Q3 2021 WNS (Holdings) Ltd Earnings Call
Good morning, and welcome to the WNS Holdings fiscal 'twenty 'twenty, one third quarter earnings conference call.
At this time all participants are in a listen only mode.
After managements 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 2021 third quarter earnings call with me today on the call I have wns's CEO <unk> <unk> Wns's, CFO, Sanjay Puria and our C O O Gotham barite.
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 Dot WNS Dot com.
Today's remarks will focus on the results for the fiscal third quarter ended December 31 2020.
Some of the matters that will be discussed on today's call are forward looking please keep in mind that these forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.
Such risks and uncertainties include but are not limited to those factors set forth in the company's form 20-F.
Document is also available on the company website.
During the 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 a ni is defined as profit excluding amortization of intangible assets share based compensation goodwill impairment and all associated taxes. These terms will be used throughout the call.
I would now like to turn the call over to WNS CEO Acacia Marrakech Acacia.
Thank you David.
And good morning, everyone.
We hope you and your families are safe and debt.
Our fiscal third quarter results.
We continue to demonstrate the strategic importance of our EPS solutions to our clients.
Okay.
Okay.
<unk> business model.
Net revenue for Q3 came in at 274 5 million.
Yes.
Mike over here.
One 6% on.
On a reported basis.
Two 6% constant currency.
Sequentially net revenue increased by $10 million or four 7% on a reported basis.
Three 5% current.
I'm sorry.
During the quarter, our delivery capabilities remain stable.
<unk> average.
<unk> per se.
Demand.
And if you don't.
WNS business momentum recovers from Covid.
He was simple.
We added nine new clients.
Okay.
These relationships.
Yes.
Despite the impact of Covid.
We have growth.
And before new logos versus imaging during the same day of last year.
Florida economy also.
Ginger.
In support of our board of signing new deals.
And as these standards pipeline.
In addition, our.
Third quarter margins.
And cash flow remained strong.
On today's call I wanted to spend a little time, highlighting WNS is unique positioning.
And the current space.
The expanding opportunity across the healthcare spectrum.
Earnings per share.
Your line.
And medical device.
Combining these from.
This is Don.
It's over 15 years of experience.
Four positive.
Hey, good morning, Kevin.
Medical doctors.
No.
Clinical staff.
In the last four years.
S GAAP revenues.
Gone from 7% up company total.
Is there anything per se.
Hey, Bob.
The growth rate of all.
Over 40%.
Good day.
Acquisition.
Yeah.
In fiscal 2000 debt you bought our healthcare revenue have grown by 19%.
Within the healthcare space.
Our largest segment.
Sure.
All of our insurance practice.
<unk> has industry leading cash.
<unk> net.
Domain expertise.
Yes.
It shouldn't technology assets.
So.
Okay Gerry logistics.
Health insurance companies in the U S.
By annual premiums.
There are companies.
But all three.
Focused on higher clinical solutions as opposed to monetize at least.
Good day book, although we have to manage mission critical processes for our clients.
WNS provided.
The necessary insurers across the utilization management claims and underwriting.
And allocates cash disease and revenue.
Net.
And customer support.
We have deep expertise absolutely benefited from.
Stemming from our acquisition of <unk>, Inc.
Hi, Scott Harsco adjusted EBITDA, Yes.
Such as radiology cardiology and oncology.
Our solution.
<unk> technology enabled.
And increasingly leverage artificial intelligence and <unk>.
Machine learning.
Denver optimal outcomes this income.
He has got a thought.
Our proprietary decision support technology platform.
Goodbye.
Omni channel with front end.
Okay.
Given the navigators and user friendly dashboards.
The platform at scale.
Top line and you probably shouldn't matter of interest while most.
Most importantly.
We also entered into Denver for patients doctors and hospitals as well as all products have been significant.
These include superior patient care.
Our vision for sustainable long term savings clinical insight and dedication.
Behavior change.
WNS.
WNS is saving.
Got it.
Two five times debt across our service revenue.
400 Bucks or.
Oh boy.
We've driven reduction in unnecessary procedures.
Firstly.
Enhancing quality of care and safety.
When you are volume based costs and desert book industry.
Promoter scores.
Turning our attention to life Sciences, WNS Adobe's industrial EBIT in the fall.
We're far off base before transponder people some all day.
It's highly specialized software.
The current.
Its citizens.
And it's rather.
Pharma companies from the work day.
It's all day in 2019 revenues.
The majority of all of them.
