WNS (Holdings) Limited

Good morning and welcome to the WNS Holdings fiscal 2023 third quarter earnings conference call. At this time, all participants are in the 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 will 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 third quarter earnings call. With me today on the call, I have WNS's CEO, Keshav Murugesh, WNS's CFO, Sanjay Puriya, 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 results for the fiscal third quarter ended December 31st, 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 uncertainty 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, acquisition-related expenses or benefits, and goodwill impairment. Adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, 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?

Hey, thank you, David, and good morning, everyone. In the fiscal third quarter, WNS continued to invest for the future while executing well and delivering solid financial results. Overall, our business continues to show both strength and resilience despite the challenging macro environment. Net revenue for Q3 came in at $292.9 million, representing a year-over-year increase of 12.2% on a reported basis and 19% on constant currency. Sequentially, net revenue increased by 1.3% on a reported basis and 2.3% on a constant currency basis after adjusting for foreign exchange. Our acquisitions added approximately 3.6% to growth year over year and 0.7% In the third quarter, WNS added 11 new logos and expanded 24 existing relationships. Sanjay will provide further details on our third quarter financial performance during his prepared remarks. As many of you are aware, in mid-December, WNS announced the acquisition of two token strategic assets. In line with our stated criteria for M&A, we believe that these companies fill gaps in our capabilities, are strong cultural fits, meet or exceed our financial objectives, and were fairly valued. At a high level, the additions of OptiBuy and the Smart Cube elevate WNS's offerings in digital solutions, procurement, supply chain, and advanced analytics while helping expand our European footprint. These all represent identified areas of strategic focus for the company. Based in Poland and founded in 2010, OptiBuy helps companies leverage the world's leading digital procurement and supply chain platforms by providing consulting, implementation, and integration solutions. Deploying third-party technologies, including iValua, Jagger, and O9, OptiBuy is able to deliver significant benefits to clients across the procurement value chain, including cost reduction, improved cash management, and streamlined supply chain performance. The company's focus on designing and building optimized digital processes is the perfect complement to WNS's existing expertise in running procurement functions. In addition, OptiBuy brings front-end digital strategy and consulting services to the WNS portfolio and helps expand our geographic procurement footprint in the whole of continental Europe. The Smart Cube is a platform-led analytics firm focused on procurement, supply chain, and commercial sales and marketing. They have a unique on-demand digital market intelligence platform called Amplify Pro that helps generate actionable insights and improved decision making. This technology accelerator combines artificial intelligence with human intelligence to scan the competitive landscape, benchmark costs, measure KPIs, identify trends, and manage risks for clients. In addition, the Smart Cube has a seasoned team of approximately 600 research and analytics experts, including more than 400 with master's degrees. These resources possess deep domain expertise in procurement and supply chain and technical skills, including data engineering, data visualization, artificial intelligence, as well as machine learning. For procurement and supply chain, the Smart Cube delivers analytical market intelligence across category management, commodity management, and supply risk including expertise in ESG sourcing. In commercial sales and marketing, they help drive revenue growth management, consumer and market insights, and pharmaceutical marketing effectiveness. Both OptiBuy and the Smart Cube bring strong domain leadership, highly specialized teams, and proven track records of performance across revenue growth, operating margins, and customer satisfaction. They also serve blue chip client rosters that present significant cross-sell and up-sell opportunities. While these firms have niche areas of vertical expertise, including retail, PPG, and healthcare, WNS views both assets as horizontal in nature, allowing us to easily take their offerings across our verticals as well as geographies. These services are highly complementary with our existing offerings and with each other and will enable WNS to provide differentiated end-to-end solutions to our global clients. As I mentioned earlier, procurement, supply chain, and analytics are strategic areas of investment for WNS. The global procurement space is rapidly growing and evolving as clients shift their attention from transactional processing to tactical buying to strategic objectives, including risk and compliance, e-sourcing, category management, as well as sourcing innovation. Driven by digitally led solutions with integrated analytics and deep domain expertise, clients are looking for their BPM partners to help reduce supply hazards increase agility, drive sustainability, streamline capital, and improve cash flows for them. Since our acquisition of Denali in March of 2017, WNS has consistently been recognized by the industry analysts as a leader in procurement BPO. Over this time period, our procurement revenues have grown by more than 25% compounded and now represent approximately 10% of total company revenue. And while we are happy with the progress we have made, we believe our new acquisitions will help accelerate WNS's leadership position and business momentum by enabling WNS to better compete for large global multi-tower transformational deals. Looking forward, we remain excited about the current demand environment for BPM and WNS's differentiated positioning in the market. We continue to invest both organically as well as inorganically in creating solutions which combine state of the art technology with best in class talent. Despite the weak macro, our new business pipeline has never been healthier and the company is delivering solid top line growth while maintaining industry leading margins. additionally we are making steady progress on our key esg and corporate sustainability goals this past quarter wns was named to the forbes 2022 list of world's best employers highlighting our success in creating a globally collaborative inclusive and rewarding organization in addition the company signed our commitment letter with the Science-Based Target Initiative, or SBTI, to reduce our emissions in line with the latest climate science. Combined with our financial and operational performance, we believe our ESG initiatives will allow WNS to deliver maximum value to our customers, our employees, shareholders, and the communities we work in. I would now like to turn the call over to our CFO, Sanjay Puria, to further discuss our results as well as the outlook. Sanjay. Thank you, Keshav.

