Q1 2020 Earnings Call
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Thank you your line will be placed on the calls and progress just from.
But as the addition of intangible assets share based compensation and goodwill impairment.
Adjusted net income or Eni is defined as profit excluding amortization of intangible assets share based compensation goodwill impairment and all associated Texas.
These items will be used throughout the call.
I would now like to turn the call over to WMS as CEO Keshav Murugesh Keshav.
Thank you David and good morning, everyone.
Fiscal first quarter financial performance was once again solid.
As our clients continue to validate WSS differentiated positioning in the BPM marketplace.
Net revenue came in at $211.6 million.
Representing a year over year increase of 8% on a reported basis and live in person.
On constant currency.
In the first quarter WMS added six new clients expanded 11 existing relationships and renewed 16 contracts.
First quarter adjusted operating margin came in at almost 23% and adjusted diluted EPS grew 23% versus the first quarter of last year to 72 cents per share.
Sanjay will discuss the details of our first quarter financial performance in his prepared remarks.
Over the past several quarters, we have discussed on our earnings call WSS ability to combine domain expertise technology and analytics to create solutions and help our clients transform their businesses.
Our collaborative approach continues to resonate well in the marketplace and is enabling our clients to navigate the increasing number of disruptive trends now impacting their businesses.
Today I wanted to highlight a different aspect of our business, which has been gaining traction over the past few years and is helping position w. owners as a top leader in the business process management space.
This trend is our ability to service Internet based digitally native companies.
The types of Inova to organizations that are creating a major source of disruption for legacy business models.
Or 10 years ago, WMS began supporting Internet based businesses by leveraging our specialized industry knowledge.
The first significant relationship was with Travelocity as you will recall.
With outsourced many of its front middle and back office functions stood up units.
Over a six year period.
And grew to become double Unisys second largest client.
While the initial goal of the engagement was cost reduction.
As the relationship expanded the focus shifted to higher value objectives, including process transformation.
Improving end client satisfaction and driving revenue growth.
This partnership give W and has a unique view into the online travel industry, but also help us understand how to create processes and utilize data and analytics.
To enable internet based digital organizations to better compete in the marketplace.
Over the past several years doubling this has the ability to leverage our experience servicing into internet based clients and to enhance these unique capabilities with domain specific expertise across key verticals.
Is being increasingly well received.
We are co, creating custom solutions, which enable these digital disruptors to drive better efficiency.
Actionable insights and an improved end customer experience.
In addition.
Clients are discovering that by partnering with WMS, they can enable their organizations to rapidly scale.
While focusing the internal attention and resources on driving brand recognition competitive differentiation and market share.
Today doubling this works with some of the most influential and innovative companies in the world.
In fact in fiscal 2019, we provided process management services to five of the worlds top 15 Internet companies as measured by annual revenue.
Our online clients are spread across verticals, including relationships in retail.
Payments Internet services, social media travel hotels and ride sharing.
The client's business models are also quite diverse including companies participating in the b to B b to C and consumer to consumer marketplaces.
Our ability to service. These organizations is increasingly visible in the Companys revenue profile.
In fiscal 2019.
Internet based clients represented 14% of WSS total revenue.
Up from 6% in fiscal 2015.
While there is a significant opportunity for WMS to continue to grow our footprint with leading Internet brands. There is a second benefit to servicing these disruptive organizations.
By leveraging our knowledge of the online space double units is uniquely positioned to help legacy clients transform their business models by co, creating custom digital processes necessary to compete.
This is becoming a clear differentiator for WMS in the marketplace up today.
Increasingly we are being recognized as an innovator in the BPM space with the experience and capabilities to help clients address complicated strategic business challenges.
This was in fact, one of the key reasons. We were recently selected as a long term process partner for convex group.
A brand new private equity backed international specialty reinsurance startup.
The BNS will design build and implement a unique platform plus BPM as a service operating model for contracts, which will expand key operations for insurance reinsurance claims finance and human resources.
Together, some units and complex will work to create the insurance company of the future, which will redefine the insurance market and break fee from legacy systems and processes.
Today, the overall demand environment for BPM continues to be robust and healthy.
We also view the ongoing BPM business opportunity as defensive in nature as most of the services, we provide not only a gross ongoing business disruption, but also reduce cost.
As such we believe that our business should continue to perform well, even if the macro environment were to softer.
In summary, Wls continues to be well positioned for long term success in the BPM market.
Our domain centric approach to solutions, which leverage strong capabilities in analytics technology transformation and process is resonating well with both existing as well as new clients and new prospects.
This is resulting in healthy organic topline growth.
Solid revenue visibility and a robust broad based pipeline of opportunity, which is increasing a marked by larger more transformational deals.
Dunkin' us remains committed to innovating investing and executing on our strategic plans to create long term sustainable business value for all our key stakeholders.
I would now like to turn the call over to Sanjay Puria, our CFO to further discuss our results and guidance Sanjay.
Issue.
In fiscal first quarter diverse net revenue came in at $211.6 million up 7.9% from $196 million posted in the same quarter of last year and up 11.2% on a constant currency basis.
