Q4 2023 WNS (Holdings) Limited Earnings Call

Speaker 2: Good morning and welcome to the WNS Holdings fiscal 2023 fourth quarter and full year earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, we will conduct a question and answer session and instructions for how to ask a question.

Speaker 3: to our fiscal 2023, fourth quarter and full year on this call. I have WNS's CEO Keshav Murugas and WNS's CFO Sanjay Puryat.

Speaker 3: A press release detailing our financial results was issued earlier today. This release is also available on the investor relations section of our website at www.wns.com. Today's remarks will focus on the results for the fiscal fourth quarter and full year ended March 31, 2023.

Speaker 3: Some of the matters that will be discussed on today's call are forward-looking.

Speaker 3: 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.

Speaker 3: Such risks and uncertainties include, but are not limited to, those factors set forth in the company's Form 20F. This document is also available on the company website.

Speaker 3: During this call, management will reference certain non-GAAP financial measures which we believe provide useful information for investors.

Speaker 3: 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.

Speaker 3: Net revenue is defined as revenue less repair payments.

Speaker 3: margin excluding amortization of intangible assets, share-based compensation, acquisition related expenses or benefits, and goodwill impairment.

Speaker 3: Adjusted net income, or ANI, is defined as profit excluding amortization of intangible assets, share-based compensation, acquisition-related expenses or benefits, goodwill impairments, and all associated taxes. These terms will be used throughout the call.

Speaker 3: I would now like to turn the call over to WNS's CEO , Keshav Murugan. Keshav?

Speaker 4: Hey, thank you David and good morning everyone.

Speaker 4: Despite the challenging macro environment, WNS continues to perform well.

Speaker 4: Our fourth quarter financial results demonstrate the health of the BPM space, the strength and resiliency of WRS's business model and the company's ability to execute.

Speaker 4: Net revenue for Q4 came in at $305 million, representing a year-over-year increase of 10.9% on a reported basis and 15.6% constant currency.

Speaker 4: Sequentially, net revenue increased by 4.1% on a reported basis.

Speaker 4: on a constant currency basis after adjusting for foreign exchange.

Speaker 4: Our acquisitions added approximately 6% to year-over-year growth and 2% sequentially. In the fourth quarter, WNS added 11 new logos and expanded 30 existing relationships.

Speaker 4: Sanjay will provide further details on our fourth quarter financial performance in his prepared remarks. Sanjay will provide further details on our fourth quarter financial performance in his

Speaker 4: year, WNS delivered solid growth in revenue and earnings while continuing to invest for the future.

Speaker 4: on a constant currency basis, driven by broad-based strength across verticals, geographies, and service offerings..

Speaker 4: as well as our three tuck-in acquisitions.

Speaker 4: Despite the weak macro, it is clear our clients understand that leveraging digital technologies and advanced analytics across processes are not optional, but in fact represent necessary business changes required to compete.

Speaker 4: WNS's ability to deliver these benefits while generating clear, immediate and significant savings means that the majority of our services are not subject to budgetary pressures or investment prioritization.

Speaker 4: evaluation of which activities are best transformed and managed by a client partner and which are best kept in-house.

Speaker 4: In addition to solid top line performance in fiscal 23, WNS once again posted industry leading margins and delivered growth in earnings per share of 13%.

Speaker 4: During the year, the company also continued to invest both organically as well as inorganically to ensure our ability to meet the evolving needs of our global clients.

Speaker 4: MNA remains an integral part of our investment plans and a key component of our balanced disciplined capital allocation program. WNSS approach and philosophy towards MNA is unchanged and is focused on adding niche token capabilities which enable competitive differentiation.

Speaker 4: including domain expertise, data and analytics, and digital technologies.

Speaker 4: Our targeted assets should help expand end-to-end capabilities across front, middle, and back office and create client solutions which span design, build, and run.