In the fiscal third quarter, WNS net revenue came in at $292.9 million, up 12.2% from $261.2 million posted in the same quarter of last year and up 19% on a constant currency basis. Sequentially, net revenue increased by 1.3% on a reported basis and 2.3% on a constant currency basis. Acquisitions contributed 3.6% to year-over-year revenue growth and 0.7% quarter-over-quarter. Our sequential revenue growth was driven by broad-based momentum with both new and existing clients, and the half-month impact of our acquisitions of OptiBuy and the SmartQ. This benefit was partially offset by currency depreciation against the U.S. dollar, hedging losses, travel seasonality, and a reduction in short-term revenue. In the third quarter, WNS recorded $0.7 million of short-term revenue. Adjusted operating margin in Q3 was 21.9% as compared to 21.4% reported in the same quarter of fiscal 2022 and 20.6% last quarter. Year over year, adjusted operating margin increased as a result of operating leverage on higher volumes, improved productivity, and favorable currency movements net of hedging. This benefits more than offset the impact of annual wage increases and costs associated with our return to office. Sequentially, margins increased as a result of higher volumes and improved productivity. This benefits more than offset increased wages and return to office costs. The company's net other income expense was $1.2 million of net expense in the third quarter down from $0 million reported in Q3 of fiscal 2022 and down versus $0.7 million of net expense last quarter. Year-over-year benefits from higher interest rates were more than offset by lower cash balances resulting from share repurchases and acquisitions and increased interest expense associated with long-term debt taken in Q2 and Q3. Sequentially, reduced interest income on lower average cash balances and higher interest expense driven by long-term debt more than offset a $0.3 million non-recurring benefit from a settlement of an insurance claim. WNS effective tax rate for quarter three came in at 19.8% down from 20.6% last year. and the same percentage as last quarter. Both year-over-year and sequentially, changes in our effective tax rate are largely the result of shifts in our geographical profit mix and changes to the mix of work delivered from tax incentive facilities. WNS also received a one-time benefit of $0.3 million in quarter three, as our liquid mutual fund investment shifted from short-term to long-term status. The company's adjusted net income for quarter three was $50.6 million compared with $44.4 million in the same quarter of fiscal 2022 and $47.2 million last quarter. Adjusted diluted earnings were $1.01 per share in quarter three versus $0.88 in the third quarter of last year and $0.94 last quarter. As of December 31, 2022, WNS' balances in cash and investment totaled $249.8 million, and the company had $179.4 million in debt. In the third quarter, WNS generated $70.3 million of cash from operating activities, incurred $11.4 million in capital expenditures, and took out a $100.9 million term loan for our acquisition of the SmartQ. In addition, the company paid net $168.7 million towards our two acquisitions as well as new captive carve-out with a large North American insurance company. DSO in the third quarter came in at 34 days as compared to 30 days reported in quarter three of last year and 30 days last quarter. With respect to other key operating metrics, total headcount at the end of the quarter was 57,994 and our attrition rate in the third quarter was 28% as compared to 36% reported in quarter three of last year and 41% in the previous quarter. In the quarter, attrition reduced across most skill levels and geographies, including significant reductions in voice-based CX services in the Philippines and entry-level work in India. The company expects attrition will normalize over time in the low 30% range, but could continue to be volatile quarter to quarter in the current labor environment. Built seat capacity at the end of the third quarter increased to 37,611, including organic growth and the addition of infrastructure from OptiBuy and the SmartQ. In quarter three, WNS continued our progress towards in-person operations, averaging 60% 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 levels, we expect net revenue to be in the range of $1,146,000,000 to $1,158,000,000 representing year-over-year growth of 12% to 13% on a reported basis and 17% to 19% on a constant currency basis. Our three acquisitions are expected to contribute approximately 3% inorganic growth to fiscal 2023. And our top line projections assumes an average British pound to US dollar exchange rate of 1.21 for the remainder of fiscal 2023. Consistent with our guidance approach in previous years, we currently have over 99% visibility to the midpoint of the range, which does not include any uncommitted short-term revenue or improvement in travel volumes beyond quarter three levels. I also wanted to once again call out that our guidance includes the ramp down of a large healthcare process in fiscal quarter four. Full year adjusted net income for fiscal 2023 is expected to be in the range of $193 million to $197 million based on a to US dollar exchange rate for the remainder of fiscal 2023. This implies adjusted EPS of $3.82 to $3.89 assuming a diluted share count of approximately 50.6 million shares. As noted in our press release, acquisition related expenses have been excluded from our ANI definition effective quarter two of this year. With respect to capital expenditures, WNS currently expects our requirement for fiscal 2023 to be up to $42 million. We'll now open the call for questions. Operator?

