger reasons is the increasing talent pool at normalized wages in the lower end of the skill sets is what's helping drive that area. The second one is the fear of the recession. As Kesha was mentioning earlier, it's also making sure that people stay put in their jobs. And thirdly, in some of the other ancillary industries, the demand for similar talent has started to reduce. So overall, all these factors put together, we definitely see attrition over the next few quarters to start reducing.

Yeah, I'll just add one thing. I'll just add one thing. You know, I think employees in the labor market really are smart people. You know, when economists and everyone starts talking about recession and you know a looming you know kind of a problem for the rest of the of the world they also realize which businesses are insulated from all of this and it's very clear from their point of view our business even as opposed to the traditional id services business is actually far more insulated and i think a lot of these people are therefore voting now to stay on uh with companies like us you know where they have a much you know longer potential to stay and at the same time some of the expectations that they have around wages, around careers, around progression, around growth, around learning. All of that is being extremely well met with the investments that we have made. So I think it's a lot to do with that.

And just to add one other piece of color more to Gautam's comment, remember that part of the driver for the high spike in the attrition rate was the return to office mandate in the Philippines. And as we've gotten north of now 90% in office in the Philippines, and over the last two to three quarters, as we've hired people into the company with the knowledge that they would be working from office, we've seen that attrition rate start to come down. So that's also clearly part of the story.

That's helpful. Thank you for all your responses.

Thanks, Jesse.

Our next question comes from Yank Tandem with Needham & Company. Your line is open.

Thank you. Congrats on the impressive quarter. I wanted to start with a question around the sales organization. I think from time to time, you guys have shared some metrics around that. So maybe if you could just speak to how big is the sales organization today, how fast do you expect it to grow? especially given that based on your guidance, it sounds like growth is running above trend. You know, when I look at the midpoint of the guide for the year, it's 16% constant currency. I think in the past you've run maybe closer to low double digits, low teens. So we'd just like to understand how are you thinking about the sales organization and expectations to grow that to meet the demand?

Hey, let me, let me start.

Have you finished your question? Yes. Sorry about that. Very long winded.

apologize no no that's a very interesting and good question so let me start by first of all saying thank you for you know your congratulatory message but i must tell you our sales team is very very busy man right and i think that it really you know gives us a lot of comfort and confidence first of all we've got a very stable you know uh team at the leadership level you know across the globe and you know the team that we brought in over a period of time and that is delivering exceedingly well everyone is super busy in terms of you know running a number of deals many of which are you know very well bracketed in the large deals kind of segment I think this whole talk about recession and the forthcoming doom and gloom that the world is talking about is actually playing exceedingly well to our business model. So that's the first thing I'll say. And I think at this point in time, we are very well positioned in terms of the number of people that we have. And with the acquisition that we did recently, it actually adds more depth and firepower And the potential for collaboration between that sales team and the traditional WNS team also is very exciting. I'll stop there, but I'll ask Dave to talk a little more about some of the numbers or the metrics that you asked for.

Sure, Keisha. So I think we talked a little bit, I believe it was a couple of quarters ago, Mike, about acceleration and the investment in the sales force. We ended the second quarter with 131 salespeople in the organization. And to your point about growth, if you look at the size of the Salesforce, it is now 16% higher than it was three quarters ago. So you kind of have seen as that team matured and became fully productive, we have made the next step function in the investment into the Salesforce. And now the focus will be making these people that we've brought on over the last couple of quarters successful. productive in delivering that accelerating growth going forward. So you're spot on. We have made those investments. We do see the growth opportunity and we are preparing for that going forward.

That's very helpful. Thank you so much for the color. And just as a quick follow-up, in terms of the client wins, I think you had nine new logos this quarter. Could you provide any insights into the size, scale, verticals, any details around that would be helpful. Thank you.

Sure. I can take that, Mike. Obviously, as both Keshav and Gautam alluded to, we're pretty excited about the fact that what we've seen is deal sizes expanding. We're seeing more and more clients looking to move the needle in terms of digital transformation and end-to-end services and solutions. Again, similar to what we've seen in the past, good diversification across verticals and geographies in terms of where it's coming from. So this last quarter, we've got representation in terms of new logos from high-tech and professional services, from insurance, from travel, from healthcare, from manufacturing and retail. So again, kind of similar to what you'll see when you look at the revenue momentum in the business, when you look at the overall pipeline of the business, extremely strong and extremely broad-based.

Thank you so much, Dave. Thanks

Thanks, Mike.

Our next question comes from Ashwin Shrivakar with Citi. Your line is open.