By vertical revenue growth was broad based with the healthcare banking and financial services.
Manufacturing retail.
CPG and travel verticals.
Each growing at least 10% year over year.
With respect to our service offerings revenue growth versus the prior year was driven by strength in finance and accounting and industry specific BPM.
Sequentially net revenue increased by 2.4% on both our reported and on a constant currency basis.
Quarter over quarter revenue performance was driven by solid growth with both new and existing clients.
Which more than offset the seasonal impact of contractual planned productivity commitments.
In the first quarter, Dublin as recorded approximately $3 million of short term nonrecurring revenue, which was booked at close to 100% margin.
Adjusted operating margin in quarter, one was 22.8% as compared to 18.8% reported in the same quarter of fiscal 2019.
And 20.8% last quarter.
I've got a 16 favorably impacted quarter, one adjusted operating margin by approximately 130 basis points.
Consistent with our comments and guidance provided on last quarter's call.
Year over year adjusted operating margin increased as a result of the impact of I FRS 16 lease accounting.
Improved productivity, including the high margin short term revenue.
And operating leverage on higher volumes.
These benefits more than offset the impact of our annual rate increases.
Sequentially adjusted operating margin increased as a result of the impact of higher fodder 16 lease accounting.
Improved productivity hedging gains net of currency moment and operating leverage on higher volumes.
These benefits more than offset the impact of our annual wage increases.
Based on our quarter, one margin performance and current visibility, we now expect full year adjusted operating margin to be in the range of 21% to 22%.
Representing a slight increase from our guidance of approximately 21% provided in April which included approximately 125 basis point unfavorable impact from foreign 60.
The Companys net other expense was.
While 8 million dollar expense in the first quarter as compared to $2.5 billion of income reported in quarter one of fiscal 2019.
And $3.9 million of income last quarter.
Year over year, the 3.8 million dollar impact of FRS 16 lease accounting on interest expense more than offset higher interest income on large larger cash balances and lower interest expense, resulting from scheduled debt payments.
Sequentially. The reductions are the result of the IRS 16 lease accounting impact and lower other income associated with onetime gain in quarter four.
Dublin as effective tax rate for quarter, one came in at 20.7% down from 21.5% last year and up from 19.3% last quarter.
Changes in the quarterly tax rate are primarily due to the mix of both delivered from tax incentive facilities.
And the mix of profits between geographies.
For fiscal 2020, we continue to expect our effective corporate tax rate to be in the 22% to 23% range.
The company adjusted net income for quarter, one was $37.6 million.
Compared to $30.9 million in the same quarter of fiscal 2019.
And $47.8 million last quarter.
Adjusted diluted earnings were 72 cents per share in quarter one.
Was 59 cents in the first quarter of last year.
And 78 cents last quarter.
This represents growth in excess of 23.2% year over year.
Despite a reduction of approximately two cents per share in quarter. One of this year as a result of IRS 60.
As of June Thirtyth 2019.
Douglas balances in cash and investments totaled $226.5 million.
And the company had $61.5 million of debt.
Laguna generated $52 million of cash from operating activities this quarter.
And had $10.8 million in capital expenditures.
During the quarter the company repurchased 802000.
222 shares of stock at an average price of $57.67.
Which impacted quarter, one cash by $48 million.
Dsos in the first quarter came in at 30 days as compared to 31 days last year and 30 days last quarter.
With respect to other key operating metrics total headcount at the end of the quarter was 41056.
A sequential increase of over 1000 people for the second consecutive quarter.
Our attrition rate in the first quarter was 34% as compared to 31% reported in quarter one of last year.
And 34% in the previous quarter.
Global basic capacity and the end of the first quarter was 33695 and average built seat utilization improved to 1.22.
In our press release issued earlier today.
Dublin is provided updated guidance for fiscal 2020.
Based on the pump is current visibility levels, we expect net revenue within the range of $855 million to $895 million representing year over year revenue growth of 8% to 13%.
Revenue guidance assumes an average British pound to US dollar exchange rate of 1.26 for the remainder of fiscal 2020.
Excluding exchange rate impacts revenue guidance represents constant currency growth of 8% to 13% all of which is organic.
We currently have 95% visibility to the midpoint of the revenue range consistent with July guidance in prior years.
Adjusted net income is expected to be in the range of 143 $253 million based on 69 rupee to US dollar exchange rates for the remainder of fiscal 2020.
This implies adjusted EPS of $2.75 to $2.95.
Assuming a diluted share count of approximately 52 million shares.
Full year EPS guidance includes a year over year negative impact of approximately six cents per share.
Associated with the adoption of it for 16.
With respect to capital expenditures.
Douglas specs, our requirement for fiscal 2020 to be up to $37 million.
We'll now open up 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 questions to one question and one follow up.
And our first question comes from Maggie Nolan from William Blair. Your line is open.
Hi, Congrats on a good quarter and I love the commentary about the the Internet companies.