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star 11 on your touchtone telephone. In the interest of time and to enable everyone on the call to participate, please limit your queries to one question and one follow-up. Our first question comes from Brian Bergen with Cohen. Your line is open.

Hi, guys. Good morning. Good afternoon. Thank you. I wanted to just start with a high-level demand question. It sounds healthy, but would you say demand is broadly consistent with what you've been communicating over the last couple of quarters? Anything to call out there? Any changes in decision-making or areas you're seeing clients lean into more or less?

Yeah, Brian, so I'll take that. Yes, it's more or less consistent with what we have been communicating. But I think one of the positives we're starting to also see is that as a number of clients as well as prospects keep hearing all the messaging around a looming recession and things like that. We're starting to see them get a little more aggressive, I think, about looking at their options, taking decisions a little faster, and looking at potentially how WNS can help them. So, in fact, I would say that it's starting to look a little healthier from our point of view at this point in time, more salutary in terms of how they're responding and reacting. And that also includes they're starting to, you know, feel their, you know, feel their toes around whether they should take any decisions on their captives that they are holding. So it's also potentially a stage where they're starting to see some more conversations now on capital. So I actually think that this whole recessionary talk as well as the potential demand contraction that everyone is talking about is actually playing in very well to the sector and definitely to WNS.

Okay, that's good to hear. Follow up on the client cohorts. So just looking at the growth performance between top 10 versus, you know, your non top 10 looks pretty solid with growth being driven in that non top 10, which is good. But the top 10 are moving a little bit slower. Can you talk about your expectations and your opportunity among that larger client base as you think out over the next year?

Sure, let me take that, Brian, and if Gotham or Sanjay want to chime in, happy to hear their comments as well. But I think, you know, this is not to be, you know, this is not unexpected. When you look at our top 10, we do have a handful of clients there that are extremely mature that have been with WNS for a while that have been aggressively pursuing transformation and automation agendas. which pressures their ability to grow. Now we have been able to continuously nudge the revenue that we get from these clients forward, but obviously when we manage multiple processes with them in that environment, it's difficult to grow, right? The good news is I think we still have significant opportunity for growth with the vast majority of our top 10 clients, but we should consistently see in our business that the growth in those next tiers of clients given the opportunity to expand the scope of what we do for them is much, much greater. We should continue to see that the growth with those clients accelerates at a more rapid rate.

And maybe I'll just add that, you know, that other than the top 10, based on the new clients, what we have been continuously adding, it gives a much larger opportunity for us because, you know, after their initial ramp up or, you know, the transition, the farming, the upsell, the cross-sell opportunity is much, much larger with them as we move onward. And, you know, that's what historically we have seen. And, you know, and that's what we are excited about.

Okay. Okay. I appreciate the added color on the procurement revenue. Thank you.

Thanks, Brian.

Our next question comes from Maggie Nolan with William Blair.

Your line is open.

Hi, thanks. It's Jesse Owen from Maggie. Congrats on the good results again. So, I first had a question on guidance. You previously set expectations for a sequential decline in revenue in the next quarter, but you've also updated guidance as well. So, how would you say the implied decline compares to your previous expectations?

So, you know, you know, when we last time provided the guidance specifically, you know, we did spoke about a ramp down from one of our, you know, client in the healthcare process and accordingly it was sequentially down. But now we have updated based on two parameters. One, further organic growth of almost a 1% to our guidance and the two acquisitions what we have done that has further contributed to another 1% to our guidance from an overall year perspective.

Yeah. So, I think, Jesse, the good news is when you look at what's really happened, we obviously had stronger growth in Q3. We expect better growth organically in Q4. And we've added the acquisitions that Sanjay mentioned of SmartQube opt to buy, which are now included in our guidance. So, it's a combination of both organic and inorganic improvement from where we were a quarter ago.

Got it. That's good to hear. I had a clarification question. So, when is that healthcare process expected to finish ramping down? I believe that's a single process for a single client, correct?

Yes, the ramp down has been completed as of December 31st.