Thank you. Hey, guys. Good to hear from you all. Good results. Yes, my first question is from a modeling perspective, can you kind of walk through 3Q versus 4Q? Normally there's sequential growth each quarter, but you mentioned a healthcare client ramp down. I'm sorry if I didn't hear the impact of that. And then, you know, it's good to see new client ads and ramps, but could you also comment on what volume sensitivity you might have in sort of the base of revenues that can be potentially affected by the longer-term recession, as you mentioned, Kesha.

So let me take that, you know, sequentially where you, Ashwin, talk about quarter three to quarter four specifically, you know, from an overall healthcare process. So a couple of things impacting. One is the large healthcare process we spoke about, as well as, you know, FX headwind. That is the second, which is, you know, overall impacting. But having said that, right now uh you know based on over 98 midpoint visibility uh you know those numbers are there and we have not factored short-term revenue as well as the travel recovery and you know and there's a range over there where there's a opportunity from upside uh perspective uh So, you know, overall, as you did, very healthy, you know, we are being in multiple, you know, very late stage. So those are also opportunities over there. volumes right now seem to be intact other than just one of the healthcare process uh you know uh in fact uh as bottom alluded clients are in fact looking for much closure faster closure of the deals and in fact faster transition so those are some of the activities what we are seeing uh and you know as we move forward we'll keep an update about that yeah let me just add a little bit of color to sanjay's comments i think when we look at the seasonality

You know, the expectation right now for fiscal Q3 is that the revenues are going to be relatively flat versus fiscal Q2. I think, as Sanjay mentioned, you know, when you look at what's included in that guidance, obviously 98% visibility. So, you know, it's largely locked at this point. No short-term revenue, no pickup and travel assumed in there. So, we should have opportunities, but in terms of the guidance right now, the expectation is flat in Q3. And then the biggest thing that we have there in terms of the reason for that flatness, though, is the optics around FX. With respect to Q4, we do have a dip from Q3 to Q4 on the revenue line because of this healthcare process that we've lost. But other than that, the overall business momentum remains healthy. So I think it's important to understand that. Relative to the volume sensitivity, I think as we've spoken about before, The biggest place we're going to see that volatility is on the CX, on the customer support side, where there's a more direct one-to-one relationship between volumes or activity levels potentially and the client. But it's also important to understand that some of those volumes may or may not have direct implications with what's going on with the macro. So, for example, if you look in the UK at our utilities business, You know, while there may be challenges with the macro, you know, when you look at the UK, for example, we could actually see increased activity levels because of the price of gas and electricity, because of rolling blackouts, things like that. So activity levels in that vertical could actually go up as a result of a weakened macro. Then we have other businesses like insurance where there is very little correlation between macro and overall activity levels, things like claims. So I think the exposure that we're going to see is going to be in the CX business, which is 20% of our overall revenue, but more specifically in the CX business where a weakened macro has a direct impact on the volumes that we see. And that will limit, I think, some of that exposure.

So Ashwin, I just want to also, I also want to mention that, you know, I think both Sanjay and dave you know very elegantly answered this whole thing but i just want to spend a little more time on the overall long-term macro you know we actually believe that you know if this prediction actually comes true it will actually be positive for our business and obviously one part of our business is more sensitive and you know we will you know we will you know work on that part the rest if you look at the way wns has transitioned its business model over the last so many years based on its business we are far more resilient in terms of being able to manage all of it, one. Second thing is clients are smart as well. They understand which companies to bet on when they are facing this kind of uncertainty. So I just want to add another element. In fact, we're seeing, I mentioned earlier that our sales people are extremely busy, right? And I expect that to continue for the foreseeable future because among other things, as clients and prospects look at potentially this so-called recession, there are new, you know, potentials of revenue coming in, including the takeout of captives, right? A number of them are also saying, if this is gonna happen, you know, maybe I should be focused on my core business as opposed to trying to run a captive in a business that maybe WNS should be running better for me. Now, those are the kind of additional conversations that are actually happening, that we actually think will also be very, very positive for us in addition, to the traditional impact that our salespeople are having on the ground.

Understood. And then on the cost side, as I sort of think longer term, this year, would you call this year a bit more of a transition year because you had multiple bad guys like wage inflation, return to office costs, higher attrition and so on, and longer term should mix and productivity, contribute to higher margins, get back to the 22%, 23% level?