As you think about the work that you're doing with those companies and across your client base can you think about driving actionable insights for those clients and there's been a lot of talk lately about the security considerations around handling large amounts of data et cetera. So can you talk to us a little bit about how your clients are thinking about that and contact unicef's thinking about security. They handle these these processes for their clients.
Right.
Thank you Maggie.
So let me try and address that and I will have caused them to add a little more.
But the reality for our business now is as we continue to make investments on the technology front as well as on the whole security front because at this point in time. We've also created a very robust managed security services offerings as well as the company, which is starting to resonate extremely well with the client base. The first thing I want to mention as a headline item is.
The conversation is now changed dramatically dramatically for us from outsourcing much more to automation baseline with the help of technology the quality of conversation that we're having with clients is very different.
To compare to the conversation we had in the past. So today. It is all about helping every client appreciate that this is a tech business around which the wraparound offer domain and so many other things and we as a partner who understand that domain extremely well and who have made the investments in technology can actually help them in terms of.
Driving much better actionable insight because of the fact that as we've mentioned many times in the past we embed analytics.
Within our services now obviously from WMS point of view the whole area of security and the whole area of cyber itself is such an important part because we recognize the fact that we are not really in the BPM business. We are in the application business, which is that of our clients as well as of ourselves as well. So you know as you appreciate and understand better some of the things that we have done within the company in terms of investing in those areas.
And therefore, helping our clients navigate the uncertainties.
That they are likely to see because of the tracks that are out there in terms of cyber and the way. We have also return our contracts with each one of these clients also really helps us first and foremost provide cutting edge actionable insight and impact and at the same time also also dilute any.
Liability that may arise.
From a W. In us point of view as well because we are quite clear that we offer.
Inside the offer value added services, but we're not actually.
Or either running the bank or running the insurance company or taking lower what this degree.
Also just to add to what Keshav mentioned, besides a significant investment that the company continues and repeatedly mix across the in public policies and the technology associated with that.
Almost never do we allow storage and management of data on our premises and our servers et cetera. This is all managed across the client locations.
Which then I'm ensures that we do not have any breaches side that some of the others could be faced with.
Great. Thanks, that's helpful context, thank you.
The other thing I wanted to ask about share repurchases have been.
A nice way for you to return value to shareholders over the years and is there any change to how you're thinking about share repurchases going forward.
Just knowing that there could be some changes in terms of tax implications. Thank you.
So you know as we mentioned earlier that.
We already have approval from 3.3 million shares of share repurchase and out of that 1.1 was done last time in all balances right now in progress, where we have already repurchased about 800000 shares and so you know there is a way to go to complete the 3.3.
At the time.
But in that range, what and when we provided our to buy the stock from a capital allocation program. It continues to be around.
The tuck in acquisitions from a capability acquisition perspective, it's going to be around the share repurchase program, our debt payment as well as investment into the business.
Whether it's.
Capital expenditure program from a delivery footprint perspective.
Well, we want to.
Expand geographically as well as into the technology and know how some of the vertical and the service offerings, what we continue to.
Do that.
Yes, and just to extend the Sun just comments Maggie I think when you look philosophically at the approach to share repurchases. The company's general approach has been to try and mitigate the impact of share creep through restricted stock issuances to two employees through the share repurchase program, but also to make sure that we have dry powder to be able to buy back shares at an accelerated rate in the event that something happens like it did in 2016 with Brexit So.
I think the philosophy remains the same going forward and to suggest point, we don't view the share repurchase programs as having a material impact on the things that we can do with M&A and with other priorities for capital allocation.
All right. Thank you.
Thanks.
Thank you. Our next question comes from Bryan Bergin from Cowen Your line is open.
Hi, Thank you.
Wanted to start on margin. So the change drivers here, if you can kind of run through those again.
FX versus for 16 versus the operational factors, particularly in gross margin.
And then how should we be thinking about fiscal 20 margin cadence as you typically build throughout the year, but really factoring this one key strengths.
So to your point was almost sequential or year over year on the gross margin.
Year over year.
Okay. So you know from a year over year perspective, they know specifically to contribution.
Driving our year one was an eye for 16 are very very hard.
130 basis point improvement from a gross margin perspective, as well as we do mention about the nonrecurring revenue were broadly almost 100% of fall to the bottom. So that is all those contributed another 120 basis point and balances.
You know the impact of.
From a currency perspective and the productivity.
And the volumes.
The growth, what we have offset by wage inflation.
In the quarter, one usually with where the instruments have been.
Rollout.
Right.
I'm sorry go ahead subject.
And that completes you know from a full year perspective I know.
As we mentioned that.
Operating margin is going to be around.
21% earlier and.
Based on those on the nonrecurring revenue the growth what we have seen.
During the quarter one.
As well as some of the investment which work land from a quarter. One prospect is motivated to pre unfolds is going to be continuously be there.
You're factoring that we believe.
Yes.
The operating margin in 21% to 22% range again, no change from my father 16 perspective, what we mentioned earlier during the last April guidance that continues to be data is going to be around.
A 40 basis.
In fact, the impact on the Eni, but on operating margins going with a 140 basis point higher.