Got it. Yeah, the new baseline run rate for revenue should be set here in Q4. The ramp down was, like you said, one client, one process, and it was effective January 1st. So we will see the full impact of that in fiscal Q4. Okay.

And then my last question was more about demand. So are you able to provide a sense of how large or comprehensive the new deals are? Are any processes jumping out to you?

You know, let me take that question, and I'm sure Gautam and Sanjay and Dave may want to add a little more. You know, first and foremost, I would like to say that broadly we're seeing more and more clients want to jump on the bandwagon first. I think that's the core. Want their transformation agenda to be driven. Those who were bystanders over the past year or two have actually now gotten a little more aggressive, fearing that they're going to miss something and that if there's a full-blown recession, that they're not actually embarked on their project. So that's the first thing. The second is we are seeing with a lot of existing clients the move from just transformation to one of also resilience, which means we're also seeing a lot of them add more to the table in terms of cost reductions, more efficiency gains, things that the traditional model has always stood for. In addition to that, we are starting to see a number of new prospects who are now excited by the new offerings that we have created, some of the new acquisitions that we have brought to the table, as well as the fact that some of the clients that are now coming through these acquisitions already starting to interact with us in terms of the broad base of offerings that WNS can bring to all of them. So I think a combination of this means that people are looking not only for the transformation agenda now, but also the resilience and add to that, the fact that people running captives are also starting to say that, is this the right strategy for me? Should I not be focused on my core business? And maybe WNS is a better company to manage some of that. The combination of all of that means the pipeline looks healthy and we think we'll get healthier.

Just to add to what Keshav mentioned, both in the US and UK slash Europe, we continue to see that both these countries face labor shortages And along with that, what we are seeing is clients requiring more digital intervention. We are able to cross-sell quite effectively. And newer clients, the decision-making has shortened significantly, so their ability to ramp up or the requirements to ramp up is increasing more and more.

So all this bodes quite well for us as our demand pipeline continues to increase.

Understood. Thank you for taking our questions. Thanks, Jesse.

Our next question comes from Mayank Tandon with Needham & Company. Your line is open.

Thank you. Congrats on the quarter. Maybe, Acacia, just given your comments around the healthy demand climate and the faster decision-making, Is this the time then to more aggressively ramp up your sales engine or just given the uncertainty you might want to hold back? Just any thoughts around your Salesforce investments going forward?

Yeah, thanks, Mike. Actually, great question. So I'll tell you, actually, we have never stopped investing in the sales force. So I just want to mention once again that I think we have one of the most experienced sales force in the industry at this point in time. We have kept making sure that we are right-sizing, adding wherever required, and most importantly, focusing a lot on driving the productivity of the sales force. right rather than just increasing numbers i'm delighted to tell you that you know while we will not step back in terms of sales investments as well as marketing investments we will also uh position the new people coming in through some of these acquisitions to broad base wns's uh you know positioning and footprint in the marketplace so i just want to say that at this point in time we think that we must continue to invest in the area but that does not mean having to take up numbers. We are looking at each one of our businesses carefully, looking at each area of demand carefully, and where it is needed, we will keep investing. That could be in the form of more sales feet on the ground. It could be in terms of more training. It could be in terms of other things as well, but not necessarily just taking numbers up.

Yeah, and just to add a little bit of color to Takesha's comments, Mayank, You know, we closed December with 142 salespeople in the organization, which is up almost 20% from where we ended fiscal 22. We ended fiscal 22 with 121. So we have built the sales force out. And as Keisha mentioned, that's a combination of WNS hires as well as the three acquisitions that we've done. But essentially, when you look at a 20% increase in the sales force, and you look at the time it takes to close deals in the BPO, BPM space, the reality is you have not seen the benefit in our revenue growth from the hires that we've made over the last six to nine months. So, you know, we have made that investment. We've continued to make that investment. And as Keisha mentioned, now the real focus at this level is to make this next, this last step function that we've done in sales more productive.

That's helpful to know. Thank you so much for that. Just one quick follow-up in terms of pricing and more specifically around productivity benefits that you typically pass on to your clients. I think historically, if I'm right, it's been somewhere in that 5% to 7% range, given some of these market dynamics today. Any change in your expectations on that as we look forward, especially into the next fiscal year?

Yes, traditionally what we had was about 5% to 6%, and what we're seeing is about a couple of percentage points increased requirements by the clients to drive the TCO benefits. And again, that's quite sustainable for us, and especially this is helped by our recent acquisition of Wurum, to which we are able to drive increased digitization and transformation and increased productivity.

So just to be clear, in other words, Are the benefits or the impact to your P&L going to be less or more? I'm sorry, I missed that. Going forward.