Speaker 4: From a financial perspective, we expect acquisitions to accelerate our long-term growth rate, have a margin profile at or above company average and carry a reasonable industry valuation.

Speaker 4: In fiscal 2023, WNAS completed three acquisitions which we believe need these key M&A criteria and integration of these assets is going well.

Speaker 4: In addition to M&A, share buybacks are also an important element of our capital allocation program. During fiscal 23, WNS purchased or repurchased 1.1 million shares of stock and since the inception of our buyback program eight years ago, the company has now repurchased 9.9 million shares at an average share price of $50.47. That's on our 31st March share price.

Speaker 4: This equates to a total return of 85% and an IRR of more than 15%. I would also like to provide you with a quick update on our ESG efforts over the past year. In fiscal 23, WNS made significant progress on our diversity, equity and inclusiveness initiatives, environmental commitments.

Speaker 4: corporate social responsibility impacts, as well as training and human capital management programs.

Speaker 4: Our highlights include improved board diversity, our commitment to the science-based targets initiative and a net-zero objective financial aid to earthquake victims in Turkey and Syria.

the launch of a formal internal tracking and reporting system for ESG, and significant expansion of our training, reskilling, and employee care initiatives. The company also received numerous awards and recognitions for our ESG programs, including the Golden Peacock Award for our WNS Care's corporate social responsibility impacts.

inclusion in the 2022 Bloomberg Gender Equality Index, and being named to the Forbes 2022 list of the world's best employers.

Back in February , we announced upcoming changes to WNS's organizational structure. The company has now moved to a strategic business unit or SBU structure, which combines the company's existing and verticals into four logical groups, each headed by a chief business officer. The company is now moving to a strategic business unit or SBU structure, which combines the company's existing and verticals into four logical groups. The company is now moving to a strategic business unit or SBU structure, which combines the

The Chief Business Officers will report directly into me and will be based around the globe, including the US, UK, as well as India. The 88th verticals will remain standalone independent business units, each with a dedicated vertical leader in order to protect our differentiated domain centric approach to BPM.

We believe the new organizational structure is vital at this stage of our evolution and will help facilitate next level growth by enabling the company to better drive business synergies, enhance scalability, generate operating leverage, as well as create organizational depth.

Turning our attention to the fiscal 2024 outlook, despite the weak global macro, WNS enters the year with a broad-based demand for our offerings, an expanding new business pipeline, and strong revenue momentum.

In addition, at present our client volumes remain stable, including the travel vertical.

The company begins fiscal 2024 with 88% visibility to the midpoint of guidance which represents constant currency net revenue growth of 30%. We also expect our margins to be stable and healthy for the upcoming year despite ongoing investments in our business.

the continued shift to work from office and normal annual wage pressure.

margin expansion opportunities going forward will largely be a function of industry evolution as clients increase adoption of higher value and end-to-end solutions and migrate engagements towards more non-FT pricing models.

In summary, I believe the company has strong business momentum, is executing at a high level, and is extremely well positioned in a healthy BPM environment. We remain focused on operating at the intersection of domain, technology, and talent to help our clients to transform their business models.

manage their rapidly evolving requirements and create competitive advantage.

This will enable WNS to drive long-term sustainable business value for all of our key stakeholders.

I would now like to turn the call over to our CFO Sanjay Puria to further discuss our results as well as our outlook. Okay?

Thank You Keshav.

In the fiscal fourth quarter, WNS net revenue came in at $305 billion, up 10.9% from $275 million posted in the same quarter of last year, and up 15.6% on a constant currency basis.

Sequentially, net revenue increased by 4.1% on a reported basis and 2.5% on a constant currency basis.

Acquisitions contributed approximately 6% to year-over-year revenue growth and 2% quarter-over-quarter.

Our sequential revenue growth was driven by broad-based momentum with both new and existing clients, the full-quarter impact of our OptiBuy and the SmartCube acquisitions, and favorable currency movements.

These benefits were partially offset by the ramp-down of a large healthcare process first highlighted on our July earnings call.