Our focus on higher domain centric research and another day when there is still targeted back office finance and accounting solutions, including <unk>.
Examples of WNS fault line.
Capabilities.
Dropping price.
Thanks.
Intelligence sales kind of commercial and analytics.
Market mix modeling.
Predictive analysis for Fisher strength and other crops.
In the digital age offering.
Good day.
Engineers data scientists and data visualization capabilities.
People from WNS platforms, such as interest rate hedge.
Cash is our proprietary cloud based technology platform.
Second is artificial intelligence machine learning.
Domain expertise to provide our pharma and biopharma clients with atopic dermatitis and basket monitored.
In combination with our domain centric subject matter experts, who provide a box right out of it.
We showed our mission and business intelligence WNS is even though it had a dry identified last boss in their interest and buy.
Mix and drive enhanced.
This has been a big.
During the Covid pandemic WNS is being able to support.
By rapidly changing requirements, enabling them to meet their need for consolidated and analyzing large amounts of physical data and identity with force.
The insights and highlights.
Thanks.
As a result.
Identify clinical trial populations.
<unk> and <unk>.
Accelerated vaccines and therapeutics speed to market.
WNS has been able to create unique offerings in the peer average.
Thanks.
These remain a significant long term BPM opportunity.
All four segments of the healthcare landscape.
With a low industry penetration rates for higher revenue clinical work.
Our expanded addressable market.
Accelerating industrial disruption.
Very good.
Is ripe for growth.
Some of the key disruptive trends, we see increased collaboration.
The other provider organizations.
Our focus shifts to enter.
Direct patient care.
The proliferation of call it the most all of our comparable.
Organization.
Rising demand for pharmacovigilance, and the COVID-19 fewer shifts towards debt.
Do you see us with all required organization to undergo significant business transformation and foster would there be a provider who can get it done by specialized domain knowledge technology assets, our Boston out a day.
Good day.
As a result, the healthcare.
But it is a key area of focus and investment for WNS.
Looking forward.
This remains cautiously optimistic about the softer demand environment and I believe the long term market opportunity continues to improve.
Why.
You see from Covid related income.
Behaviors.
By industry and by country.
It's clear that demand for it.
Production of technology, enabling process transformation.
HIFU is automation.
Oh for.
For clients.
WNS.
These investment programs are progressing in line with where you're expanding in D C and the market is headed.
We remain confident that our differentiated came from disease solid business momentum.
And proven ability to execute we are driving long term sustainable value for all of our key stakeholders.
I would like to turn the call over to our CFO Sanjay Puria.
To further discuss our results.
Sanjay.
Yeah.
Thank you Keisha.
In the fiscal third quarter WNS net revenue came in at $224 $5 million down one six per cent from $228 $2 million for search in the sales quarter of last year and down two six per se on a constant growth.
And see basis.
Sequentially net revenue increased by four seven points on a reported basis and $3 five per se on a constant currency basis.
Sequentially revenue improvement was broad based across verticals services and geographies.
In the third quarter WNS recorded $5 $5 million of short term revenue, which was booked at margins significantly above company average.
This quarter, the Stockholm revenue amount was driven by gain sharing fees associated with clients Randolph.
Well and business continuity pass through charges.
Adjusted operating margin in quarter, three was 24 per se and from.
Back to pretty low 0.8% reported in the same quarter of fiscal 2020, and 23, 4% last quarter.
Yeah, I don't want you adjusted operating margin improved as a result of proactive management of discretionary spending lower travel and facility related costs and favorable currency movements net of hedging.
This benefit more than offset margin pressure from COVID-19 related impacts, including lower volumes.
License strength and.
Additional expenses associated with business continuity.
Sequentially margins improved due to increased revenue without corresponding increase.
In average head count and current C moment net of hedging.
This benefit more than offset the sequential impact of the $4 million.
One time reversal of our limb provision booked in the second quarter and increased cost associated with facility utilization and business enabled me.
The company's net other income expense was $1 million of net expense in the current quarter as compared to $1 million of net expense.
Importantly, our fiscal 2020, and five 7 million of net expense last quarter.
You don't know what the unfavorable variance is accurate.
The reduced interest income driven by lower rate.
More than offset lower interest expense, resulting from debt.
Net repayment and reduced ifr leaves interest costs.
Sequentially. The increase in net expense is due to reduced interest income driven by lower interest rates.
WNS effective tax rate for quarter three gaming goodness.
Five per se.
From 2000 per second last year and down from three 5% last quarter.