Let me take that, Mike. So essentially what's happened now is because of digitization and automation, the productivity headwinds that we give to clients are greater than they've been in the past. And we talked about that walking into this year that we expected an additional 1% productivity hit for this fiscal year as a headwind. versus prior years. But from a P&L perspective, what you have to also understand is that the movement to leveraging technology and automation provides margin opportunity, margin leverage, right? So while it may be pressuring the top line, it's creating better opportunity to expand margins and deliver on the bottom line.

Got it. That's very helpful. Thank you so much.

The other thing I want to make sure we hit here is just to make sure that you understand that while the productivity on a given process may be higher, the reality is in order to deliver the kinds of benefits that clients want, in many cases, we have to expand the scope of what we're managing for that client in order to deliver it. So while same store sales, if you will, or same processes may be facing a 1% bigger headwind than previously, What it's also doing is opening up opportunities for us to expand the scope of the relationship and add new processes for WNS to manage.

Our next question comes from Moshe Kasri with Wedbush.

Your line is open.

Hey, thanks. Let me add my congrats on very solid results. So, I have two follow-ups. As we continue to see this pivot in the pipeline towards, I guess, cost optimization and I don't know, some people are talking about vendor consolidation as well. How different is it going to be for WNS in terms of the economics of the new, maybe the new nature of the projects that are coming on board? Is there any difference there? And then when we were in India early December, we heard some conversation about captives, which is something that keeps on coming on and off throughout, during the past 15, 20 years. Maybe you can talk a bit more about the captive opportunity here for WNS, because again, that's kind of something that we haven't heard people talk about for a couple of years now. Thanks a lot.

Sure, maybe I'll start and have the others add on. But like I said, the opportunity actually is continuing to sound very, very positive. And therefore, again, it will be different things for different people and different companies. So we are very, very confident about the fact that the way we have invested in terms of, first and foremost, domain, in terms of technology, in terms of our transformation agenda, in terms of our innovative models, engagement models with clients, as well as the kind of people that they want to interact with, we will definitely be the beneficiary of any exercise that is being undertaken by clients as well as prospects. And that's actually resulting in a larger pipeline. And yes, we are actually seeing in some cases know uh you know some players talk about consolidation but as of now we've actually been benefiting from those trends because people really want to interact with companies that have you know all of these capabilities and can surely uh take them in the path of resilience as well as transformation that is one the second is you know while all of this happens obviously companies on the other side are also looking at making sure that their transformation agenda is not disturbed. So they have to make the right choice of the partner. But beyond that, they're also looking to make sure that these companies can help them with their cost take out challenges, so that they can continue to be relevant and not create any negative impact with their end customers. So again, I think companies like WNS are seeing the tailwinds of that as well. Now, in terms of captives, there have been two trends that have been happening, Moshe. One is, you know, as you know, with the successful management of COVID-19 by the sector generally and some countries in particular, there has been a move towards you know, many companies wanting to create certain captives in India and other countries, right? Now, that is one sign, and these are normally captives created in areas which is very close to these customers and they don't want to really hand it over to, you know, a third party, you know, kind of a player. But what we are also seeing very quickly is the smaller captives, you know, 100, 200, 500 person kind of captives that are being created, already are starting to face issues that go beyond just management of the cost and the resilience. It becomes HR problems, the management of attrition, things that we are extremely good at. And that is causing new heartburn and new heartache for the people who actually own these capsules. And that is, again, driving this discussion at a new pace. You know, while decisions may not have been taken yet, all I can tell you is the quality of conversations that we are having has dramatically increased. You know, you would have seen that in one particular case, you know, we actually helped a very large global insurance player, you know, with the problem that they had, and that's actually very large and very salutary to WNF, and we think this trend will continue to progress.

Also, just to add to what Keshav mentioned, besides the challenges that the captives would face, one of the bigger advantages that we bring on the table is cross-industry transformation and digitization benefit, which most of the captives struggle with. And that's where we are seeing an increased level of conversations where we are being asked to come in to help drive, digitize, and transform.

Yeah, and just to further add to that, Moshe, I think, you know, interestingly enough, when you look at the questions that were asked earlier about ongoing productivity commitments and improvements, I think one of the reasons that clients aggressively look at potentially getting rid of captive units is because if you can find a partner who will commit to productivity improvement, why do you want to try and run this yourself and hope you can deliver productivity improvement? So I think that level of visibility, certainty to being able to manage your cost structure going forward is something that's very appealing to clients. The big challenge, obviously, for these companies is determining what they believe is core and mission critical to their business and they need to keep in-house and what they believe is less core or they're not good at, that they're better off finding a partner to help them manage. And that's something that every client is going to have a different opinion on.