Let me take that, Ashwin. So I think we've been pretty consistent saying that in this overall environment, we're going to run a low 20s operating margin business. And if the stars line up, we could be at 22. If they go against us, we could be at 20. And obviously, if you look at the operating margin guidance for this year, what's assumed, you know, we're spots between 21 and 22. So I think despite these pressures that you rightly called out in terms of return to office, in terms of outsized wage increases, given the demand environment and given the access to talent challenges, you know, yeah, there's some pressure here. But when we look forward, I think the real opportunity for the sector as a whole is this ongoing shift towards digitization i think it's the ongoing shift towards non-fte models and if we do see margin lift in our business then we believe it's certainly a possibility it will be as a as a result of clients willing to move to these kind of higher end higher value transformational business models and away from the traditional fte-led type of business model so We know if we can move a client to a model where we're getting paid based on outcomes that we deliver and we have the ability to change and transform how that process runs, it's typically margin accretive to us. The real challenge is getting clients comfortable enough with outsourcing things that are core and mission critical to them that they're willing to give up control of those processes. And I think as the industry evolves and matures and clients become more comfortable with our ability to deliver that, you're going to see that transition. But in terms of our ability to drive that, we don't have that, right? So I do think if we were to look out five years, I wouldn't be surprised if we were talking about this business as a mid-teens margin business versus a low, I'm sorry, a mid-20s margin business versus a low-20s margin business. the same way we used to talk about this business as a high teens margin business, and now we talk about it as a low 20s.

Understood. So mix remains an opportunity. That's good to know.

Longer term and very limited control on our part, but yes, we think directionally that's where the industry is headed.

Thank you, guys. Thanks, Ashwin.

Thank you.

Our next question comes from Nate Svesen with Deutsche Bank. Your line is open.

Hey, guys. Congrats on the results today. First question, I just wanted to ask on how the VRM integration is going today versus your prior expectations. So what are you seeing from a project standpoint? What cross-sell opportunities are you seeing? And just any color you can buy would be great. And then Just clarifying, so Vurum added three points to growth this quarter, but in the guidance, you're still only assuming two-point contribution to the top line. So just wondering the difference between those two numbers. Anything you can give would be great.

From a Vurum perspective, the acquisition is going better than planned is what I would state at the moment. The Urum acquisition has given us the capability to actually drive deep in terms of our ability to manage better productivity for our client, which is where the demand comes in, bring about greater digital interventions to our client needs. So the depth that they have provided to us is allowing us to effectively not just cross-sell within our existing clients, but to drive an aggressive digital solution within our prospects also. So that's one of the core reasons over the last quarter also we have seen the accelerated pipeline and closure rates that we see. Culturally, the team is very similar to the WNS way of working, which is co-create with our client-led solution. So that's another area where we have seen a big plus. And financially, the acquisition has been accretive to the WLS growth rates and the margin level.

And maybe I'll just add over there, you know, from an overall VORAM perspective, you know, gold is a 2% what we have spoken from a guidance perspective. But definitely, as Ratham was talking about a cross-sell is an opportunity that's helping us to drive the organic growth. from the company, including some of the, you know, the productivity, what we can drive with our existing client. And, you know, despite those wage pressures and, you know, the attrition, what we spoke about, these are some of the things which are helping us to drive our market.

Yeah. And just to your question about the percentages, Nate, you know, we took over VIRM effectively July 1st. So when you look Q2, I'm sorry, fiscal Q1 to fiscal Q2, you have a full quarter of impact, which is 3%. When you look year over year, obviously, we also have that same 3%, which is what you'll see in Q3 and Q4 as well. The reason the full year impact is only 2% is because you only have three quarters of a year of room.

Got it. Very, very helpful. And then just my follow-up. So obviously travel and leisure growth still looking very strong despite the comp getting a little tougher this quarter. So maybe you can talk a little bit about how business travel is trending and sort of how far away from pre-pandemic levels travel is and if they're still upside to numbers. I think previously you had talked about 2% upside to revenues if travel returned to historical levels. So just wondering where we're at versus pre-pandemic and if that upside still stands.

I think we're still slightly short to the pre-pandemic levels, especially on the business side of the travel. And what we are starting to see is whilst in Q2, we had few clients increase their commitments to us, which has been forecasted over the next few quarters for us. The exciting part within the travel sector is the growth that we have had is not just across existing clients in terms of volumes, but the new clients that we have added are across multiple sectors, i.e. airport management, Cargo as well as hospitality and what's even more exciting is we have been able to win businesses across the higher end of our delivery ecosystem which is across finance and accounting core operations and the analytic side of the business so where we see is they're extremely enthused with the growth of our travel business and we have continued to be extremely optimistic that this will be on an upward trajectory and

Yeah, and just to give a little more color to that, Nate, you know, we had previously talked about about a 2% recovery opportunity, which was about $5 million a quarter. We did have about a million dollars of pickup in fiscal Q2 from travel volumes. So we still look at that recovery opportunity as being about $4 million a quarter or just under 2%. So, yes, we did get some back, which is great to see, but there does remain a travel recovery opportunity going forward. Great. Thanks for the call, guys. Thanks, Nate.