Do you think the quarterly tax rate are primarily due to the mix of profit between geographies and amidst the volatility from tax incentive facilities.
The company's adjusted net income from quarter, three was $41 million compared with $49 million in the same quarter of fiscal 2020, and $37 9 million last quarter.
Adjusted diluted earnings were <unk> 79 per share in quarter. Three months is it would be say in the current quarter of last year and 73 things last quarter.
As of December 31, two.
2020, WNS balances in cash and investment total.
$319 million.
The company had $25 $1 million on debt.
WNS generated $56 $3 million of cash from operating activities this quarter and incurred $8 million in capital expenditures.
During the quarter the company repurchased 405284 shares of stock.
The average price of $67, 67, things, which impacted quarterly cash by $27 4 million.
DSO in the third quarter gaming 34 days as compared to a positive last year and 44 days last quarter.
The year over year increase.
The increase in DSO is the result of temporary payment from concessions provided to several client and some collection delays.
With respect to other key operating metrics total zone at the end of the quarter was 42830.
Attrition rate in the current quarter was 23% down from 36% reported in quarter three of last year and non from 34 per se in the previous quarter.
Cash capacity at the end of the third quarter remained relatively steady at 34979.
The seat utilization metrics, which the company typically from Hawaii as a measure of infrastructure property would be not meaningful given the current work from home environment.
In our press release issued earlier today WNS provided updated guidance for fiscal 'twenty to 'twenty one.
Based on the company's current visibility levels, we expect net revenue to be in the range of 860 million to $817 million, representing a year over year revenue decline of four 3% on both reported and constant currency basis.
And every new guidance assumes an average British pound to U S. Dollar exchange rate of 135 for the remainder of fiscal 2021.
We currently have or 19, 90% visibility to the midpoint of the range and guidance does not include any short term revenue for the fourth quarter.
WNS continues to expect some ongoing business volatility over the next several quarter positive or negative, which could impact client volume supply capability contract transitions and new project ramps.
Full year adjusted net income for fiscal 2021 is expected to be in the range of 146 $242 million based on a $73 five rupee to U S. Dollar exchange rate for the remainder of the fiscal year.
This implies adjusted EPS of $2 61 to $2 and 73 things.
Our diluted share count of approximately $52 1 million shares.
For fiscal 'twenty 'twenty, one we continue to expand capital expenditures to reach up to $91 million will 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 then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
In the interest of time and to enable everyone on the call to participate please limit your queries from one question and one follow up.
And our first question comes from my Op Tandon from Needham Your line is open.
Thank you congratulations on the strong numbers.
Maybe application first case have you called out nine new client wins could you talk about what areas were those in and maybe more broadly.
Appetition changed over the course of the pandemic.
Seeing more cutthroat competition around pricing or is it pretty much similar to what you were experiencing pre COVID-19 in terms of competitive pressures.
Thanks, Mike Good question.
So I'll have Dave and Sanjay talk specifics about benign new clients.
I would say they are all.
All very excited in terms of the potential for the long term future.
WNS and as I called out earlier, if you just look at the number of new clients, we signed up already this year as compared to the same time last year, it actually positioned to pick up from a year ago, almost regardless of the country.
In terms of the overall activity level.
I would say that first and foremost the business is starting to normalize.
We believe that a big business opportunity for <unk> is continuing.
The growth there is a large comfort in the minds of clients and prospects in terms of how superior companies like WNS actually manage debt crisis, we're seeing scrap flow.
With our existing clients as well as from new prospects quickly moving.
Function agenda, and widened price will always be a volume of discussions our clients' risk appetite.
Thank you that's gaining momentum time as we are seeing now clients are much more focused on business outcomes as opposed to just pure price. So I think a few other companies have done and have managed the transition due to COVID-19 extremely revenue I'd like to think that WNS.
Definitely the leader in this space.
That is what is actually creating the momentum.
Which is enabling the delivery of these kinds of results.
Yeah, and just just the education comment Mike.
The specifics around your question about the profile of the new clients that we added nine new customers that we added this quarter were in five different verticals.
Including some some good wins in shipping and logistics and insurance in the diversified and in health care. So.
Again kind of similar to what what Sanjay mentioned in his prepared remarks in similar to what our business looks like pre pandemic. What we're seeing is very healthy broad based growth across all of our key verticals.
That's very helpful and just as a follow up I wanted to turn to focus their margins could you maybe size. The one time benefits that you've experienced so far during fiscal 'twenty, one when did they roll off.