That's really helpful. And if I can just sneak in a last one here, clients continue to ask about the UK business. The UK has been resilient in the past few years given what's going on in the UK from a regulatory perspective, but Obviously, the economy has not been doing that great, but maybe some color on what you're seeing in the U.K. market. Thanks a lot.

Yes, what we're seeing is, of course, what we're seeing is not much of a difference in terms of the client demand because where we are seeing an advantage within the U.K. is as companies are preparing for a weaker macroeconomic scenario, the increased demand for digitization for them to align their cost base, in line with the potential in terms of where the demands are going to come from is leading them to drive increased need for companies like us. And that's where we are seeing our UK pipeline, in fact, is as strong as ever. And the decision-making cycle, in fact, in the UK for clients to take the decision in terms of giving the go-ahead is much more aggressive. And at the same time, the ramp-up cycles are shorter.

I just want to add one further aspect. I think UK clients and prospects who engage with our sector and us in particular over the past few years have prepared to some extent for brexit and the the kind of impacts that go with it so i think they've already realized for quite a while that they may not be able to get the talent that they will need from a tech point of view to transform their own agendas and and therefore they've allowed companies like us to lead them in terms of dramatically transforming how they go to the market So while UK as a whole may have a problem of not having the talent to take care of different services, the reality is we have helped insurers, fintech companies, and others to completely transform their business models through insurance in a box, fintech in a box kind of solutions, which are solutions which were unheard of in the past. And therefore, we have actually helped them prepare for tough times, but more importantly, gain market share as a result of these new offerings.

Yeah, and just to add a little bit of color to that from a financial perspective, Moshe, when you look at our numbers, obviously, year to date, the UK is up about 4% year over year, which certainly doesn't look that encouraging. But it's important to remember that that 4% growth is with a 12% currency headwind. So what we have seen in our business is healthy, healthy growth on a year over year basis within the UK on an organic constant currency basis.

That's helpful. Thank you. Thanks, Moshe. Our next question comes from Ashwin Shrivakar with Citi.

Your line is open.

Hey, guys.

Thanks for doing this. Let me start with a two-part question, just back to the economic environment. First, if you could remind on volume sensitivity, should there be a slowdown or air pocket? I just want to outline downside risk. And then the second one is it seems, Ketra, that you're saying digital transformation objectives are actually still intact for clients. That's consistent with our own checks. But any color on how the nature of digital initiatives might be changing?

Sure. So let me kind of take the first part of that, and I'll let Keshav talk a little bit about digital and kind of what we're seeing from a client perspective. But looking at the exposure, if you will, to our business, I think there are really, you know, four different pockets where we could see pressure, right? And most importantly, I think what I want to highlight up front is that we have not seen these to date, right? But the reality is certainly we have the potential for volume pressures with certain clients, certain verticals, certain processes. And obviously for everybody who follows the WNS story, travel comes to mind as something that's front and center. But we also do have the potential for volume exposure in certain verticals like shipping and logistics or financial services. The second area where we could see pressure would be what we've been discussing here, which is productivity pressure, total cost of ownership pressure from clients. And we've seen that steady and rational as we've moved across through this year and across the years. The third would be where clients have structural or strategic changes to their business. And this would fall into the category of what we've seen with this large healthcare process that we've lost in Q4, where the client has made a strategic decision to move in a different direction. And the last would be delays and cancellations, where we have not seen any of that to date. So I think just to kind of highlight where we could potentially see exposures, those would be the areas. But I think what's more important, Ashwin, is that we understand that we believe in this weak macro environment, the opportunities for our business as things get challenged more than outweigh these risks. So we believe this is a great environment for BPO BPM.

And also, hi, Ashwin. This is Gautam. And just to add to your or answer your second part of the question, what we are seeing with clients is A, firstly, in terms of the digitization journey, is to change the target operating model, taking into account the end-to-end process, and especially in the banking, financial services, insurance, and healthcare clients, what we are seeing is that these are companies or industries where clients are actually plagued with legacy systems and infrastructure, the need for smart, non-invasive workflow engines that can actually drive an end-to-end process. So what we are seeing is not just uh discrete process efficiencies but an end-to-end process efficiency that gets driven and that's being driven quite upfront rather than later stages of the deal so that's where the digitization journey is starting to impact more and more got it got it um and then on m a uh you've obviously done uh

couple of deals here, but is it still a good pipeline? What should appetite, you know, in a current environment, do you feel a need to maybe maintain a level of net cash on your balance sheet? Any thoughts in that direction?