In the fourth quarter, WNS recorded $1.6 million of short-term revenue.

Adjusted operating margin in Kotor 4 was 20.6% as compared to 21.5% reported in the same Kotor of fiscal 2022 and 21.9% last Kotor.

Here over here, adjusted operating margin decreased as a result of annual wage increases.

higher costs associated with our return to office, and the impact of unfavorable currency movements on our monetary assets and liabilities.

This headwinds more than offset operating leverage on higher volumes, improved productivity, and favorable currency movements on operating costs. Sequentially, margin decreased as a result of higher wages, increased return to office costs, currency impacts on our monetary assets and liabilities, and

Performance bonuses and advanced hiring for project ramps.

This headwinds were partially upset by higher volumes and favorable currency movements on revenue during the quarter.

The company's net other income, public expense was $0.4 million of net expense in the fourth quarter as compared to $0.9 million of net income reported in quarter 4 of fiscal 2022 and $1.2 million of net expense last quarter.

Year-over-year benefits from higher interest rates and interest income on tax refunds were more than offset by lower cash balances resulting from share repurchases and acquisitions and increased interest expense from long-term debt and operating leases.

Sequentially, the favorable variance was the result of non-recurring interest income stemming from tax reference and increase in our average cash balances and higher interest rates.

These benefits were partially offset by higher interest expense driven by operating leases and a full quarter of long term debt.

WNS's effective tax rate for quarter 4 came in at 15.8% down from 19.7% last year and 19.8% last quarter. Both year over year and sequentially.

Changes to our effective tax rate are largely the result of shifts in our geographical profit mix, changes to the mix of work delivered from tax incentive facilities, and a one-time tax accounting benefit of $1.7 million.

The company's adjusted net income for Q4 was $52.4 million compared with $48.3 million in the same quarter of fiscal 2022 and $50.6 million last quarter.

Adjusted deluded earnings were $1.04 per share in quarter 4 versus 95 cents in the fourth quarter of last year and $1.01 last quarter.

As of March 31, 2023, WNS' balances in cash and investments totaled $304.9 million and the company had $173.4 million in debt.

In the fourth quarter, WNS generated $84.3 million of cash from operating activities

incurred $14.7 million in capital expenditures.

and made scheduled debt repayments of $8 million. DSO in the fourth quarter came in at 32 days as compared to 30 days reported in Q4 of last year and 34 days last quarter.

With respect to other key operating metrics,

Total headcount at the end of the quarter was 59,755.

and our attrition rate in the fourth quarter was 40%, as compared to 44% reported in quarter 4 of last year.

and 28% in the previous quarter.

In the quarter, sequential attrition increased for entry-level voice-based CX services in the Philippines and South Africa, driven by our clients' desire for in-office delivery.

The expect attrition will normalize over time in the low to mid 30% range but continue to be volatile, quarter to quarter in the current labour environment.

Build sheet capacity at the end of the quarter 4 was 37,222.

and WNS continued our progress towards in-person operations, averaging 63% walk from office during the quarter.

I would now like to provide you with a brief financial summary of fiscal 2023 before discussing our outlook for the coming year.

Net revenue in fiscal 2023 came in at $1 billion and $162 million, up 13.2% on a reported basis and up 18.8% on a constant currency.

Our acquisitions of Wuram, OptiBuy, and the SmartCube contributed 3% to the company's growth rate. Organic revenue growth was broad-based across geographies, services, and verticals, and driven by strength in both new logo additions and existing client expansions. Popline in fiscal 2023 also benefited.

from a partial recovery of pre-pandemic travel volumes.

Revenue growth during the year was partially offset by a ramp down in the healthcare business.

and unfavorable currency movements. The company's fiscal 2023 adjusted operating margin came in at 21%, down 40 basis points from 21.4% reported in fiscal 2022.