An apple to Apple comparison from the earlier your perspective.
Yeah, and just just to add a little bit of color to passengers comments, Brian in terms of the year over year impact in the first quarter from currency actually a lot less than you would think.
We are less than 50 basis points of favorability in Q1, both on a gross and an operating margin basis came from came from FX. So when you look at what's going on with the margin improvement.
As Sanjay mentioned some of it is not sustainable in terms of what happens quarter over quarter with the nonrecurring revenues and whatnot, but the reality is it is operational because it's not coming from FX. The second thing I'd like to add is in terms of the cadence of margin as we kind of move throughout the year.
Obviously, given some of the onetime items that we had here in the fact that somebody mentioned we've had some investments that have moved out of Q1 into Q2 Q3, we do expect a sequential drop in the operating margin for Q2, which is not the normal cadence to our business, but again I think kind of more of a normalized number for Q2, and then sequential increases as we go through Q3 and Q4.
Yes.
Okay. That's helpful detail. Thank you for that and then I wanted to ask then on convex group deal does this meet your large deal criteria and is this BPM as a service is this offering reflective of IP development services that are acquiring a different type of expertise, meaning are you finding required changes that are going after coming a resourcing approach and how should we think about that.
I can develop it as an area of organic or inorganic investments.
Yes, I mean, I think we are.
I'm sorry go ahead go ahead.
Hi in terms of the larger you'll see us definitely convicts has the potential to be a large deal for us over the next few quarters.
In terms of.
The deal it is predominantly a BPM as a service deal with a large technology.
Pardon.
Implementation, what we see some due to the strength of our domain expertise that we have with a vertical what we see is the resourcing mix that we have currently is absolutely suited to actually delivering the deal and that will continue to be the norm from going forward.
Yes, I don't think there's anything unusual here, Brian in terms of the skill sets required to deliver this is Scott mentioned in anticipation of Mike mentioned in his prepared remarks.
This is a start up so we're really excited to have been selected as a strategic partner to help build this capability.
And we're going to be building in across multiple processes within their business, but the real opportunity for us long term here is to watch this business grow and for us as an organization to grow with them. So I don't know that it necessarily meets the large deal criteria day, one, but clearly as Garland mentioned the opportunity for this to become a large deal in a large relationship is pretty significant.
Okay, great guys. Thank you.
Thanks, Brian .
Thank you. Our next question comes from Edward Caso from Wells Fargo. Your line is open.
Okay.
Good morning, good evening, congrats on another great quarter.
I wanted to talk about.
Maturity of the client base.
I see that your your top 10 ish growing slower than the total and if you could particularly talk about the insurance and utility area. Thank you.
Sure. So let me take that and I think one of the things that you'll see if you look at WMS over the last and this isn't just a couple of quarter trend. This is the last four or five years.
We've been adding more large clients and more clients of over a million dollars.
At an accelerated rate over the last four five years and we also know that most of these relationships take 234 years to kind of hit that sweet spot for growth. So.
Because we've been fairly consistent in our our growth, but we've been able to do is continue to kind of grow and more importantly, diversify this business in terms of customer concentration. So you've seen reduced reliance on on the top client reduced reliance on the top three 510 across the board.
And this is great. You'll also see a similar pattern. When you look at the concentration levels across services across verticals across geographies. So really excited and when we talk about kind of broad based healthy business growth. This is exactly what were referring to.
Obviously, when you look at the specific verticals and some of the things that are going on there.
Lots of moving parts the utilities space has obviously been weak and Weve talked for better part of a year now about a large utilities client, which created some headwinds for us in that business and continue to present some challenges.
But kind of under the covers if you will that business seems to be performing pretty well, it's just not.
No not getting the the growth in the attention that it deserves I guess from from the optics perspective based on both currency and that large client ramp down that we've been dealing with.
On the insurance space business extremely healthy broad based across multiple geographies, adding new clients, adding new large clients, we talked about a very large deal that's been ramping about a little over a year ago now.
We talked about the convex deal here, so really happy with our position and how we differentiated ourselves within the insurance space.
And maybe not at all actually.
Maybe just to add on the utility space you know right now as Dave mentioned Lloyds looking.
Little bit more pressure being bid on some of the headwinds over there.
But you know by historically it has been more concentrated from a.
You can Europe market perspective, and Thats, where the opportunity for US is kind of the whole North America, where the investment has been done and we have been going after I just a matter of time of some closures over there.
But they don't.
By just a temporary phenomena.
Well, we believe that there is immense opportunity to expand in this vertical.
My other question is around.
Kind of a larger deals are you seeing out a larger relative to recent years and are there durations extending it all and then if you could talk both in a recent experience and sort of what you see in the pipeline. Thank you.
Yes, so ed.
The answer so first and foremost.
I just hope that.
From the previous answer.
We gave you a lot of comfort around the fact that we are actually very positive about how each of our clients.
Is trending and the fact that as we leverage some of the new initiatives, including convex across existing client basis, you'll probably start seeing the concentration.