And do you think structurally that margin profile might actually look better growth.
The pandemic just given that some of the.
Changes in the business in terms of the sales process the delivery, maybe more employees working remotely et cetera, just maybe more of a longer term question two around what margins may look like structurally from the BPM business.
So you know.
Mind, you don't from a short term revenue day.
During the year, we already have $16 million.
Our short term revenue.
Including the $5 five during the quarter and again it all depends upon the mix of the short term revenue won't be gone against you don't get it.
It was a shock to them from a volume five of it as a gain share in a market.
During the year.
This quarter definitely the margin was significantly higher than the company average.
We get all day, having said that from a law.
Long term perspectives as geisha mentioned and the business is getting back to normalcy.
The margin we expect to.
It will be around the 20% operating margin.
What we used to deliver because the walls.
From home of our debt.
Are those cost which is.
Definitely gone up.
Enable those water all of them, including the cyber including some of the other enablement on the net.
I appreciate it tools and so on to really walk from that and as we use I'll keep on zinc.
From office back because that's what that line is expecting.
As we move forward I know those cost are going to come back, including some of the escalation on the investments around digital transformation and so on.
Okay.
And a little bit from that I think when you look at this fiscal year and you look at kind of the nonrecurring stuff. There's a lot of moving parts to this year, obviously on a net basis.
Covid is going to be a negative for the year you look at the first quarter at 17, 5% margins when supply issues were a major challenge and through the first two quarters, where we were carrying pretty significant excess capacity.
These were drags on our margins. This year now we did get some benefits obviously as you mentioned with lower facility costs lower travel costs.
Net of our business continuity, but the reality is we're still down about 130 basis points. If you look at the midpoint of guidance on a year over year basis, and it's largely reflective of the headwinds that we've had this year from Covid. We've also had a tailwind this year from FX. So you know one of the things we haven't.
A lot of time talking about you know through three.
Three quarters of the year, and where we stand with respect to the fourth quarter guidance is that we're going to get about 150 basis points of margin lift this fiscal year from from currency. So you know.
A lot of moving parts within the year, but the subject point I think as we look forward, we look at our business kind of returning back to normal which means getting back to our our pre COVID-19 growth rates and getting back to a situation, where we're able to deliver the 20% plus debt debt.
Where we are.
Known for doing.
Great. Thank you again congrats.
Thanks, Mike.
Sure.
Okay.
Thank you. Our next question comes from Bryan Bergin from Cowen Your line is open.
Okay.
Hi, Thank you.
I was hoping you can comment on deal conversion and engagement ramps so talk about how that's occurring today.
Characterized clients, taking smaller bites previously of the large deals so each day.
Me an update on what you're seeing there.
Yes.
The trend continues to be similar while the pipeline is extremely healthy.
Dave at cash about unit earlier continued to be broad based.
The transitions that are happening at the moment that I get bite size all day.
What we are seeing is a lot more optimism with the clients in terms of introducing the size of this transition.
Yeah.
So Brian I'll just add.
From the discussion.
What are you testing and obviously, we're seeing a mix.
Across the portfolio, but generally what we're seeing is clients being quite comfortable at all in terms of foregoing in person transition.
Important for.
It means that once the decision is made.
To walk the board, they're able to move very swiftly with confidence.
WNS and because of the fact that we're seeing.
New overdue cases.
Europe, the U S and things like that south expire for facts.
It's getting a little bit, but that's the only thing we have to prepare for that.
All of our control, but generally.
<unk>.
On a fixed price.
These efficiencies smaller leasing decisions.
Wall Street buckets, what I want to say.
Got it.
Expected profit.
Maybe moving ahead now.
We'll get the.
Business faster narcolepsy.
This vast areas such as spoke about earlier in terms of broker and profit.
Okay. That's helpful.
And as we think forward here.
Are you expecting that growth trajectory.
<unk> next year, so in fiscal 'twenty, two do you anticipate a material sequential build through the year or is this a cadence that's going to look more like your typical trajectory just given your fiscal year overlaps pretty cleanly with the timing of the pandemic.
Yeah look I think we've been pretty consistent Brian and trying to focus people more on the sequential cadence to our business, it's really more reflective of how our business runs and the fact that given the long term nature of our contracts given the stickiness of the revenue that we have basically an annuity business. So.
What's really important to understand is how that business is layering on on a quarter to quarter basis.
