WNS Call Insights: Contract Wins and Market Competition

WNS holdings ADR (NYSE:WNS) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Contract Wins

Paul Thomas – Goldman Sachs: I guess first up you mentioned several new project starts in the quarter. Was any of that related to the two large contracts we have been talking about that have been in discussions for a while now?

David Mackey – SVP, Finance and Head of IR: I will take that Paul. The two – we now have four large contract wins to-date. Of the four that we’ve won, the two that we’ve been speaking out most recently are not included in the that number. Both of those deals still remain in play. We believe we are still very well positioned for both of those projects, but the client has yet to make decisions in terms of finalization and contract discussion.

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Paul Thomas – Goldman Sachs: Then I guess with respect to margins, speaking about those contracts, if you’re expecting margins to be under pressure for the next couple of quarters here from the current ramps, I guess we will continue to see that if those bigger, larger wins come through later on?

David Mackey – SVP, Finance and Head of IR: I think, Paul, the impact on margin is going to be more about the relative amount of transition cost to the total revenue within the quarter. So, depending on what’s ramping up or what’s ramping down in any given quarter, that transition revenue can present the opportunity to either expand or contract margin. This quarter as both Keshav and Deepak mentioned, we had an additional $2 million of transition revenues related to the projects that we have underway. If we do kick off several new projects over the next couple of quarters, we would expect that to continue to pressure margins a little bit; but again, as that happens, we would expect the transitions from the project we’ve just discussed in Q3 to begin rolling off.

Paul Thomas – Goldman Sachs: Then maybe the last one. Any early thoughts on next fiscal year with these wins here, I mean, how does the pipeline look going into FY ’14?

Keshav Murugesh – CEO: Let me take that. As I mentioned, obviously, we see the demand for BPO services being stable and healthy. We do have a good pipeline of business that are going through the various stages. We are quite comfortable with the fact that and very confident about the fact that what we said we would deliver this year, we are heading in that direction and moving towards double-digit growth rates. At this point in time whereas we have no numbers to update you, all I can tell you is we feel comfortable going into next year.

Market Competition

Edward Caso – Wells Fargo: I was wondering if you could discuss a little bit about the competitive situation, particularly if the larger multinational companies have increased their visibility in your part of the market.

Keshav Murugesh – CEO: Again, so that’s a great question. From our perspective, we continue to see the usual suspects in the deals we are pursuing. We do see every now and then some of the large players there. But I think what has also happened is over the past few quarters, we’ve actually successfully being able to take business away from some of them — from their existing clients. So at this point in time, we’re not seeing any aggressive kind of moves or changes to what we saw over the past few quarters. We continue to see more activity from the traditional pure plays, the IT BPO kind of integrated players. And every now and then we do see some of these players coming in, but not really impacting in terms of our ability to build a pipeline, take the pipeline through and win more deals.

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Edward Caso – Wells Fargo: You mentioned that you are taking business away. So is the opportunity set that you’re looking at a takeaway opportunity set or is it new sort of greenfield opportunities?

Keshav Murugesh – CEO: Again, great question. I think our team is charged with doing two things. One is, hunting new logos, which are new logos essentially for the Company and that’s the reason why we made all those investments around the new hunters that we have positioned globally. So, that would be based on a very focused targeted prospect list that the business unit leaders and the sales people agree to and it could mean essentially getting into a multi-vendor environment with the client and going into a completely new area there by positioning WNS strongly. It could also mean stealing existing wallet share away from an existing provider and we’ve actually done this quite successfully in a number of cases. So, that’s one option. Once we have won the account and brought it into steady state, the focus thereafter is for our farming community to really penetrate and radiate the account and after starting with maybe one area or one process just provide the entire array of services into the client. So, we’re selling in both cases, but the way to do is a combination of all of this. So, we could start with a horizontal offering; we could start with a vertical offering; we could start with one of our new offerings. But it could be to a first time adopter of these services; it could also be to a mature adopter of these services, in which case, we’re actually taking sometimes business away from an existing vendor of theirs.

Edward Caso – Wells Fargo: Just a quick question then on approval levels, have they increased, I mean, the number of sign-offs? Trying to get a sense for how long the decision process takes and how difficult the decision process is. Maybe you can anchor that versus maybe a year ago or two years ago and do you see it getting better, worse, the same?

Keshav Murugesh – CEO: Yeah. So, as we have been consistently saying over the last few quarters, we continue to see decision timing cycles as long, but we’ve not seen any significant change from there or the situation deteriorate any further. Having said that, Dave you might like to talk about the comparison with the previous year and two years ago?

David Mackey – SVP, Finance and Head of IR: Sure. I think relative to the approval levels and the decision cycles, Ed, we’ve been seeing deals that have high levels of complexity that are transformational in nature and they cover multi towers across businesses requiring higher and higher levels of approval over time. We talked about a very large Australian contract that we won about a year back and that required Board level sign-up. One of the large deals that we’ve been tracking here that we just spoke about with Paul’s question that’s still in play that we expect to have word on soon has also gone through Board level approval for the client. So, I do think if it’s someone who is relatively new to outsourcing, if the engagement is transformational, what we have seen over the last year to year and a half is that those decision cycles maybe a little bit slower because they are requiring higher and higher levels of approval. That being said, I think if you look at some of the smaller deals that are in the pipeline and some of the deals where clients have a higher level of maturity with outsourcing, and specifically business process outsourcing, those deal cycles have not been lengthening and seem to be moving through the pipeline at a pretty steady rate.

Keshav Murugesh – CEO: And I just want to add one last piece of information there, and that is, as you look specifically to WNS, we see that at least in the top 10 or 15 clients that we have, quite a few of them actually have completely new management teams; senior level executives, and we’re really excited about the fact that these new teams now in some of these large accounts are actually driving decision-making faster to show a quicker impact. So, it’s actually working well for us and resonating well for our business.

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Edward Caso – Wells Fargo: Just a final one on attrition. It seems like it’s kind of stabilized here at the 33% level. I guess just thinking of longer term as you try to be more industry-specific and vertical-specific, is the people – the type of people that you’re hiring changing and should that – what impact do you expect that to have on attrition?

Keshav Murugesh – CEO: We are very excited about the fact that the attrition rate at the Company has kept going down across the quarters, and I must say that that’s because of very focused talent management initiatives that have been unleashed at the Company, and with very strong ownership and collaboration by the business unit and the horizontal leaders at the Company. So, very happy and proud about that. Having said that, we are also even happier about the fact that the attrition levels in the higher-end processes have actually kept declining. So, on the technology side, F&A, research and analytics; the higher-end areas’ attrition actually are at significantly lower levels than the corporate average. It’s most often the voice component that pushes the average up. And while on an overall basis our focus is to get the overall number down, I think there’s a lot more of focus in terms of the higher value services, the areas that need a lot more of domain kind of inputs and at the same time some very critical specific interventions on the voice side as well particularly around training and retention that are actually being focused on. So I would say that our expectation is to get it down next to around 30% levels and we will just keep progressing from there.

David Mackey – SVP, Finance and Head of IR: I think one other point that’s important to note guys is the fact that when you look at the attrition rates and how they impact our business especially as Keshav mentioned on some of the lower end offerings and the lower end skill sets, a certain amount of attrition in this industry is actually healthy and is required in order for us to manage our cost structure and manage the impact of annual wage increases. So these are things that we need to monitor and manage. Obviously we want to control attrition where it affects our ability to deliver service for our clients. But I think we are doing a good job directionally and still have a little bit of ways to go, but certainly directionally headed the right way.

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