Ratio change again, but I think what is most important is your second question. The fact that.
We are actually seeing a very strong pipeline across all verticals.
Driven a lot by the transformation agenda of our clients and as we implemented a.
A change in terms of how we go to the market also from a heart is onto point of view. We're also seeing a number of finance and accounting diesels.
Customer CIO as kind of deals and analytics deals also lead the way in terms of.
The conversation.
Now obviously.
As we look at the pipeline.
The pipeline is filled with deals of all sizes that are four or five.
Very large transformational in a high impact deal where the client is looking to get a number of things done upfront and very quickly.
Then there are the usual kind of suspects where it's a very nice transformational high impact on our deal with it maybe part of a multi.
Vendor management were already that to somebody existing.
The client is coming introduction as saying that you know what you guys are different because you bring a completely different capability in some new areas and that's feeding into the pipeline as well, but I think in terms of overall impact.
I will say that this is probably one of the best times Board of units in terms of just scale size and impact transformational impact of deals where all the investments that we've been making over the past few years are coming together very well and I think we'll continue to.
Provide great impact us for the company over the next few quarters or a few years.
Great. Thank you.
Thank you. Our next question comes from May on Tandon from Needham and company. Your line is open.
Thank you good morning.
Keshav you mentioned the growth in automation. So could you just talk in terms of.
What percentage of deals today are Arthur deals and your win rate on those type of specific opportunities and the same way and how are you pricing these deals versus traditional BPM type contracts.
Okay again, let me just start by again, giving comfort and confidence around the fact that our investments in this area and our investments in terms of just bringing in the right partners beyond what would we have done organically.
Has been very well received in the marketplace is resonating very well with existing clients as well as new prospects. So if you look at.
Most of the industry advisor ratings, you will see the WMS from a technology point of view not just a domain point of view is now positioned as leader right and that actually gives a lot of comfort not only to us, but also to our clients and.
Prospect now as I mentioned, Iraq technology, and automation is now par for the course and therefore in every one of the deals whether the client demands it or not.
It is something that we.
In any case, we have been before and leverage it to the hilt in order to make sure that we are seen as a very strategic partner.
To our clients allows got them to talk a little bit about what he is seeing from an IP point of view what percentage of beans were seeing with our technology enable and I can only tell you that you know very well that is technology and domain with embedded analytic coming in.
Dublin US has a very very high chance of winning that deal.
Yes, as Keshav mentioned almost every deal that we are winning today on competition in at the moment has a significant element of RP as a part of the end to end solution that we are committed to drive.
Our win ratio is Saab significantly high in terms of even Standalone RPL deals that we are asked to address.
At the last measurement it was north of about 65% to 70% as we look at it in terms of different pricing models, either get embedded into the entire transaction based pricing, but what we are seeing more and more is clients that extremely receptive to a gainshare model in terms of benefits realized throughout automation.
And I think it allows us.
My ride over there specifically in all.
As Gordon mentioned that in all its part of older deals. So right now what we are seeing what the customer expectation is all about the outcome, what we are able to drive variable.
RP.
I think everything is embedded as part of the solution right.
So it's part of the game now with the customer expectation is about the outcome or the productivity. It will approximately are being driven primarily around some of this element and not something that analytics.
It will take an example of analytics, we wrote off a mortgage that growth was there, but actually visit bothered by Nicholas because it's embedded as part of our industry specific BPM.
As Oregon.
And just just to add to that just to add to that Mike.
Because I think it's an important point.
The commentary has been focused on on our PPA, but the reality is.
We need to elevate this discussion to technology and automation or technology tools or automation tools period, because the lines are blurring between our PVA in machine learning tools, and AI tools and natural language processing tools and enter governance point. The reality is we've got some technology component on almost every deal that we're seeing.
The real question becomes how much of that is going to get service through technology, that's owned and proprietary from WMS versus how much of that is getting service through third party strategic partnerships.
Great. That's very helpful. I'll leave it there. Thank you so much congrats on the quarter.
Thanks, Mike.
Thank you. Our next question comes from Moshe Katri from Wedbush Securities. Your line is open.
Thanks.
Good quarter again.
Just from a big picture perspective, maybe we can talk a bit about what you're seeing in the UK market.
And then also talk about the existing pipeline, maybe some details how does that look versus a year ago.
And then I have another follow up thanks.
Sure, let me start by saying that you know from a UK point of view.
We're not seeing any impact off.
All the usual suspects that we keep reading about and hearing about in fact, I think most Ceos.
Seemed to have taken the view that.
They just havent get on with their business and not really value of our integrated politics is leading them. So from a Dublin us pursue perspective, we continue to see a lot of traction we continue to see.
Some great compositions, and we continue to see very strong wins as we have been reporting.
Including the the insurance when that we just spoke about.
So thats as far as the.
The UK and the overall picture there goes.
And it got them and Dave you want to talk about the risks.
Yes, sure I think took vacations points that the UK has been.