Margin favorability from operating leverage on higher volumes, improved productivity and currency movements were more than upset by wage increases, return to office cost and the resumption of corporate travel. In fiscal 2023, net other expense was unfavorable by $2.6 million.

as a result of increased interest expense associated with the new long term debt positions, higher operating lease costs and lower average cash balances during the year.

This had wins more than offset higher interest rates realized on our cash balances. The company's effective tax rate for the year was 19.1%

down from 20.7% last year as a result of a change in the mix of profits by geography, the percentage of work delivered from tax incentive facilities, and a one-time benefit in Q4 from the creation of a deferred tax asset. Overall, our full year adjusted diluted earnings per share.

Improved 13%

coming in at $3.86. In fiscal 2023, the company generated $205 million in cash from operations, $160 million in free cash. During the year, W&S spent $312.8 million on acquisitions and captive carve-outs.

repurchased 1.1 million shares of stock at a cost of $81.6 million or $74.21 per share.

spent $45 million on capital expenditures, and made scheduled debt payments of $8 million. We ended the year with a net cash balance of $131.5 million or approximately $2.60 per dilute share.

In our press release issued earlier today, WNS provided our initial full year guidance for fiscal 2024.

In our press release issued earlier today, WNS provided our initial full year guidance for fiscal 2024. Based on the Company's current visibility levels, we have scheduled an additional return to fiscal 2024 as newI whole new world- wide..

We expect net revenue to be in the range of $1 billion and $290 million to $1 billion and $348 million, representing year over year growth of 11% to 16% on both a reported and constant currency basis.

Our acquisitions are expected to contribute 3% inorganic growth in fiscal 2024.

Our top line projections assume an average British pound to US dollar exchange rate of 1.24 for the year.

As our recent acquisitions have added an element of high-growth project-based work to the WNS portfolio and our short-term revenues have fallen to very low levels, we have modified our approach to visibility accordingly.

As a result, WNS enters fiscal 2024 with an 88% visibility to the midpoint of the range.

Fully adjusted net income for fiscal 2024 is expected to be in the range of $209 million to $221 million based on a Rs.82 to $1.1 million exchange rate.

This implies adjusted EPS of $4.12 to $4.36 assuming a diluted share gone of approximately 50.7 million shares.

With respect to capital expenditures, WNAS currently expects our requirement for fiscal 2024 to be up to $60 million.

We love about the go for questhes operatacertainly liies and gentlemen if you'd like to ask a question at this time please press star one one on your telephone if you wish to remove yourself from the queue simply press star one one again and in the interest of time and fairness.

we ask that you please limit yourself to one question and one follow-up. One moment for our first question.

And our first question.

comes from the line of my aunt Tendon from Needham. Your question, please.

Thank you. Good morning from our side here. I wanted to ask in terms of the guidance, how should the quarters shape up if you could just talk about the linearity of the quarters, both on the top line and in terms of margins. That would be helpful.

morning from our side here. I wanted to ask in terms of the guidance, how should the quarters shape up? If you could just talk about the linearity of the quarters, both on the top line and in terms of margins, that would be helpful.

Quarter one, usually as we know that there is an upfront loaded productivity. Accordingly, at this time, we expect quarter one to be flat from a revenue perspective. Also there is a wage inflation which generally hit from quarter one as well as the productivity as I mentioned. We expect quarter one to be flat from a revenue perspective.

So margins usually are a couple of percentage down from an operating margin perspective sequentially as well as the tax rate is as we saw it got a 4 because of some one time benefits it was lower. So the tax rate approximately is going to be somewhere around 22%.

So I think kind of all said and done Mike, when you look at the progression throughout the year, obviously if you look historically at the seasonality to our business, Q1 is soft on both the top line and the bottom line, but the expectation should be as we progress across the quarters, the growth rate should accelerate or it should expand.