Let me start. I'm sure Sanjay will want to add a little bit more. So first and foremost, as you know, you know that we've for a long time you know, had this focus on constantly looking at assets that are capable of adding new capability, you know, while being accretive also to WNS, you know, models overall for the past few years. It's just that in the past few months, you know, we've had the opportunity to actually complete three deals which are bringing very strong capability and playing in extremely well with where the market is headed in terms of some of the new demand areas. So really delighted with what has happened there. At the same time, I want to again underline that our approach to M&A will continue to be disciplined, focused, and we will continue to look at assets, particularly capability, uh led you know assets in a very disciplined fashion and if there's something that you know ticks the box and which makes sense to us and if it uh is uh you know coming in at the right valuation uh we will look to do it you know considering the fact that we believe that in this kind of an economy uh as well as in the you know in terms of just how the the markets are moving and the business is moving and the demand from clients we have a right of way in terms of leveraging all of these assets and creating these new capabilities in order to deliver impact as well as impact for clients and growth for ourselves. So, you know, whatever we do will be around capability as well as will be, you know, accretive. And, you know, in terms of the capital allocation, you want to talk?

So I'll just, you know, add, Rashid, from You know, yes, we do have a healthy pipeline, but the philosophy absolutely doesn't change from a, you know, M&A perspective. It's all going to be around tuck-in capability acquisition, and with the opportunity to keep on adding those capabilities, you know, and including the captive opportunity, what we keep on looking for. And, you know, from a cash perspective, what you just mentioned, you know, 15% of our revenue is good from a working capital perspective. And we believe we have a, you know, a stable, healthy cash generation. So that's going to, you know, will be good enough from a growth prospect perspective.

Got it. Appreciate the insights. Good execution.

Keep it going, guys. Thank you. Thanks, Ashwin.

Our next question comes from Puneet Jain with JP Morgan. Your line is open.

Yeah, hi. Thanks for taking my question. Can you talk about sustainability of your attrition rate at these levels? I understand December is seasonally easier quarter, but is attrition, can it sustain at these levels on going forward basis?

and our philippines issues completely behind you now hi panit the continued reducing attrition over the past two quarters has been has been largely driven due to stabilization across most job families and especially over the last few months this has been led by our customer services agent requirement in the philippines and a lot of the entry level requirements in india We do expect a little bit of volatility across certain niche job families, but by and large, we expect this to be stabilizing around the early 30s is what I see.

So maybe I'll just add, Punit, if you recall, we did spoke about that when the regulations got changed in Philippines, specifically from April 1, and where, you know, employees were really being asked to come to work from office 100%. And that is where it all spied and specifically around at the agent level. And, you know, we did mention that, you know, still that's not impacting from our delivery perspective. So it took a couple of quarters for us to stabilize and it started, you know, normalizing at this stage. But having said that, know it's too early to talk about it and we believe you know it will still take a certain time to normalize and maybe it will go back to those uh 30 percent but i think it was more around the junior level and the middle management and all it's uh it's uh pretty normal uh what we used to see uh got it and it seems like uh your answer to prior ashwin's question it seems like uh

you are going to be more acquisitive near-term focused on acquiring tuck-in deals. But on the other side, how should we think about your current portfolio? Are there any businesses assets that could be de-emphasized or you could look for some alternatives there?

Yes. First, let me clarify. At this point in time, you know, done three acquisitions this year. So right now we are digesting, right. And we will, you know, focus on digesting these acquisitions, welcoming, welcoming, you know, all the people from these three companies, as well as, you know, the capabilities and, you know, just in a, very excited manner, take it across all our client base and welcome many new prospects. I just want to mention that we'll do that. But at the same time, we will also be opportunistic in terms of continuing to look at, you know, what is available out there. And if we need to do something that is small and accurate at some stage, we'll look at it later. So I just want to set that expectation. We are not out there to, you know, just put our cash out to acquire. That's not our approach. It's always been a disciplined approach. Now, in terms of our businesses, generally all the core businesses that we operate in continue to do extremely well. All the horizontal offerings that we have gone to the market with and we have positioned with you, we will continue to invest strongly in. As we have mentioned in the past, the auto claims part of our business that we have historically kept de-emphasizing, continues to be on that journey, and it is not an area of significant investment other than taking care of existing customers. But every time we look at a business, we are constantly evaluating the impact of that business, the growth potential of the business, as well as the ROI from the investments that we make in that business before we make progress i am really comfortable with the businesses we have at this point in time and their potential for the long term thank you no i was thinking about auto claims as well when i asked that question so thanks for the answer special thanks a lot our next question comes from dave coning with baird your line is open

Yeah. Hey, guys. Just I guess a couple quick things. A nice job, too. So on the travel vertical, it looked like revenue was down a bit sequentially. I know that's a little choppy. It's still growing a lot year over year. But, you know, anything to that just a little bit of sequential decline?