Kind of a strength area for W. in us for a long time now and obviously part of the reason we've been able to diversify our revenue portfolio away from the UK has been a function of currency. When you look at the growth that we've been posting in the UK on on a quarter over quarter basis on a year over year basis. It remains extremely healthy just on a reported basis, but you also have to understand that there is a currency headwind embedded in that as well so.
UK remained strong for us in terms of new client adds in terms of strategic positioning in terms of overall growth and we don't see that scales point changing going forward and maybe maybe both keshav and got them want to address a little bit at a macro level. The overall demand pipeline for WMS and kind of where we sit today versus.
Where where we were a year ago.
Yes, thanks, Dave So Dave covered in terms of the continues to see a very healthy pipeline across our UK region and what's also important is given the size and the nature of the clients. We are dealing with its cross border across Europe to at the moment. We are we are seeing a lot more traction.
But from a broad based ecosystem, we are seeing a very healthy pipeline.
Across the North American region, and our APAC region also so we continue to be a growing pipeline across all three regions.
Okay, Thats fair and then in terms of a follow up.
Yes, obviously the pipeline is healthy beat numbers this quarter.
But you still have a pretty large delta in terms of your constant currency revenue growth guidance, maybe can talk a bit about that were being extremely conservative what were kind of prompt us to kind of maybe kind of pulls the delta maybe raise some fill those metrics down the road. Thanks a lot.
Yes, I'll take that and I think the answer is pretty pretty straightforward Moshe. The reality is our approach to guidance remains consistent.
The guidance that we provide each and every quarter is visibility based and its based kind of on our historic ability to close the gap between what we have committed as a point in time and what we know so so the reality is for example, we know that walking into the July quarter, having 95% visibility to the midpoint gives us a good chance for us to meet or beat that number.
The reason, we have such a wide range. If you will is because.
Mathematically for that number to be a midpoint, there's got to be as much upside as there is downside. The reality is we tend to know that based on how we guide for the company to end up below the midpoint of guidance something typically has to go wrong something has to fall out of the box doesn't mean, it can't happen, but the reality is that it should be more likely that we beat the midpoint of guidance and Miss the midpoint of guidance in terms of the kinds of things that would get us from the midpoint to the high end.
As Sanjay mentioned earlier, we have absolutely no short term nonrecurring revenue baked into our guidance baked into our forecast for the last three quarters of this year. We did 3 million in the first quarter, we did six and a half million dollars last year, we did $19 million the year before so the reality is we know we're going to get something we just don't have any any visibility or any direct the ability to impact what that amount is going to be for the next three quarters. So the two wild cards I would say in terms of.
What gets us to the midpoint, which gets us to the high end of guidance what gets us beyond that short term revenues and how quickly new clients and new processes clothes and ramp.
Understood. Thanks for the color.
Thanks Moshe.
Thank you. Our next question comes from Joseph Foresi from Cantor Fitzgerald. Your line is open.
Hi, This is drew coming on for Joe could you discuss some of the levers you can use to impact margins and what factors will drive you being at the high or low end of guidance by the end of this year.
Sure I'll take that group.
Obviously, when when you look at how we guide from a margin perspective, we have a pretty high degree of visibility to what that number looks like.
The wildcard really at this point in the year tends to be more about FX than anything else.
And historically based on the way, we guide and based on the way, we hedged through a combination of forwards and options. We should typically have more margin upside and downside, but again I think the two wild cards to that margin would be.
The amount of non recurring revenue that we get and how much of it is things like gain sharing and the types of activities that we had in Q1 that came with no cost versus how much of it is incremental volume at a similar margin to our core business and the second would be again, how quickly new deals signed in ramp which could have a positive or a negative impact on our business based on the size of the deal and the amount of transition revenue associated with that.
Got it and then.
It looks like travel and healthcare had some strong acceleration in the quarter can you guys touch on what you're seeing in both those verticals.
Sure I think I think overall, we've got good strong broad based growth in both of those verticals.
Clearly, we have been able to do extremely well.
On the healthcare side, a lot of that has to do with the capability and the positioning of help.
It's been a great asset for us it's been a great growth driver for us it positions the company the right way within the healthcare space on the clinical side.
So that's been really well received and we've seen both good healthy growth coming out of that deal as well as a strong pipeline of opportunities. So.
It's kind of been a big ticket item, if you will within the healthcare vertical but again the value edge asset continues to perform well from an analytics perspective, and our core R&D activities within healthcare remains strong so.
Feel really good about how the company is doing on the healthcare side travel for US has been a little bit more volatile and we've had good quarters and bad quarters, We've had good years and bad years, but again I think.
This is WMS is DNA I mean, we are at our core a spin off from British Airways, we understand the travel space and specifically the airline space extremely well.
It's a function of what's going on within our existing client base quarter to quarter, but also.
The fact that we're looking at some larger more transformational deals and the travel space that we think could help drive the right kinds of long term accelerated growth curve vertical that is very large for us. So.
You will see more volatility in the smaller verticals just based on size and law of large numbers, but.
We feel really good about our position in both of those verticals that you mentioned.
Perfect. Thank you.
Thanks drew.
Thank you. Our next question comes from Dave Koning from Baird. Your line is open.