Got it. That's helpful. And then just as a follow-up, I wanted to ask about the deal sizes as you entered this year. Are you seeing larger deals in terms of scope and size just given that such an important initiative for many enterprise clients around transformation? How are you seeing actually deals?

maybe break into smaller pieces as clients deal with uncertainty in their own business? Yeah, I'll take that question. This is Keshav. So, you know, I think the most important point I would like to make here is that with a lot of comfort now being seen around potentially a mild recession.

What we are starting to see is not only the transformation agenda continue to be front and central, but clients now moving quickly on the other agenda of agility and cost saving and cost leadership and things like that. So combination of both of these actually will be very positive we believe for the sector and more.

important for W and S company that is invested so much not just in domain but also in terms of technology transformation as well as data to insights. In terms of deal sizes I must say that I am not seeing any significant change. I am continuing to see a lot of focus.

on clients wanting to progress with larger size deals. So we had a number of these conversations. The pipeline continues to look very, very, very strong at this point in time. What has also been really good for us is we are seeing decisions coming through faster, probably because clients are looking to be ahead of any changes that the macro environment may.

Thanks, Michael.

Thank you one moment for our next question. And our next question comes from the line of Maggie Nolan from William Blair. Your question please. Thanks. Can you talk a little bit about, is there a structural change in the contract types that you're seeing?

of our business. We're still running pretty close to that 70-30 mix between FTE and non-FTE. I think the contract mix type that you're seeing that's affected the visibility is more about the acquisitions that we've done which are really focused on the design build side of our business, right? So implementation, integration, consultative types of efforts that have as a result of them being

shorter duration types of projects, if you will, as opposed to a five-year contract. The shorter duration, but the higher growth profile of this business has reduced the visibility slightly. I think in terms of the contract types, no major change, but obviously adding 6% of revenue to the company.

through the three tokens that we've done have changed a little bit of the mix between kind of the five year contracts and the six month one year contracts. And I just had even from a pricing perspective, we're not seeing any dramatic change because the shift already happened earlier.

where clients are not focused anymore on the the build rates but they are all focused upon the total first of the ownership and that's where you know the transformation as well as you know enabling to technology analytics from a business outcome perspective workshop.

Got it. That's helpful. Thank you. And then I think you mentioned, if you characterized it as normal annual wage pressure, does that imply, you know, level similar to last year or the new normal or has the, you know, inflation level come down to kind of more of a historical level and then can you comment on specific geographies?

We believe it to be expected to be normalized and that's what we have been in our guidance.

Thanks so much. Thank you, Megan. Thank you. One moment for our next question.

And our next question comes from the line of Puneet Jain from JP Morgan. Your question, please. Yeah, hi. Thanks for taking my question.

I wanted to ask about applications of generative AI, chat, GPT, and all that new AI technologies in the client processes. Yeah, so Puneet, first of all, thank you for being on this call and for that question.

Now, actually, we are quite excited about all the discussion that is now starting happening on the chat GPT and generative AI and things like that because we actually believe that for a company that is so focused on domain.

All of this will continue to be new tools that we will add into our armory as we deliver excellence to our clients.

So first and foremost, I think a lot of this is not really new because if you look at it, NLP and artificial intelligence have been around for quite a while. And I think what we are seeing as changing really is the size and the complexity of the models.

around which we can use some of these tools and technology. I would say that as we look at the evolution of some of this, the real benefits will probably be around cost, scale, language, support, the accuracy of data, reduced cycle times, the ability to learn.

and things like that. And it will also help us in the longer term in terms of pushing our people into higher level kind of work while some of the lower level work and repeatable tasks will get done by some of these tools. The important thing that we like to discern here is that this is really...

tool and you know you know we'll have to wait to see how it evolves obviously but we think this is a tool not really a long-term solution that takes care of everything that we provide so you know you cannot you know the tool really will always suffer from the lack of critical thinking it will not

at this point in time be able to understand the context, emotion. It will, you know, in terms of creativity, there will be limitations, its ability, you know. It will also, you know, introduce bias which humans do not introduce. And therefore, you know, to that extent,

It is a tool, it is not yet a solution. And we actually think that overall it's a good tool that we will leverage. But at the same time, for companies like us that are so focused on domain as a core differentiator on understanding clients' business.

so well. Remember one also cannot really you know outsource you know ethics, morality, fairness things like that which human beings are very good at. So we are quite excited. No, that's great. So tool not a solution. I like that characterization. Switching gears.