Part of the reason we call out the short term revenue. So that you get an understanding of what is not expected to repeat in the following quarter. It may or it may not but at least it gives you a better visibility to kind of what that all your underlying cadence. It. So you know what we try and do is we strip away the impact of FX, we strip away.
The impact of these short term revenue and what you get is a real understanding of kind of what the on the ground.
Underlying business momentum is and what we've seen across the last couple of quarters is a very slow, but very steady improvement in that case.
You look at the last fiscal quarter here Q3, and you take away. The fact that we had a little bit of an FX tailwind and you pick away, we add an additional $1 $4 million in short term revenue what you'll see is that our business actually grew 3% sequentially on a constant currency basis, and when when you annualize that out you'd see it puts us back.
Back into kind of the low double digit type of range. So you know, we obviously took a step back because of Covid.
Parts of our business like travel have yet to recover but if you look at the underlying momentum in the business.
<unk> back and were comfortable that you know, we're kind of back on a trajectory, where we think we should be able to put up the kinds of numbers in fiscal 'twenty two that we're known for doing.
Thank you.
Thanks, Brian.
Thank you Brian.
Thank you. Our next question comes from Maggie Nolan from William Blair. Your line is open.
Thank you hi.
I Wonder if that's fine.
So how long do you expect dsos to be elevated or do you expect additional clients coming for at asking for extended payment terms and then how is your visibility into your clients' general health now that many are through their 2021 budgeting cycle.
So we definitely expect the DSO to be industry from.
31 to 34 35.
Right.
Yeah.
As I said in my prepared remarks.
It has been from delayed.
[laughter].
Net debt has been some delays because of the collections income stream.
You can also have more concessions.
<unk>.
Yes.
Moving on to talk some more about that.
This is 90 day for a couple of more.
And we have to see that health pandemic current line ship over there.
Well, let me, let me take a little bit of that magnitude.
If you look at kind of what's going on.
Some of the concessions that we gave you know early on in Covid continue and it's largely in the areas that you would expect the areas that have been most impacted for US you look at the airlines, that's clearly an area where there has been a challenge.
And it's it's not something that's going to that we think is going to go away in the short term here. So you know I think most of our clients. When you look at their budgeting process. When you look at the outlook for next year I think most of them realize they've kind of hit the bottom.
At least they hope they would hit the bottom, but some of them do have ongoing challenges, especially within travel and specifically in travel within the airline space and we're gonna have to kind of watch and wait here, but I think overall the profile of our business is improving.
Improving the profile of our clients business is improving and you know I think the other thing. That's important is to understand that you know travel now for US is it's down to 15% of company revenue and our exposure to the airlines is down to 4% of company revenue. So I think we continue as we as we grow around some of these areas as well we continue to derisk.
Yeah.
That's great. Thank you and then good new logo additions are these companies new to BPM in general and are you seeing any uptick in demand for offshore services.
Yeah, So I'll take I'll take that out also.
Second part of the question first actually what we're seeing is a very exciting trends maybe in terms of.
Crawford who have not.
Actually.
Experienced this model in the box.
Sure.
No actually quickly.
The feedback in terms of the model. So we're seeing quite a few of these companies come up and finish.
Diversified across all our core verticals and Horizontals.
Non-GAAP is on geographies and at the same time, we're also seeing our existing customers also moving quickly in terms of taking decisions.
New area.
Stepping back to Michael.
Outsourcing.
So overall I can see that debt about.
They have performed.
We have given in terms of corporate interest under ships has worked extremely well and customers are very.
Very happy to attract enough at this model even in a virtual model with our sales model is still much of the transition models to virtual gifts to interacting with their teams.
Okay.
And I think most clients also realize the COVID-19 is not going away so much of a Hollywood problem.
And I don't have an extra water. So it's a combination of our existing.
Existing clients over to new prospects.
Processes, and new stuff coming in and in my prepared remarks, I also spoke about some of our existing verticals, becoming far more excited based on the investments we've made in the index.
From the recent box, we believe that some of these verticals actually has tremendous potential to dramatically change the game for WNS.
In the medium to long term is so exciting days ahead.
Thank you congrats.
Thanks Maggie.
Thank you. Our next question comes from Ashwin scrap a car from Citi. Your line is open.
Thank you.
Sanjay got them in day.
Congratulations on the quarter happy new year.
That's true.
I guess I wanted to start you know your comments of positive you youre doing a buyback again.
The numbers themselves indicate.
Sort of you know I don't want to call it normal but.
If that's been a let's see.
So my question is really on the pace of that determined and.