Our next question comes from David Koning with Baird. Your line is open.

Yeah. Hey, guys. Thanks so much. Nice job. And maybe my first question, research and analytics, I know it's not very big, 10% of revenue. It was down 11% sequentially after five quarters of sequential growth in just Wondering anything to that specifically. I mean, maybe that's a little more macro sensitive than the other pieces of the business.

Yeah, so you know, from a research and analytics perspective, you know, there was a, you know, reduction from a healthcare client, specifically on the life sciences side. And this was, again, a very disciplined approach to not continue with a low margin account. And that not only impacted from a research analytics, but you'll see from a metrics perspective on the healthcare segment as well as the UK segment, R&D, it was around that. Having said that, it was a known brand account and was part of our guidance provided you know, earlier on that.

Gotcha. So that was the, yeah, the healthcare client was what hit that segment. Would have that been up sequentially without that headwind in the quarter? Yes.

Yes.

Okay. Okay. And then just the follow-up question, anything with interest income or expense going forward, you know, just given all the moves in rates and everything, or is the rate that we saw This quarter, I think $4 million of expense, $3 million of income. Is that pretty sustainable going forward?

Yeah, at this stage, definitely, it's, you know, having all other parameters remain safe, it's pretty sustainable, and that's already factors on the debt, what we have taken for general doctor purpose, which is going to have an impact of almost, you know, 4% as an average, which already has been making some spikes of the interest rate, what we expect.

Yeah, so yeah, exactly, Dave. We expect interest income will run around $3 million per quarter for the back half of the year, and interest expense probably close to $4 million per quarter.

Yeah, great. Well, thanks, guys. Great job. Thanks, Dave. Thank you, Dave.

As a reminder, to ask a question, please press star 1-1. Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

Yes, nice quarter, guys. Keisha, if I'm curious, how do you feel about your ability to add scope to your top five and top ten as an offset to potential volume weakness if we get into a recession?

So, Vince, great question. You know, first and foremost, I actually think that potential weakness that you're talking about is positive for WNS, and based on all the conversations we are having with prospects, we're already seeing people just assuming that something will happen, and therefore it's helping us because they're starting to take decisions, as Gautam said, you know, in some cases faster than what we expected. That's one. The same pressures hold good for our existing clients as well. Because none of them want to be caught unprepared if something happens. Nobody really realizes or knows for sure if it's happening or not. But at the same time, this time, everyone is working on the basis that something is going to happen and that the street knows more about this potential recession. And therefore, all of them are actually having elevated conversations with us. And again, I'll tell you, I think a lot of it is also with who they're having this conversation. At this point in time, I think a lot of these clients are focused on working proactively with partners who have made the investments over the years in areas that make sense to them, and therefore are helping them in terms of taking some of their fixed costs out, making it more variable, preparing them for a new environment where you know they could depend on us for you know for managing in this new environment so actually we feel very very positive about it but I just want to clarify that even on the you know even in the case that there's a change in you know the overall macros we actually think is positive for our sector and for the business in particular

And as far as a follow-up, if I remember correctly, you have a very high percentage of COLA adjustments in your contracts. For those where you don't have those adjustments, I'm curious, has there been any pushback on pricing?

So, you know, from a, still we have the SCOLA adjustments into the contract, you know, that's a pretty standard what we go with. From an overall pricing pressure, I don't think there is any pricing pressure. You know, the discussion generally mostly happens from a total cost of ownership reduction rather than, you know, the FTE rates or the pricing. And that is, you know, when we co-create the solution, that's always driven through the productivity or the automation or the transformation. as well as, you know, the recent acquisition of the Vura. Those are some of the things which is going to help to drive and achieve those clients, you know, the proper cost reduction.

Okay, thank you. Yeah, it's very rare. Go ahead. We have pricing discussions with our clients. Now there's this constant pressure and it's baked into our business every year. There's this constant pressure for productivity, right? That's part of what we sell to clients is our ability to manage their processes better. And certainly if what's driving a client to want to reduce costs is the macro environment, then in those cases what we can do is we can always have a conversation with the client about how to leverage technology, automation, process expertise to be able to deliver those benefits. But to have a conversation about, hey, you're charging us $10 an hour for someone, we want you to charge $9, that's not a conversation that we're having.

Thanks again, and congrats on the quarter. Thanks, Vince.

At this time, we have no further questions in the queue. Thank you for your participation. You may now disconnect. Everyone, have a great day.