And can you also comment on margin profile of the new app position for new business that's incoming, whether it's like the large client, large account or the new acquisition? Yeah, supone, you know, this Anjay here, you know, from a guidance perspective, operating margin is, you know, 21 to 22%.

range pretty stable what we have been seeing earlier quarters as well as you know some of the you know that positions margin profile they are better than the company level margin because it's a project based revenue with you know the high growth profile what we have been seeing at the same time some of the large client you know typically we know that the whole transition phase

It takes time, it can range from 6 months to 18 months and accordingly the margin gradually starts expanding. With the mix of all those elements, we expect operating margin to be 21-22% for the next two months and only in 2 months?

And I think just to add to that, obviously, we talked a little bit about some of the unusual one-time margin pressures that we had in Q4 of this year that drove the fourth quarter operating margin down below kind of what we had expected walking into the quarter.

and correspondingly drove the full year operating margin to 21%. Excluding those items, we would have been at 21.5% adjusted operating margin for the quarter, which would have been the third consecutive year that we've been at 21.4, 21.5. I think when you look at the guidance for fiscal 2024,

for our next question. And our next question comes from the line of Brian Bergen from Cowen. Your question

This is actually Jared Levine on for Brian today. In terms of the internal reorganization, can you talk about early performance under this new operating structure in terms of any key learnings or surprises thus far?

Yes sure, actually we're quite excited about the new operating structure and no surprises at all. In fact we've seen the new leaders go into those roles with a lot of excitement and positivity. We've seen clients respond you know very well because they're not seeing any

different in terms of operational, rigor and impact, but they're also seeing a lot more of attention in terms of their core businesses co-focus because the leaders now are very tenured leaders running into end-to-end businesses for them.

decision making is much faster, flexibility much higher and even within each of those structures we're seeing a lot of excitement because I think the ability to move with agility is much, much higher. So I think it's the start has been very positive.

Okay, great. And then in terms of travel, what are you seeing in terms of the various travel client subsectors you serve and are you anticipating any additional improvements in FY24 here?

Yeah, let me take that, Jared. I think, you know, we're certainly happy to see that the travel business for us has been stable on the volume side. We continue to progress well with the new logos that we've added and our ability to expand the services that we're providing to our existing customers. If you look at the guidance for fiscal 24, we have not.

up to 2% revenue recovery opportunity looking forward.

Perfect, thank you. Thank you.

And as a reminder, ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our next question.

And our next question comes from the line of Vincent Colicchio from Barrington Research. Your question, please. Yes, Keshav, you just, we just called out that travel will be, you know, you're assuming flattish this year. I'm wondering if you look at your pipeline, sales pipeline, do any verticals...

particular stand out or is it fairly broad based in terms of growth aside from travel?

Yeah, so Vince, thank you for that question. So first and foremost, I think demand that we're seeing is broad based across all cold verticals, geographies, as well as, you know, horizontals. And as far as travel is concerned, I'll have Dave give you a little more color so that you know, you appreciate what he said slightly better. Yeah, I think first.

opposed to the recovery of volumes that we had lost. So the assumption on volumes is stable and it's in line with what our clients had projected going forward. To Kayce's point again, I think we see the overall composition of the verticals extremely healthy across the board. We're not really seeing any weakness relative to the end market. We do obviously expect it.

see weakness in our healthcare vertical support this year, based on the ramp down of the large healthcare client that we saw in Q4.

What are your thoughts on top five and top ten clients in terms of growth opportunities for 24? Are there any large deals that may cause some lumpiness in those groupings?