Partly what drives the question as you implied for Q revenue outlook, it seems to incorporate the below normal level, but.
Both sequential and year over year.
Growth.
And I know you have a tendency to beat each quarter, you have done debt by about 10 million or more to each of these quarters.
So what's the explanation here or are you just being conservative what's the explanation.
Yeah.
Yes.
I'll take a stab at that question first and I am sure Sanjay and Dave will have more to.
Talk about but.
First thing I would say is while we are very confident about the return to normalcy.
WNS is executing I think that's very important.
You'll note from the results across a few quarters that we are definitely not leaving anything on the table at execution to support our sales support.
Our operation.
Areas of support and if you look at the.
The business model in my view is outstanding as well, but when we do these guidance is focused.
This year in particular, we have.
Follow the ecosystem.
<unk> you.
Useful but more of a property.
Once again interest clients are also quite conservative in terms of per widening day.
Unfortunately, the sites based on <unk> items.
During the quarter, if something changes and it is a positive change that's what debt.
Revenue without profitability, along the way so we execute better but at the same time. This year, we are all cash.
It's all about making sure that they've got a longer guidance is actually coming from signing those contracts.
From clients.
In terms of the fourth quarter in particular.
Some day they spoke about the one five months of acuity, but I'll leave it.
David do you expect that even better.
Yeah, and I know shooting, maybe yesterday, and what Kishore mentioned specifically for quarter four.
You'll see us based on a number of at least a 3% growth because you know in quarter three we had a fire in our Hoffman and non recurring revenue.
And for quarter, four and we have not baked any of that short term revenue because we don't have a visibility and that's pretty much consistent waukesha was talking about as well as some of that line flow.
Forecast because they haven't even when it comes out of it is but that's another thing you know what is driving debt. So right now what do you mentioned, specifically like 3% sequentially. What we are seeing the growth and all that sort of indicate including we have started hiring as you mentioned and you know as we move forward in quarter four to deliver those revenue I know that those hiring will continue.
Okay.
Yeah, and it's not just it's not just the revenue ashwin right. So what ends up happening is we're hiring.
We're not projecting short term revenue, where we're not projecting increases in terms of versus where our clients have given us forecast and what ends up happening is if we ended up generating incremental revenue over and above that what it tends to do with also generate incremental margins. So one of the things you'll see in terms of the guidance.
If you look at what's implied in the fourth quarter, we're back to around the 20 per cent merchant and that's based on doing Mark revenue, that's relatively flat to Q3, but if that revenue comes in it comes incrementally.
Incrementally to where we are it's going to drop at a healthy clip down to the bottom line and so not only does it create the revenue upside that you were talking about it also creates the margin upside.
Understood. Thank you for debt and then.
Going back to the.
So buyback I mean, I personally I think you can buy back stock because it is make acquisitions. If you want I just wanted to confirm the day. The buyback assumption is just the indication you'd think there's value in the stock its not an indication that debt arent.
Meaningful acquisition targets and can you talk to the diligence process in the current environment as it relates to the M&A pipeline I mean laptop.
I'm sure that a you know social distancing and the lack of travel might makes diligence them more difficult.
So our strength.
Right, So first and foremost let me once again.
And then is.
The priority products and along with debt buyback. So these are the two areas.
Very much focused on.
Just give you a I'll confirm that we are we have a very strong peak just typically the bigger news.
We believe that share.
All the right things to make sure that the cash position that we have utilized.
The longer term interest of our shareholders.
Have a great track record of digesting, our acquisitions and debt.
But I can do that we know that I have any better so.
Patrick I'm far from that.
We are looking at M&A every one of our core areas. We have had no impediment in terms of doing due diligence because that is.
The.
Scheme as well as our growth.
I've worked off.
How do we get all of this debt so no issues there at all and as far as buybacks.
Obviously, we believe that there is a.
Slug of an object.
He is really continuing to me.
Our capital allocation plan at this market.
Having said that we believed.
And industry is healthy strong potential for WNS in.
In the emerging industry is very strong and even from.
Interest in.
In all four areas core verticals marketing.
Allergies and so that's great.
Good day.
Okay. Thank you.
Yeah, No I was just going to add with respect to the diligence process Ashwin.
We're actually saying that it is not difficult to do effective due diligence in this environment.
Certainly doing that type of activity back in the March April may timeframe was a major challenge given not only the the distancing issues, but also given the lack of understanding and lack of visibility into what some of these assets might look like coming out of COVID-19, but I think over the last.