Yes, Hey, guys. Thank you and I guess first of all just a numbers question I know you said FX it looks like guidance no no impact to the year I know Q1 was a little over a 3% headwind.
In the rest the GBP is a little bit of a headwind as well. So im just trying to reconcile it feels to us in our model. We have I think right around 2% headwind for the year I just can't figure out why it wouldn't be a little bit of a headwind.
Sure. So I think the simple reason for that Dave is that remember.
And we've got to go back a year now, but I FRS nine has changed the.
The treatment of hedging gains within our business all of our cash flow hedges now sit in the revenue line. So the constant currency revenue guidance that we provide not only has the operational movements of the various currencies, but also has the hedging gains and losses on those revenue currencies as well as the currencies that are predominantly cost currencies like Indian rupees. So.
The reality is if you look at our business the core business, you're correct, we would have roughly 2% headwind to revenue coming from operational movements, but we're picking some of that up based on the fact that our hedges are protecting us well and we've got probably a little bit less than 2%.
Upside from where we were a year over year in terms of hedging gains.
Gotcha. Okay, then that makes a lot of sense secondly, free cash flow has consistently in Q1.
Ben a weaker quarter and I know thats, just seasonal and it reverses itself throughout the year. This Q1 for the first time ever was kind of massive and I'm, just wondering kind of what happened and if that might be a new trend.
Yes. So there were a couple of factors or were there any overnight that denotes a little bit unusual from a quarter, one perspective, and we have bonus payouts and registrations and so on.
But you know.
One number is a higher profitability, we spoke about the nonrecurring revenue and better cash from that.
Also from an iPhone or a 16 perspective.
We don't.
That's good I know, it's out from the cash from operations and its been represented another gaffe from financing activity. So there just wasn't contributed as well as you know some of the payments I know it's going to be.
A matter of time, it does fall into the quarter do I and so on so you may have a little bit.
A pressure in quarter grew from.
Cash from operations perspective, but primarily it's being driven by opera high profitability I part of 16, and some of the payments falling unpartnered.
Okay now that's helpful and then finally.
Just the SNA line was really strong I think up 23% like massive acceleration. There is is there anything in the market happening or is it more just one or two clients just using.
Your offerings.
Yes, there is something happening in the market I think.
More clients.
Our.
Looking at.
Finally, the pipeline of finance overall, including more clients are looking at outsourcing our some of this all work.
Two partners and that the other interesting initiative happening in the market is Dublin as winning a lot of those deeds.
And maybe I'll just add to that in off Driller Denali acquisition from a procurement perspective, where we are able to advocate review on the on the sourcing side. There. It has also played well off from a bonus perspective, because we are able to offer an end to end services, where the client is looking for.
You know as compared to believe scenario, where we were more around us.
Transitional side of it.
Hey, Thanks, guys ill go ahead.
I would say and again, Dave from a from a.
Outsourcing automation perspective, the reality is M&A is always going to be a great place for new clients to start.
It's it's an easier entry into transformational deals than entering on the client facing activities are entering into core middle office operations. So it's not surprising that we see.
Clients, who are willing to to look at more transformational deal starting those journeys with evonik.
Yes makes sense well thanks, guys appreciate it.
Thanks, Dave I think you.
Thank you.
And our next question comes from Puneet Jain from Jpmorgan. Your line is open.
Hey, Thanks for taking my question.
Sorry.
Yes, Matt indicates that the Internet based companies contributed more than a third of incremental revenue.
For the last four years.
Do you view the blue NSS differentiated in servicing these companies the sector that have helped drive above that price growth for you.
Over the last many years compared to your peers.
Put it I think you answered the question yourself, yes, absolutely and I think more than us thinking that I think is our clients within that.
I think it's pretty clear that we've got a reputation now in this space is someone who can service. These these companies in terms of providing the structure, providing the fuel for growth.
But I think in education mentioned in his prepared remarks, Puneet I think what we're as excited about is the ability to leverage that knowledge in traditional business models to help these clients get to where they need to be so.
Really kind of an exciting time for the company in terms of.
How we've been able to leverage not just this internet based capability, if you will and.
These types of processes, but also to integrate that with our domain expertise to to be able to provide specific solutions that clients are looking for.
Got it and can you also give US an example of services we offer to such companies.
Mitt do that kind of initial.
And your services mix.
Yes, the revenue at least across the industry specific side of the business and the appendix side of the business predominantly and as Dave mentioned that as a significant amount of transformation and embedded analytics, especially in all these deals so that gets integrated into our industry specific solutions.
Yes got them is exactly right you are not going to see a lot of Cie is or.
Standalone analytics for these kinds of companies the solutions that we're providing tend to be more end to end in nature and more integrated nature. So the biggest place you're going to see it as an industry specific BPL segment, where we've obviously had some very very robust growth over the last couple of years.
And to a lesser extent finance and accounting, where some of these deals start again kind of back to the conversation we just had.
Got it and one like housekeeping question it seems like your depreciation expense.