Hi, Dave. The Q3 decline that you see has historically been led due to softer volumes during this time of the year, which is generally driven due to reduced leisure bookings. And also just to draw attention, nearly 50% of our revenue comes in from the OTAs, especially driven by B2B or B2C leisure travel. So that's where we are seeing, that's where the sequential drop has been for this quarter. But for Q4, we are already seeing moderately increased volumes due to the recent weather events and also with increased bookings. But these numbers have still not been factored into our forecast that we have provided.

Yeah, so Dave, let me just mention one thing. When we talk about recession, when we talk about all the impacts that recession will have, I think a lot of people start voting with their feet in terms of their holidays and travel programs and blah, blah, blah. And therefore, we also see, therefore, customers of ours on the other side, go soft in terms of that projection. So I think that some of this is also a factor of that. But, you know, as of now, as we look at, you know, how the sector is actually behaving, we're continuing to see, you know, a slightly more bullish positioning as opposed to the kind of numbers that they have given us in the past. So, you know, let's hope that, you know, people's faith in travel and you know having a nice holiday uh you know visiting their offices across the globe and potentially the revenge tourism that comes back and it will benefit us and i'll just add that you know uh the bigger opportunity for us still rise that you know the volume was still not at a pre-covered level and that's the opportunity from uh you know uh from a forward-looking perspective

is there, which itself is a pre-COVID level, volume is still below almost like a 1.6% of the company's revenue. That's the opportunity still lies ahead for us.

Gotcha. Yeah. Thanks for all that. That's good. And I guess to just follow up, you've had remarkably consistent margins. I think this year you're trending to I think 21.5% or so. The last two years were right about 21.5%. and a half percent, you know, which is impressive given rupee movements, you know, revenue volatility, just all the different things. So I guess I'm wondering, is there anything one-off in this year that we should just think about, you know, as we kind of think about next year? Or, you know, is this a pretty normalized year?

It's a pretty normalized margin at this stage. You know, there has been no one-off right now. And we expect, you know, to continue with this margin as we move forward.

Yeah, and I think as it relates to FX, Dave, it's important to remember that, you know, we've now seen 10 plus years where our hedging strategy has been extremely effective in protecting our margins and smoothing the impacts of currency over a two to three-year period. So, You know, not only does the hedging strategy give us the stability and the margins, but it also gives us the visibility to allow us to guide you guys properly.

I also want to just add one thing, Dave, and that is I must give full credit to our teams across the globe, our operating teams, who have created, you know, this new WNS, as I call it, in terms of, you know, just creating all these new innovative solutions the new digital interventions, the new platforms that we have created, and the new offering sets as a result of which, in spite of all the uncertainties outside, WNS is able to drive those efficiencies in order to maintain those margins. And I tell you, it's not an easy task to make those investments, manage all those problems that are out there, yet deliver those numbers, and I think it comes from our superior execution, but most importantly also the new offerings that we have created over the last few years.

Yeah, certainly. Kudos to all of them, and yeah, thanks for the answers, guys.

Thanks, Dave.

Our next question comes from Vincent Colicchio with Barrington Research. Your line is open.

Yeah, Keshav, another question on travel. Curious with the awful airline issues recently in terms of the operating side, is that opening opportunities for the company?

Yes, absolutely. And with some of the problems that the airlines and the airports have been facing over the past year or so, that's led to an increased demand across all our lines of services, whether it is our industry-specific offerings or our baggage handling offering, and at the same time, our reservations and change management offerings. So it drives volumes across all these areas. And I would also say that as airlines actually increase capacity by introducing new aircrafts over the next number of months, we do see the volume also start increasing from there.

And I must mention that, you know, with all the stock of recession and the kind of stress people are facing in the markets, we're also seeing the airports. also start, you know, moving with, you know, discussions and potentially decisions on, you know, transformation and the cost agenda as well. So I actually think that all of this is going to be very positive for WNS in the short order.

Yeah, really important too to remember that over the last couple of years, Vince, while we have had, you know, some recovery of the travel volumes we lost during COVID, when you really look at what's driven the health of our travel vertical, it's been the expansion of our existing relationships and new logos coming to the table looking for transformation, automation, digitization to be able to better compete. So I think the more difficult things consistently become for the airlines, the more they're gonna look externally for help to change their operating models to be able to compete better. And then one more.

Any large clients facing financial challenges? Retail comes to mind, and if I remember correctly, I think your exposure to traditional retail is pretty low.

Yeah, I think that's safe to say. Our exposure to pure retail is extremely low, Vince. I don't think, looking at our customer roster today, I don't think we have any significant clients that we believe are at financial risk. But obviously, in this environment, things can change quickly.

Thanks, Dave. Nice job, guys. Thanks, Dave.

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