Three to six months, we've been able to get a better level of comfort in terms of kind of what the post COVID-19 environment might look like for some of these acquisition targets and we have been able to engage with a number of these firms to get into deeper and deeper due diligence and understand whether or not these are going to be good fits for us.
Okay, well that's good to hear so if it's a good thing do you have no hesitation in pulling the trigger here.
Not at all.
Okay.
Yes.
Yeah.
Thank you. Our next question comes from Dave Koning from Baird. Your line is open.
Yeah, Hey, guys nice job.
Thanks.
Yeah.
Yeah in you know first of all the margin progress is pretty incredible and I know you know if you'd go back 510 years. We would've said. He is we can disconnect from FTE based revenue and more transaction based that would be good for margin you've actually had the transaction base go down it used to be like 17% of revenue, it's a little under 10.
Now now subscriptions have gone up which probably helps but maybe describe like what's happening. It you know it used to be the F. T. He was viewed as not as good but it actually seems like youre doing better with with that growing so so maybe describe kind of what's happening there.
Yeah look I mean, you're right.
Margin certainly one of the one of the things that we've always spoken about is that when we were able to move clients to transaction and outcome based models, we have more leverage in our business. We had these at our disposal, but one of the other things. That's happened is as we become more domain centric as we become more tech enabled we're also able to dry.
<unk> profitability that way. So so one of the things that we've seen and if you look at the profile of our segments.
As significant growth in the industry specific revenues.
And when you can move clients to solutions that are specific to the the verticals in the sub verticals with.
They operate within.
You tend to be able to move away from Commoditized price thing right. So if what youre doing is selling up in AG services. It can be difficult to get value. What you're doing is just selling hardcore analytics. It can be difficult to get value. If what youre doing is just selling customer interaction services it can be difficult to get value, but when you sell solutions.
And those solutions cut across traditional horizontal the ability to price per value goes way up and I think that's been part of the margin story for WNS. The other part has been the gradual deployment of more and more technology on the processes that we manage where we do have some level of control and our ability to drive higher margins there as well.
Yeah.
Yeah, that's that makes a lot of sense that that's really helpful. And then maybe just as a follow up I mean basically the last two quarters margins have been all time highs despite revenue being down a little year over year and I know you answered some questions on margins already but.
Is there something that just changed in the fundamental.
Business, you know, whether it's just lower travel, maybe maybe permanently or whatever.
You know maybe your margins over time now are just going to be at a higher level and you know just kind of thinking about next year could we be above peak margins you know as we look at next year if revenue normalizes.
Yeah, I think it's a little little early for that Dave you know certainly we've gotten some benefits by either delaying or deferring certain types of expenditures.
Travel, obviously, a part of that marketing right, if you're not able to hold marketing events, whether they are for the analyst and advisors or whether they're per client.
These kinds of things they save you a lot of money in and they're part of our normal expense structure and we believe.
At some point over the next 12 months. These things are going to start to come back as a matter of fact, we started to see some of these expenditures come back and we saw a little bit of it this quarter right. So our facility utilization, we're going to get people more and more people back into the offices. We're gonna have people getting on planes at some point. So yes. These costs will come back.
How long, it's going to take I think will be a function of essentially how quickly.
We can get herd immunity or we can get vaccinations out there and get people comfortable getting back on planes and kind of going back now now you're 100% right and that some of this maybe structurally impacted.
We certainly expect to have a certain percentage of our people working from home, but the question is are people going to want to go to conferences or they're going to want to go to convention. So they're going to want to do some of these activities and that's one of these things that we're gonna have to wait and see but you know.
Our margin performance and outperformance this year has been to some extent a function of.
That dynamic, but it's also been a function of that back to we've had the a.
A unique situation. This year, we really haven't seen in the past five to 10 years, which is.
Both the British pound and the Indian rupee on a year over year basis.
Moving in favorable trends for us typically we have one moving favorable and the other moving negative. So you know part of the story for this year is also currency.
Yep Yep.
Yep, that's great well, thanks, guys nice job.
Yeah.
Thanks, Dave.
Thank you. Our next question comes from Puneet Jain from Jpmorgan. Your line is open.
Hey, guys. Thanks for taking my question good quarters.
Hum.
As you plan for next year and over the medium term how are you thinking about long term changes in the luxury market.
So from sites needed for transition or even selling.
Work from home employees, or even though total outsourcing select onshore locations.
So if you're a high percentage.
Yeah.
Go ahead Bill from my perspective.