Increased a lot in this quarter compared to what it was previously was that related to accounting change lease accounting, but maybe something.
Those that drove higher depreciation expense.
Yes, but if you're right that's primarily because of my front at 16.
Earlier, what was being taken as a range on all based on the accounting change.
That's being reflected as a depreciation.
Into that into that acquisition line.
And just so you can just so you know from a from a depreciation perspective as well as to Dave's question earlier from a from a cash from operations perspective that number in Q1 was six and a half million dollars.
Got it thank you.
Thanks, Brian .
Thank you. Our next question comes from Vincent Colicchio from Barrington Research. Your line is open.
Yes, Acacia from other convicts deal it looks like you're doing some fairly high value added work I'm. Just curious are there any meaningful restrictions on your ability to leverage that work with others.
This has got them not not at all.
In fact, the client is extremely supportive in helping us actually taking it to the market. Because this is not a deal that is limited only to the convicts deal because it the way we are implementing it it has the potential to redefine the market space within insurance in a number of area.
Okay, and then a question on the M&A side, because I haven't done the deal in some time.
I'm curious.
First of all could you remind us.
What's most interesting to you now and what the pipeline looks like.
Joe I'll take that.
You know.
Must fit again that you know.
For us.
Making sure that we have.
All the right ingredients in place to continue to grow our business is very very important and therefore, a few areas, where we believe that.
Bye for now.
Make makes more sense, that's where our M&A focus really is at this point I'm still very focused on making sure that we are.
Looking at.
Our capability creation as opposed to very large.
Transformational kind of acquisition, so as more Bakken as opposed to transformational.
Well if you like.
At this point in time.
We have a very strong pipeline off.
Possible M&A kind of views on a going across three or four key areas and fungible talk about all of them.
I must also say that.
Discussions with many of them are actually occur.
At our mature level at this point in time, but again, we will do a deal only when everything comes together.
And we will not do a deal at any price it will be done based on the right value and the right timing.
Yeah, and just to add what gives you said that you know there is a very healthy pipeline multiple conversations on and Thats, what one of the very important strategy from our capital allocation program perspective, and even Dave alluded that you know.
Nothing's win.
A compromise of right from an M&A.
And many perspective.
So some of the very specific.
Well, we are focused on on the analytics.
On the technology front as well as you know.
On the finance side, including Awesome, some spacing the insurance and some of the healthcare other areas. What we have been working upon but as Joe said, it's all about the lifetime Rightsizing the right value.
Thank you for the color nice quarter gentlemen.
Thanks, Vince Thank you Ryan.
Thank you and our next question comes from Ashwin Shirvaikar from Citi. Your line is open.
Hi, guys.
So.
Good quarter, good execution I, just wanted to ask sort of stepping away from the quarter.
You guys have done this you know as Connie.
Low double digit topline growth solid margins.
Modest margin improvement quite a long time now is this something you can be doing to ratchet up easily topline growth margins.
Is this something in the landscape you can think of that might change meaningfully the profile of what you are doing.
Yes.
Stop on have Dave on the others take a stab at it.
Obviously from our point of view at this point in time it is.
Whatever we're talking about is on visibility bees, ashwin and therefore.
In the numbers that you have out there is based on the consistent philosophy philosophy that we normally follow but having said that if you.
Paying attention to all the discussions we've been having.
Across this call itself and you see how relevant we are now becoming to a larger set of stakeholders, including.
Some of the new age kind of businesses.
One of the things I want to mention is that with a number of these new age declines in a bond in the.
Internet kind of client born in the cloud our clients.
Many of them are growing at that Dan and for them. Therefore, they need to have a very strong partners, who understand their domains very well from the trust inherently and who can scale dramatically with them very quickly I think at this point in time.
No we are scratching the surface there in terms of.
Some of the demand trends as some of the areas that ready Morgan.
Obviously from a limited point of view WMS is seen as a leader in that space is seen as the most compelling partner is all missing a huge potential in terms of how we have positioned ourselves, but you know if I was a betting man.
I would say that in the medium to longer term you know as some of these kind of initiatives take off I mean much.
Our biggest gain then actually get into a higher growth rate is very much possible right I mean, all other things being equal and at the same time, you're also seeing some of the traditional businesses that we are used to growing at a lower rate now starting to experiment with completely new models, we just spoke about contract.
In the past, we have spoken to about other clients as well and therefore as traditional clients also dig the advice of WMS and take out elements of that business and moved them to come completely digital enablement.
You are not the technology brands businesses again, I think while they will benefit a lot of the growth rate or margin profile out WMS in the medium to long term can also benefit.
You know order Peter Pan So that's how I would position does answer at this point in time.
But again.
We are very disciplined about earning every dollar of revenue.
Yes.
Got it thanks.
No not joking here, but I want to ask geisha.
Are you a betting man.
So that.
Should we should we be offered these dcs perspective thinking of higher growth rates in the future I guess is it does it look more like mid teens, what does it look like.
I assume you have the guidance that we declared that out there and thats what period of time bye for now.
Got it thank you.
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 you may now disconnect.