Thanks, <unk> so from our perspective over the short term, we don't see any change in terms of full force.
Sales growth fill up in terms of our transition and then reported.
The vacation early.
Oh.
It progressed through the next few quarters, there will be a few more people who will start working from the office piece as the client demands.
What are some gift from fed from our hybrid operating model.
The long haul, but surely clients.
Clients that are much more comfortable dealing with it.
Okay.
So puneet I'll just.
I don't know a little bit of share I thought from the next set of questions.
And as we look ahead.
I appreciate.
<unk> said in terms of the short term or the medium term.
I think it won't be most impactful is the fact that the industry has now demonstrated.
Total body weight loss there'll be other non capable of working from the office.
Moving to a work from home.
Martin.
From coal is not going to be post COVID-19 in my view.
Furthermore, because of the other days the complexity, although there's much change.
Thomas your confidence behind the business is good.
<unk>.
The requirement for final secular b and.
From what was keeping PZ and <unk>.
Therefore clients would be more comfortable.
Having.
People worked from the offices that we've also been lots of again not just from a comfort point of view, but also from an economic part of it because in the office you can also drive more seat utilization and there are many other market is you can think of things like that but I would say that WNS as a company that's work that day.
Industry very closely.
Sure Bill.
Long term well from old trends as a result of fish.
Our workforce with our channel.
Oh.
Bottom line basis.
He was very good even.
If you ask me, we wouldn't be able to be potentially won't be many employees, who want to work box.
That is why the work from home.
Okay.
Sure.
All the changes that need to be.
<unk> pushed through with the government will actually entered in the long run.
But predominantly as we also said we would expect to see that business will go back to the offices.
As we have been started with clients. We will also take the right decisions in terms of.
I definitely want to invest in more offshore Senegal.
In order to grow our business.
Some of it every day.
Sure.
Yeah at the end of the day, it's pretty simple.
Day, one because clients are going to drive the model.
Yeah.
Yeah.
Yeah got it got it no that's helpful.
And this quarter was your transaction growth was down on sequential basis.
FTE based growth.
What's up.
What was the difference due to expose their two specific lines and travel vertical and transaction. This week.
Or should we expect that to them.
M. Two line items to convert even today.
So what are the other.
Debt observation is right index nothing from a strength perspective, it's a no specific tools some of that line saw temporary.
And utilities worthy goal as well as some from us and some of it on their final verticals. So you are absolutely right.
It's not about any just a shock from a little volatility what we keep on having quarter over quarter.
Understood. Thank you.
Thanks Puneet.
Thank you.
Our next question comes from Vincent Colicchio from Barrington Research. Your line is open.
Okay.
Yes, Thanks, Casey if I'm curious could you give us an update on your top client in your top five clients maybe the growth.
So our expectation over the next several quarters.
Sure. So first of all let me say that.
All of these client that you spoke about the relationship with good solid b.
The partnership also this process has been outstanding.
Quite a few cases renewal discussions have actually been commenced and.
In some cases also completed.
We've also used this opportunity to compete.
Some of these renewals and go after a completely new processes as well.
The most important statement I would like to make it.
Sure Greg every one of our top 10 top five property price continue to actually become healthier.
The COVID-19.
The experience of a COVID-19 is actually being used to build even stronger relationships with the CSL community inside each of these clients.
Much more time to interact with the leadership at the site.
So very foster strength.
But having said that because of cost.
They have received a number of new clients as you know.
We thought that because of all of our.
New apartment without the potential with regard to the Doctor of interest the company, Yes, which is a good product.
And given some of the issues. Some captives are experienced with the pandemic are you seeing opportunities on that side.
In terms of acquisitions always wins.
So up to.
<unk> spoken on the box about.
About the captive doghouse.
That's something that we're constantly focused on lots of discussions.
Do you have any plans that we spoke about.
All of these kind of deals so.
So, yes I think.
In no time history current baas.
Ceos CSO the clients.
Client sites actually now with the advanced stages of managing a captive as opposed to focusing on their core business side I actually think from near Metro diner before which many of them received these decisions in terms of just focusing on more corporate debt.
Henry.
What is non core to them and therefore, there's a big object.
EBIT companies like the <unk> came.
Kim.
I'm going to discuss it one day.
Thanks for answering my questions great quarter guys.
Thanks Vince.
Yes.
Thank you at this time, we have no further questions in the queue.
This will conclude today's conference call. Thank you for your participation and you may now disconnect.
Yeah.
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